In December, the ECB announced that bonds from regional issuers would be eligible for its public sector purchase programme.
Bankers welcomed the move, as it corrected such absurdities as NRW.Bank being included but not its guarantor, Land NRW. The extra demand from the Eurosystem was causing the German development bank’s securities to trade tighter than those of Land NRW.
However, five weeks on from the ECB’s announcement, sub-sovereigns in Europe are sitting on their hands.
The ECB has not updated the asset purchase programme’s list of eligible institutions since July and we have heard nothing of its plans.
Issuers have good reason to be unsure of where they stand. The ECB has no official minimum size for the bonds it buys, but bankers around Europe believe that there might be an implicit floor size, which could exclude regions that prefer to print in smaller formats.
No one knows what set of criteria the ECB will use to decide which bonds it can actually buy, even if, for the sake of appearances, it needs to cast the net of officially eligible issuers wide.
Land NRW, one of the largest sub-sovereign issuers in Europe, is justifiably confident it will be included, so yields on its benchmarks crunched 5bp tighter on the announcement regions would be eligible.
However, other issuers are holding fire on big deals, hoping to lower their cost of funds if (and when) the ECB wades in.
But the delay is still frustrating. January’s packed primary calendar means there are plenty of public sector securities for the ECB to purchase, so it’s hardly surprising that the Eurosystem is not scouring the markets for sub-sovereign debt so far. But it would still be nice to have a better idea of which securities will be eligible.
Holding fire on sub-sovereign, however, does keep the ECB’s options open. The central bank can establish more or less restrictive criteria for the assets it wants, and lean more or less heavily on the regions, according to the conditions of the market.
The trouble is, with the regions slowing down their funding in anticipation, the ECB could easily disappoint markets once again.
Should the ECB decide that it only wishes to purchase issues of, say, €1bn or more, the flood of jilted regional issuers will push up yields as they fight it out for private sector investors. That is the exact opposite of what the ECB wants: increased cost of funds for the public sector and higher yields to suck real money investors back out of real economy lending and into financing governments.
The ECB may be waiting for conditions to settle before it decides what to do but issuers need to know what to expect. If there is nothing to worry about, why not say so?
