The ECB's Failed Quantitative Easing Attempt Shows Its Irrelevance
The European Central Bank (ECB) believes that Europe's economy would improve if there were just more money floating around Europe, especially in the form of bank loans made to companies. In an attempt to boost the European money supply and increase bank credit the ECB is now offering four-year loans to European banks at an interest rate of only 0.15 percent provided that the money is lent to European companies. The first such sales were last Thursday and proved disappointing as banks took only 83 billion euros ($107 billion) in such loans, even at those fire sale rates. The problem is that the ECB apparently has no idea what is going on in the European credit markets.
For the ECB's particular brand of quantitative easing to work it would be necessary for the key constraint on the European economy to be access to cheap credit. However, this is simply not the case. In fact, thanks to the ECB's efforts to push down rates on government bonds, corporations are having an easy time borrowing money. If the ECB tracks bank loans, they would see that credit was not particularly lacking, but why would a company bother to get a bank loan when the corporate bond market is in such a giving mood?
As reported this summer by Bloomberg, the European corporate bond market is exceptionally bullish. Investment grade corporate bonds are selling for an average yield of about 1.5 percent and even junk bonds are selling for about 3.5 percent. Even when the ECB gives European banks a cost of funds that is close to zero, banks would have a hard time offering loans to their corporate customers at better rates than those companies can get for themselves in the bond market.
In particular, companies that never before issued bonds are doing so in record numbers. While they typically pay above average yields, they believe there are advantages to going to the bond market for funding needs. For example, French auto parts distributor Autodis, SA sold 240 million euros of five-year notes with a 6.5 percent yield. While this may seem like a high rate to pay, the company issued a statement reading, in part, "We wanted to avoid the constraints of loan covenants that would have deprived us of flexibility."
Given the large role that sovereign, corporate, and individual debt played in the most recent recession, it is unclear why central banks think increasing the economy's level of debt is a step toward better economic health. However, even if one believes that more credit can unlock Europe's dormant economies and get them back on a path of solid growth rates, it probably would pay to look at the data before formulating a policy.
Companies see the inevitable Federal Reserve Board tightening somewhere on the horizon and they are rushing to the bond market to lock in favorable rates before that happens. So far, 2014 is setting five-year highs for corporate bond sales worldwide. European companies alone issued over $800 billion in bonds in the first half of 2014. A similar corporate bond market boom is occurring in the U.S.
Interestingly, a quick perusal of the ECB's own statistical warehouse shows that the total volume of oustanding loans in the EU is slightly above its pre-recession level already. In July 2007, loans outstanding to non-financial corporations were 4.16 trillion euros; in July 2014 the total of such credit is 4.30 trillion euros. Such data, while only one simple view of a more complex situation does not cause one to instantly see access to credit as a problem.
When the total amount of outstanding bank credit is combined with the surge in volume in corporate bond markets, one wonders why the ECB believes that credit constraints are the key problem holding back European economies. One signal that they were wrong in that assumption is that so few banks were interested in taking their nearly free loans. There is some speculation banks are simply waiting until they get the results of their latest round of stress tests. However, a more likely answer is that banks know what the ECB does not: corporations have all the access to credit they want-through the bond markets.
