Can the European Central Bank (ECB) really resuscitate the eurozone economy? It thinks it can. And one of the ways the central bank thinks it can is to purchase billions of dollars worth of bonds that will lose it money.
The ECB announced Wednesday – one day before the Bank of England (BOE) announced it would be slashing rates and buying bonds, and two days after the Bank of Japan (BOJ) announced an aggressive economic and monetary stimulus package – that it would be trying to revive the economy through its own quantitative easing (QE) initiative.
ECB President Mario Draghi confirmed that at least 20 percent, or $11.7 billion, of the corporate bonds it bought between June 8 and July 15 would actually lose money if held through the entire maturity. The reason why is because they hold negative interest rates. It also bought another $5 billion worth of bonds since then and they, too, maintain subzero interest rates.
It is estimated that more than $1 trillion worth of euro debt has been purchased since the beginning of 2015. With this immense size, it’s quite likely that a large portion of the ECB’s asset sheet contains negative-yielding bonds. Since a third of all government bonds globally and one-quarter of all euro-denominated corporate bonds are in negative territory, it would be difficult for the ECB to not lose vast sums of money.
Bonds may benefit the issuers because they’re being paid to borrow. However, it doesn’t help investors, savers and even the banks. These negative-yielding bonds and cheap money produce a moral hazard by sending investors into riskier assets and markets. What makes this interesting is that investors are actually holding onto money-losing bonds because the financial markets are too volatile. So, evidently, the central banks’ plans are not really working out (SEE: U.S. 10-year bond falls to record low yield of 1.36%).
No wonder why Great Britain abandoned the sinking European Union (EU) ship!
Leave a Comment