The ECB’s new role as “debt-buyer of first resort” raises a whole litany of concerns.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In June 2016, the ECB activated its corporate bond buying program, ostensibly to revive the Eurozone’s stalled economy. The program has been shrouded in secrecy, as the ECB has refused to reveal the identity of most of the companies, divulging only the International Securities Identification Number (ISIN) of the bonds, but not the amounts.
The ECB coordinates the overall effort, but the actual buying is done by the national central banks. Now the non-profit Corporate Europe Observatory (CEO) has cracked the code, so to speak:
Finding the names via the ISIN code is a simple job. CEO has looked them all up to see what investments the ECB has found worthy of public money.
Unfortunately, a lack of transparency at the ECB means the amounts held in bonds of individual corporations are not revealed. While many pension funds do release this information, it seems that the common national bank for hundreds of millions of European citizens is unable to! Nevertheless, a lot can be learned from the lists…
For instance, the fact that Europe’s oil majors have been particularly spoiled, with the ECB splurging on bonds issued by Shell no less than 11 times. The central bank bought bonds from Italian oil company Eni 16 times, Spain’s Repsol six times, Austrian OMV six times, and Total 7 times. Gas companies have also fared remarkably well. When counting the purchase of bonds in Spain, for example, 53% are from companies involved in the natural gas sector. The corresponding number in Italy is an astounding 68%.
Also well favored are Europe’s biggest car companies, in particular those from Germany, with Daimler and BMW tied in top spot with 15 purchases apiece. The ECB also bought seven times bonds issued by Volkswagen, despite the reputational and financial fallout from its emissions scandal. And it bought Renault bonds three times.
Other companies on CEO’s list of coddled giants include Thales, a French producer of missiles, rifles, armored vehicles, and military drones, which has been engulfed in a spate of corruption scandals in recent years; France’s three major water corporations, Suèz, Vivendi, and Veolia; Novomatic, an Austrian-based gambling company owned by billionaire Johan Graf; and luxury goods companies like LVMH, producer of Moët & Chandon champagne, Hennessy cognac, and Louis Vuitton women’s handbags.
These are just some of the corporations benefiting handsomely from a bond-buying binge that has already reached some €46 billion (as of Nov. 25, 2016). When the ECB buys these bonds, it inflates the bond prices and pushes their yields down, which is the purpose, and it thus lowers the cost of capital for this companies even further. By the end of the program, which is “scheduled” to finish in September, 2017, the ECB is expected to have lavished around €125 billion on them.
But that’s not the worst of it. As we reported in August, the ECB has admitted that it is not only buying already-issued bonds trading in secondary markets, as the public was initially led to believe; it is also buying bonds from companies via so-called “private placements.” These debt sales are not open to the broader market, so there’s no need for a prospectus. Only a small number of institutional investors participate.
Private placements are not unusual. What’s new is that the ECB is using them to buy bonds. This was done discreetly, but it was leaked – and the ECB had some explaining to do.
The central bank’s new role as “debt-buyer of first resort” raises a whole litany of concerns. It grants the ECB an almost god-like grip over Europe’s financial markets. And according to The Wall Street Journal, Citigroup figured “that bonds eligible for ECB purchases have already outperformed ineligible bonds by roughly 30% since the bond-buying program was announced in March.”
When the ECB initially launched its program, much was made about the financing opportunities it would provide for companies of all shapes and sizes. Goldman Sachs even forecast that the program would “provide a healthy boost to the equity prices of the continent’s small and medium-sized companies.” It was a joke, of course. 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
Now, six months into the program, total corporate debt in Europe remains dominated by bank loans despite corporate bond issuance being on track for an all-time record this year. As the U.S. rating agency Fitch reported in November, bonds account for only 12% of total funding for Eurozone corporates and they are the almost exclusive preserve of large multinationals. The comparable share in the UK, at 28%, is more than twice that figure. In the US, with its broad, deep-rooted capital markets, bonds account for 44% of corporate debt.
In Spain, only 2.5% of corporate funding is covered by bonds. Most of the remaining 97.5% of funding is provided by bank loans, which have declined sharply since 2011, “partly reflecting the scale of deleveraging, especially in the property sector,” notes Fitch.
In other words, the ECB’s corporate bond buying is having zero positive impact lower down the corporate food chain. Those companies that are still able to get financing invariably end up paying an arm and a leg in interest and commissions. Meanwhile, giant Spanish corporations like Repsol, Telefónica and Iberdrola are gaining access to funds more quickly, more easily, and at cheaper rates than anyone else in the market.
In flooding the upper reaches of Europe’s corporate bond markets with virtually free money, the only thing the ECB has achieved so far is to skew market forces even more in favor of the biggest, the strongest, and the already most coddled corporations, while in the process becoming a major silent partner and investor in corporate Europe. By Don Quijones, Raging Bull-Shit.
“There is not and there will not be a banking crisis in Italy, nor will there be a European financial crisis coming from Italy,” proclaimed EU Commissioner Moscovici. Read… So Who Gets to Pay for Italy’s Banking Crisis?