Group Economics
Macro Weekly
Mario delivers…now to Athens
Nick Kounis +31 20 343 5616
23 January 2015
The ECB delivered a much larger than expected QE programme, which is pushing down government bond yields and the euro
and supporting risky asset prices. We think QE will lift growth and inflation, but Europe’s long term economic performance
depends crucially on reform. European data this week were encouraging, suggesting a moderate recovery was already taking
shape pre-QE. All eyes now turn to Greece, which seems set for a Syriza-led government. We think that Greece will eventually
reach an agreement with other eurozone member states and the troika, even though it might be a bumpy ride in the meantime.
ECB turns to bazookanomics
The ECB surprised with a much bigger asset purchase
In a separate decision, the ECB also reduced the interest rate
programme than expected. It added government bonds and
on its upcoming TLTRO operations by 10bp, taking it to the
agency debt to its existing programmes and in total will now
same level as the refi rate. This could increase bank take up at
buy EUR 60bn a month ‘at least’ through to September 2016.
the margin.
This points to a programme totaling EUR 1.14 trillion.
Purchases of government bonds and nat. agencies
However, ECB President Draghi went further, saying the plan
was open-ended and would continue up until inflation had
embarked on a path towards its inflation goal over the medium
Purchases %
Country
Capital key
Total purchases
Total market*
outstanding
PT
3
23
85
27
FI
2
17
67
25
DE
27
238
1037
23
ES
13
117
568
21
NL
6
53
286
18
IR
2
15
89
17
and ABS programmes will account for EUR 150bn. That leaves
FR
22
187
1207
16
around EUR 990bn of new money. Of that, around EUR 120bn
AT
3
26
168
15
will be made up of European-level agencies, while the
IT
19
163
1240
13
remaining EUR 870 bn will be accounted for by government
BE
4
33
253
13
100
871
5001
term. So the programme could exceed 1.14 trillion if
necessary, though there was an upper limit per issuer. The
ECB also plans to buy long maturities (up to 30-years).
Decomposing the programme
Of the EUR 1.14trn, we think that the existing covered bond
bonds and national agencies. The total will be shared between
countries using the capital key, which means that countries
with a relatively low outstanding stock of securities compared
Total
Source: ECB, ABN AMRO Group Economics; *Bonds 2-30y outstanding
to their GDP benefit the most directly (see table).
Positive for growth and inflation…
The programme will focus on investment grade bonds, but the
We expect the QE programme to lift growth and inflation and it
ECB opened the door for Greek government bond purchases
is therefore well worth doing. The main effects will come
as well. The country would need to be on track with an
through a lower euro and easier financial conditions more
adjustment programme and the ECB’s existing holdings of
generally, especially in the periphery. The ECB is missing its
Greek bonds would need to fall below 33% of the total (will
inflation goal and therefore it had a duty to act and it is not as if
happen in July).
it had a tool box brimming with alternative options.
Risk sharing limited, but issue played down
…but not a miracle cure
The degree of risk sharing is relatively limited, at 20%.
We should not expect miracles. There is little doubt that weak
However, Mr. Draghi played down the issue, saying that it was
demand is an issue in the eurozone and we think QE will help.
not that important. He said that in the ‘theoretical’ case of a
However, arguably the bigger problem is that the eurozone’s
default, central banks had sufficient buffers. This is debatable,
trend or potential economic growth rate has declined. To lift
but it seems the ECB President sees this concession to the
economic performance over the long-term, governments need
hawks as just ‘window dressing’.
to step up structural reforms.
2
Macro Weekly - Mario delivers…now to Athens - 23 January 2015
Markets rally on announcement, with risky assets leading
Eurozone surveys improved in December
the way, while euro slumps
Meanwhile, Germany’s ZEW economic sentiment indicator
European government bond yields fell sharply following the
jumped from 34.9 in December 2014 to 48.4 in January 2015,
announcement, led by the periphery, while equity prices
reaching its highest level since February 2014 and rising
surged. In addition, the euro fell significantly. It is typical that
further above its long-term average value of around 24.
risky assets do well and the currency slumps on the back of
Furthermore, the eurozone composite PMI rose to 52.2 from
QE. This is exactly the experience we saw during the various
51.4 in December, the highest level since August of last year.
phases of QE in the US. Indeed, we expect risk premium
The fall in the euro (on QE expectations) and lower oil prices
compression and euro weakness to continue going forward.
appear to be having a positive effect.
High quality bonds also supported on demand-supply
China’s gradual slowdown
imbalance
Outside of the eurozone, the main economic data came out of
What is less normal is that safe government bonds (for
China. China’s GDP rose by 7.3% in Q4, the same rate as in
instance Germany and the Netherlands) have also continued
Q3. This left annual growth at 7.4% in 2014, almost exactly in
to rally, with yields falling to new historical lows. In the US
line with the government’s target of 7.5%. The monthly data for
yields rose sharply following the QE announcement, as
retail sales and industrial production showed growth edging up
investors expected an economic recovery and as money
in December. The overall trend looks to be one of ongoing
flowed to higher yielding assets. The stark difference in
gradual slowdown and we expect the authorities to ease policy
behaviour of core yields in the eurozone likely reflects that
further to ensure this remains the case. The authorities will
these markets are shrinking. Therefore ECB purchases could
likely set the target for 2015 growth at 7%.
lead to an acute demand-supply imbalance. This means that
there are now significant downside risks to our forecast of
Greek election has raised worries of euro exit
modestly rising core yields later this year.
With the ECB behind us, another big event in the calendar
looms, with the Greek elections on Sunday. The polls suggest
Stronger loan demand points to eurozone recovery
that Syriza will be the largest party. It may not get an overall
Loan demand, balance
majority, but it should be able to form a coalition government
% qoq
2
with the smaller Potami party. This prospect has caused some
50
1
concern (though at time of writing there was no visible effect
0
0
100
stronger demand
on markets glowing on the ECB euphoria). The worry is that a
Syriza government would unilaterally default on its debt and
-50
-1
refuse to stick to any of its obligations, which would lead to an
-100
-2
eventual Greek euro exit.
weaker demand
-150
-3
03 04 05 06 07 08 09 10 11 12 13 14 15
Cons. credit and other lending (lhs)
Overall corporate (lhs)
House purchase (lhs)
GDP (rhs, % qoq)
Greece likely to remain in the eurozone
Nevertheless, we think it is likely that Greece will remain in the
eurozone. Syriza has already significantly toned down its
Source: ECB, ABN AMRO Group Economics
stance on many issues, and will likely be more constructive in
government than its rhetoric suggests. Opinion polls report that
Europe’s moderate recovery pre-QE
the vast majority of Greeks want to stay in the euro. In
Meanwhile, we had a set of encouraging eurozone data. The
addition, Greece has made a lot of progress with reforms,
ECB’s latest Bank Lending Survey painted a positive picture. It
fiscal consolidation and wage adjustment. It would be odd to
signalled a eurozone economic recovery going forward. Banks
throw it all away now. Meanwhile, other eurozone countries
eased lending conditions at a faster pace, while demand for
loans continued to improve across loan categories. The
improvement in corporate loan demand – driven by rising
investment intentions – was particularly encouraging. Stronger
loan demand is consistent with firming economic growth in
coming quarters (see chart above).
also have an interest in keeping the club together. Although
risks are lower than a few years ago, there may still be a major
fall-out from a country leaving.
3
Macro Weekly - Mario delivers…now to Athens - 23 January 2015
Greece’s unsustainable debt
European banks’ exposure to Greece
A key Syriza aim if it does come into government is to get debt
EUR bn
relief. The German government says Greece must meet its
140
obligations. However, there cannot be anyone in the German
120
government or elsewhere that judges that Greece’s debt
100
burden is sustainable. Greece will very likely not be able to
meet its obligations. Sooner or later it will need debt relief.
80
60
40
20
A deal is possible
Most of Greece’s debt (around 80%) is to the official sector,
with the largest share (around 60% of total debt) to Eurozone
0
11Q1
12Q1
Public sector
Banks
13Q1
14Q1
Non-bank private sector
member states either via bilateral loans or via the EFSF. So a
debt write-off would need to involve other member states. An
Source: BIS, ABN Amro Group Economics
outright debt write off will obviously be politically difficult as it
will be unpopular in other eurozone states. However,
Greece’s debt mainly to the official sector
significant debt relief could be provided by further lengthening
Holdings of Greek debt
maturities and freezing interest payments. Indeed, the
Eurogroup already committed to do this in a statement on
Greece in November 2012.
EU/EFSF
Debt relief could be made conditional on actions by the Greek
IMF
government. While Syriza is less willing than the previous New
ECB/NCB
Democracy–led governing coalition to cut welfare spending, it
Private
will be more willing to fight tax evasion and go after vested
interests. In any case, there looks to be sufficient room for
negotiation.
Source: IMF, EU, ABN AMRO Group Economics
Uncertainty will not go away
Although we expect a solution, this does not mean it will be
smooth. Negotiations might be tough and there may be a lot of
pre-positioning by the different actors in public. Tough talk
could lead to nervousness. So we may well be in for a period
of uncertainty as far as Greece is concerned. Still, we do not
expect any significant contagion.
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2
Macro Weekly - Mario delivers…now to Athens - 23 January 2015
Main economic/financial forecasts
GDP grow th (%)
2013
2014e
2015e
2016e
+3M
+12M
2015e
2.2
2.3
3.8
3.0
United States
0.25
0.26
0.4
1.4
1.4
3.1
-0.4
0.9
1.5
1.9
Eurozone
0.07
0.06
0.1
0.1
0.1
0.1
Japan
1.6
0.4
1.6
1.2
Japan
0.18
0.17
0.2
0.2
0.2
0.2
United Kingdom
1.7
3.0
2.8
2.6
United Kingdom
0.56
0.56
0.6
1.2
1.2
2.2
China
15/01/2015 22/01/2015
United States
Eurozone
3M interbank rate
15/01/2015 22/01/2015
2016e
7.7
7.4
7.0
7.0
World
Inflation (%)
3.2
2013
3.2
2014e
3.7
2015e
3.9
2016e
+3M
+12M
2015e
2016e
United States
1.5
1.6
1.0
1.8
US Treasury
1.73
1.87
2.1
2.7
2.7
3.4
Eurozone
1.3
0.5
0.2
1.5
German Bund
0.48
0.45
0.5
1.0
1.0
1.5
Japan
0.3
2.4
1.0
1.4
Euro sw ap rate
0.70
0.75
0.7
1.2
1.2
1.7
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.25
0.32
0.5
0.7
0.7
1.0
China
2.6
2.0
2.0
2.5
UK gilts
1.51
1.52
1.5
2.4
2.7
3.2
World
Key policy rate
4.4
22/01/2015
4.0
+3M
3.7
2015e
3.8
2016e
15/01/2015 22/01/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.25
1.00
3.00
EUR/USD
1.16
1.14
1.17
1.10
1.10
1.00
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
116.2
118.5
122
130
130
140
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.52
1.51
1.44
1.41
1.41
1.33
Bank of England
0.50
0.50
1.00
2.00
EUR/GBP
0.76
0.76
0.81
0.78
0.78
0.75
People's Bank of China
5.60
5.35
5.10
5.10
USD/CNY
6.19
6.21
6.20
6.25
6.25
6.30
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
KEY MACRO EVENTS
Day
Date
Time
Country
Monday
Monday
Monday
Monday
26/01/2015
26/01/2015
26/01/2015
26/01/2015
00:50:00
09:30:00
10:00:00
10:30:00
JP
NL
DE
GB
Tuesday
Tuesday
Tuesday
Tuesday
Tuesday
27/01/2015
27/01/2015
27/01/2015
27/01/2015
27/01/2015
10:30:00
14:30:00
15:00:00
16:00:00
16:00:00
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
28/01/2015
28/01/2015
28/01/2015
28/01/2015
28/01/2015
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Thursday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Merchandise trade exports - % yoy
Producer confidence manufacturing - index
Ifo - business climate - index
BBA mortgage approvals - units
Dec
Jan
Jan
Dec
4.9
3.4
105.5
36717
11.2
GB
US
US
US
US
GDP - % qoq
New durable goods orders - % mom
S&P/Case Shiller house price index
New homes sold - % mom
Conference Board cons. confidence - index
4Q A
Dec
Nov
Dec
Jan
01:30:00
20:00:00
21:00:00
22:45:00
AU
US
NZ
NZ
GB
CPI - % yoy
Policy rate - %
Policy rate - %
Trade balance - NZD mln
Nationwide house prices - % mom
29/01/2015
29/01/2015
29/01/2015
29/01/2015
29/01/2015
29/01/2015
29/01/2015
29/01/2015
29/01/2015
09:55:00
09:55:00
10:00:00
11:00:00
12:00:00
14:00:00
16:00:00
20:00:00
DE
DE
EC
EC
GB
DE
US
MX
ZA
30/01/2015
30/01/2015
30/01/2015
30/01/2015
30/01/2015
30/01/2015
30/01/2015
30/01/2015
30/01/2015
30/01/2015
30/01/2015
30/01/2015
30/01/2015
00:30:00
00:30:00
00:50:00
01:05:00
10:30:00
11:00:00
11:00:00
11:00:00
14:30:00
14:30:00
15:00:00
15:45:00
16:00:00
JP
JP
JP
GB
GB
EC
EC
EC
CA
US
BE
US
US
ABN AMRO
106.2
3.5
106.5
0.7
-1
0.8
-1.6
92.6
0.6
0.4
0.7
2.6
95.2
0.6
0.8
2.6
95.5
4Q
Jan 28
Jan 29
Dec
Jan
2.3
0.3
3.5
-453
0.2
1.8
0.3
3.5
0.3
3.5
Unemployment - %
Unemployment change - thousands
M3 growth - % yoy
Economic sentiment monitor - index
CBI retail sales - balance (%)
CPI - % yoy
Pending home sales - % mom
Policy rate - %
Policy rate - %
Jan
Jan
Dec
Jan
Jan
Jan P
Dec
Jan 29
Jan 29
6.5
-27
3.1
100.7
61
0.2
0.8
3.0
5.8
6.5
-6.5
3.3
101.4
102.0
-0.1
0.5
-0.2
0.5
CPI - % yoy
Unemployment - %
Industrial production - % mom
GfK Consumer confidence - index
BoE mortgage approvals - thousands
Core inflation - % yoy
CPI - % yoy
Unemployment - %
GDP - % yoy
GDP - % qoq annualised
GDP - % qoq
Chicago Fed - business confidence - index
Univ. of Michigan cons. confidence - index
Dec
Dec
Dec P
Jan
Dec
Jan A
Jan
Dec
Nov
4Q A
4Q P
Jan
Jan F
2.4
3.5
-0.5
-4
59.0
0.7
-0.2
11.5
2.3
5.0
0.3
58.8
98.2
2.3
3.5
1.4
-3
59.0
0.7
-0.4
11.5
0.7
-0.5
3.1
3.0
58.0
98.5
58.0
98.5
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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