What to watch for in the July 21, 2016 ECB decision
Watch for chances in the 'terms and conditions' of bond buying
The ECB wants to wait and see on the Brexit impact but it's rumored to 'tweak' its bond buying program.
Capital key metrics:
- The ECB can buy up to 70% of an issue of corporate non-bank debt
- The ECB can't buy bank debt
- The ECB can buy up to 33% of a country's (or sovern-like) total debt (from 2s to 30s)
At the start of the month, Reuters reported that the ECB is not considering changing the proportion of debt from each country. They cited 'sources close to the ECB'. The problem is that 25.6% of bond buys must be German but they're running out of debt to buy.
This is a problem that will have to be solved sooner or later. The ECB has bought just over 900 billion euros in bonds. They program is expected to run through March and hit 1.7 trillion -- almost double the current level. In addition, there is growing speculation that bond buying will be increased beyond 1.7 trillion.
The Reuters report said that 'several other changes would be first considered' before mixing up the ratios including hiking the 70% limit on individual issues and/or broadening the universe of eligible assets.
The ECB could buy bank debt. That would free up something like 900 billion for purchase but buying bank debt is a risky proposition. Germany along has about 300 billion of bank debt available for purchase.
So it's either buy less German debt, which is a political nightmare. Or 'bailout' banks by buying financial debt, which is an equally big political problem.