END TO ECB’S BOND-BUYING PROGRAM WILL CRIMP DEBT MARKET

When the European Central Bank (ECB) ends its bond-buying program that it has conducted since the COVID War broke out, there will be a “void” in demand for corporate debt, investors have warned, making it harder for large businesses to borrow money.

The central bank has said it will stop buying bonds in this year’s third quarter—probably early in July, many analysts think—after it raises its key interest rate, a move also expected next month.

The ECB owned €341 billion in corporate bonds on 31 May, up from about €200 billion in March 2020, the Financial Times reported.

“The ECB became not just the [corporate bond] buyer of last resort, but also the buyer of first resort,” Barnaby Martin, Bank of America’s chief European credit strategist, told the FT. “The sheer volume they were buying was enormous.”

With bonds’ chief customer leaving the market, the difference in risk among various kinds of bonds will increase and companies will be less able to raise bonded debt, the FT noted.

“Who is the buyer of marginal debt” after the ECB closes its wallet? Martin asked.

The ECB’s disappearance from the bond market will be “unpleasant” but the market must “transition away from having a backstop,” James Vokins, chief of investment-grade bonds at Aviva Investors, said to the FT.

Investors, already rattled by record inflation and the prospect of higher rates, have begun selling out of bonds, the FT said.

“All quantitative easing will be over very early in July,” Martin said. “After a matter of weeks, you’ve got a credit market that will better reflect risks.”

However, even without the ECB’s presence, few corporations are expected to quickly default on their debts, Tatjana Castro, Muzinich & Co.’s co-head of public markets, said to the FT.

TRENDPOST: After years of negative interest rates and the central bank’s bond-buying, cutting inflation could mean tanking Europe’s economy, which has barely sustained a 2-percent growth rate for the last 10 years, according to data reported by Macrotrends.

The ECB is stuck in a vice: it needs to cool inflation and about all it can do is raise interest rates and stop buying bonds, which it has all but promised it will do next month. 

On the other hand, taking those steps will push the Eurozone’s economy close to, if not into, a recession—which, ultimately, may be the only way to stop inflation’s rise.