asset purchases

On top of the $265bn being made available to banks, the Bank of Japan has decided to double its asset purchase scheme to $122bn (¥10,000bn). The decision was made at the Bank’s scheduled monetary policy meeting, at which rates were kept at 0-0.1 per cent.

Liquidity
Of the $265bn (¥21,800bn) being made available to financial institutions, $182.3bn (¥15,000) is available immediately, and $82.6 (¥6,800) over the coming days.

Asset purchases
The Bank’s current Asset Purchase Programme is subject to a ceiling of $427bn (¥35,000bn). This splits into a maximum of $366bn (¥30,000bn) in loans, and a maximum of $61bn (¥5,000bn) stock of outstanding financial assets. It is this latter limit that is to be doubled to $122bn (¥10,000bn), effective today, with assets being bought by the end of June 2012.

Specific details are as follows: 

Maybe charity doesn’t pay, after all.

The founding assumption of my earlier post has proven incorrect, for which I apologise. To set the record straight, ECB national accounts show that the central bank held more like 18 per cent than 8 per cent of bonds bought to aid sovereigns in distress. 

And down they go again. A mere €146m ECB-bought bonds settled last week, following a bumper, €2.3bn, week the week before. As serious discussions began about enlarging the funds or the mandate of the EFSF, markets calmed and government bond yields fell, requiring less intervention from the ECB. Relatively speaking, however, bond yields remain high.

One idea floated at the discussions is that the EFSF will be allowed to lend money to sovereigns to buy back their own debt.

An ECB council member has pointed out the possibility of bond-buying duties shifting entirely to Europe’s rescue fund. “That would be one way to have additional flexibility that at times might be found useful,” Cyprus’ central bank governor Athanasios Orphanides told Bloomberg. Senior French officials say they back the plan, though Germany – the fund’s biggest contributor – remains reluctant.

The six AAA-rated euro member states are apparently meeting to discuss the rescue fund in advance of a wider eurozone finance ministers meeting this afternoon. As well as changing the fund’s mandate to allow the purchase of bonds, one change under consideration is simply to increase the reserves at the fund’s disposal. But Austria’s finance minister has called instead for efficiency improvement and sees no “acute” need for an enlargement, while Slovakia’s PM would prefer an increase in the ECB‘s capital, saying such a move would be “more systematic”.

The EFSF can call upon €440bn at present – a sum inspiring “shock and awe” initially, but now considered “too small“. But in practice only about €250bn could be drawn down without risking a downgrade to debt issued by the facility. One way to tackle this, as FT Alphaville pointed out today, would be to accept a downgrade for the fund’s debt. That way, all €440bn could be used. Alternatively, the EFSF could issue tranches – debt with different ratings. 

After reaching a modest Ireland-crisis-high of €2.7bn last week, the ECB’s bond purchases have fallen sharply to €603m. With the cost of debt in Spain and Greece again reaching record highs, is this sort of quantity enough?

Many will say not, especially after bond purchases during the Irish bail-out were revealed last week to be just €2.7bn. What with the bail-out panic and the ECB quadrupling the minimum bond purchase size from €25m to €100m, most had expected a far larger increase in the central bank’s shopping bill. Of course, bearish markets can be subdued with large rumours instead of large purchases – but it’s not a strategy that can work for long.

Liquidity measures are given their own paragraph in today’s monetary policy announcement from the Reserve Bank of India, as tempering inflation allowed the central bank to hold rates. The (temporary) end to the Bank’s rate normalisation programme was expected after the governor gave a strong hint last month.

“The extent of [liquidity] tightness has been beyond the comfort level of the Reserve Bank,” said the statement, which announced two liquidity injection measures. There has been a cash crunch in the banking sector since at least early November, when the RBI extended temporary easing measures.

The first measure, which has been used temporarily before, is to reduce the amount banks have to keep with the central bank. The statutory liquidity ratio will be permanently reduced from 25 to 24 per cent with effect from December 18. The last time this was done, one estimate equated the reduction to an additional 45,000 crore Rs ($10bn) liquidity.

The second measure 

The ECB’s controversial bond buying programme continues to increase, in spite of vocal opposition from high profile figures such as Axel Weber. Last week, €2.7bn eurozone bonds settled – thought to be almost entirely government debt of struggling economies such as Ireland and Portugal.

Perhaps surprisingly, the figure rose following the Ireland bail-out: last week, €2bn settled. The number remains modest compared to the start of the programme, during the Greek crisis, when in one week €16bn bonds were bought. 

European officials are considering measures to overhaul the eurozone’s €440bn rescue fund, including using it to buy bonds of distressed governments, say people involved in the deliberations. The changes would make it easier to aid debt-burdened economies without resorting to fully fledged bail-outs.

Buying bonds of distressed countries to lower their borrowing costs is currently only being employed by the European Central Bank, a policy that has proved controversial. 

Both the Federal Reserve and the ECB are now purchasing government debt in large scale. Yet neither of them seem at all eager to admit that they are doing anything unconventional with their monetary policy. In fact, some of the recent statements by both Ben Bernanke and Jean-Claude Trichet are not as straightforward and transparent as they might have been.

In the US, this is probably because of the risk that Congress might actually intervene to stop the Fed from “printing money”. Therefore the Fed has started to make narrow technical arguments which obfuscate what it is really doing. In Europe, the ECB has a strong historical dislike of monetising government deficits, and fears that quantitative easing might be declared contrary to their legal obligations. Therefore they draw very fine distinctions between their actions and US-style QE. In the long run I think that both central banks would be better advised to tell it exactly as it is.

Mr Bernanke has recently claimed that the Fed’s current policy should not be described as “quantitative easing”, a claim I disputed in this earlier post. Over the weekend, he defended the Fed on the grounds that the central bank was not printing money, which has been the accusation levelled at him by many of his Republican critics. Is Mr Bernanke’s claim accurate? 

European Central Bank action to calm tensions in eurozone bond markets must remain firmly controlled, otherwise the euro’s monetary guardian risks “losing everything we have”, one of its most ­senior policymakers has warned.

Mario Draghi, Italy’s central bank governor, says in an interview with the Financial Times that large-scale purchases of government bonds could threaten the ECB’s freedom to act without political interference and break European Union rules.