And not for small companies either.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Money for nothing, for everyone: This is supposedly the next stage of the treatment program for today’s debt-addicted economic system. Milton Friedman’s hypothetical scenario of giving every citizen direct money transfers in a desperate bid to stoke inflation is gaining traction with growing legions of mainstream economists.
In their theory-addled brains, a massive one-off injection of central bank-conjured money into people’s bank accounts would do wonders for the real economy — in particular a terminally stagnating one like Europe’s. Rather than creating asset price inflation, as QE has done, it would fuel consumer price inflation. This is seen as the solution to the recently created and now unpayable mountain of debt: the central bank would simply erode it away via inflation.
In April, however, the ECB dashed such hopes, at least for the immediate future. “It’s not on the table,” ECB Executive Board member Peter Praet told a bunch of economists who’d been pushing for an answer at a conference organized by the Center for Financial Studies in Frankfurt.
That’s not to say that the ECB is opposed on principle to the idea of showering people with money they’ve done nothing to earn. It just depends what kind of people.
Indeed, in many ways the central bank is about to do just that, but the lucky people on the receiving end will not be normal, everyday people; they will be corporate persons, including some of the richest, most powerful companies in Europe as well as the European subsidiaries of huge foreign multinationals.
The amount of free money these corporations are about to receive will be counted not in the hundreds or thousands of euros, but in the millions or billions. And instead of transferring money into their corporate accounts, the ECB will just buy up to 70% of any new corporate bond issuance.
The ECB unveiled its latest cunning plan some months ago, when global investors were begging for a bone to chew on, but the bond purchases are scheduled to begin in earnest next Thursday. To be eligible for this new central banking welfare scheme, the bonds must be issued by non-bank corporations established in the euro area. But just as with everything the ECB does, the conditions could change at any time.
Indeed, they already have.
Back in March the central bank stated that it would buy only investment grade rated debt, but then concerns were raised about what might happen if a name they owned was downgraded to below investment grade. Today a representative of the bank put such fears to rest by announcing that it “is not required to sell its holdings in the event of a downgrade” to junk, the FT reports, raising the prospect of it holding so-called “fallen angels.”
For the moment it’s not clear exactly how much the ECB will splurge each month on corporate bonds but estimates range from anywhere between €3bn and €15bn. “It’s a massive market, so they need to buy a vast amount of paper to have any impact,” said one bond syndicate banker. “Consequently, the risks of that process being less than optimally managed increase substantially.”
There’s also no telling who exactly will be the biggest beneficiaries, though the obvious candidates are big German, French, Spanish, Italian, and Dutch firms in the energy industry (Enel, EDF, Shell, Repsol, Iberdrola), telecommunications (Telfónica, Orange, Deutsche Telecom), and the automotive sector (Volkswagen, BMW, Daimler).
Europe’s small and medium size enterprises could also benefit from the ECB’s latest actions, according to Goldman Sachs. Last week, it forecast that the program would “provide a healthy boost to the equity prices of the continent’s small and medium-sized companies,” even before it was known the ECB would impose non minimum bond size.
This must be a joke. Most small firms do not even have the means to issue corporate bonds, especially in Europe where the debt capital markets are far less developed than in the US. And if we’ve learned anything from this interminable global financial crisis, it is that central banks do not give a fig about small businesses. Their prime — some might say exclusive — constituencies have always been big banks and big corporations. The former have already received what amounts to trillions in state aid to the detriment of their smaller competitors, and now the latter are about to be gifted billions of euros of helicopter money.
With the ECB offering to buy up just about anything and everything that isn’t already nailed down, including “old bicycles“, Europe is about to witness yet another monstrous asset bubble — this time in corporate bond. Yields have already begun plunging and spreads narrowing as companies from around the world are tempted to sell euro-denominated debt. The more that come, the more the yields will fall.
Barnaby Martin, analyst at Bank of America Merrill Lynch, predicts that ECB corporate bond buying could result in a doubling of its size over the next five years. That implies euro investment-grade issuance of €2.5 trillion between now and 2021, and means that the bumper €70 billion issuance seen in March “could become the norm rather than the exception,” Mr Martin said.
Which will be great news for all the corporations waiting eagerly under Mario Draghi’s helicopter. Of course, all this meddling in the markets is triggering very dangerous distortions, and when they come home to roost, the ECB will probably begin directly propping up European stocks, as it has already said it might. As for the average folks out there, well, they can just keep dreaming that one day they, too, might get some free money. By Don Quijones, Raging Bull-Shit
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