Reuters: ECB monetary policy may fail due to lack of bond sellers

ECB’s Draghi wants to buy bonds, but who will sell?

(Reuters) – At the height of the euro zone debt crisis in 2012, ECB President Mario Draghi’s problem was how to convince investors to hold on to European bonds. Now he faces a struggle to make them sell.

Weeks before the European Central Bank begins a program to buy about 1 trillion euros of euro zone government bonds, banks, pension funds and insurers across the continent are hoarding them for regulatory or accounting reasons.

That may complicate implementation of the quantitative easing program, aimed at reviving growth and inflation in the euro zone. The ECB might have to pay way above market prices, or take additional measures to encourage investors to sell.

“We prefer to hold on to them,” said Antoine Lissowski, deputy CEO at French insurer CNP Assurances. “The ECB’s policy … is reaching its limits now.”

Banks, which buy mainly short-term bonds, use government debt as a liquidity buffer. Selling would force them to invest in other assets, for which — unlike government bonds — regulators ask banks to set cash aside as a precaution. Alternatively, they can deposit money with the ECB, at a discouraging interest rate of minus 0.20 percent.

Insurers and pension funds typically buy long-term debt. They could make hefty profits selling to the ECB. But the money would have to be re-invested in other bonds whose yields would be much lower than their long-term commitments to clients — a regulatory no-no.

In 2012, many euro zone bonds offered double-digit yields. Today, Greece aside, the bloc’s highest yielding debt is a 30-year Portuguese bond offering 3.30 percent.

Between a quarter and a third of the market carries negative yields, meaning investors pay governments to park their money in debt. In Belgium, a country whose rates are taken as indicative of the euro zone average, benchmark 10-year bonds BE10YT=TWEB yield 0.7 percent, just above record lows around 0.5 percent.

“If we were to sell bonds, we would make huge capital gains, but we will then have to reinvest that money at a yield of 0.5 percent, set against liabilities at 3.50-3.75 (percent),” said Bart de Smet, the CEO of Belgian insurer Ageas.

Dutch banks ING (ING.AS) and Rabobank RABN.UL, Spain’s Bankinter (BKT.MC) and rescued lender Bankia (BKIA.MC) and France’s BNP Paribas (BNPP.PA) said they were unlikely to sell when the ECB comes knocking.

“The volume of sovereign bonds we own at the moment is not linked to monetary policy,” BNP Paribas deputy CEO Philippe Bordenave said. “It’s linked to the regulation.”

If Greece were to leave the euro, selling pressure might increase, but Grexit is seen as an outside risk.

The full article is available here.

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