--ECB's planned bond-market intervention is likely to have a lasting
positive impact, says BlackRock exec
--Spain likely to wait until after September auction before requesting aid
--ECB rhetoric, commitment to sizeable bond purchases, key to success of plan
By Nick Cawley and Tommy Stubbington
The European Central Bank will likely learn from weaknesses in its
previous bond-buying program and ensure any future purchases are large
and aggressive enough to prompt a positive turnaround in the euro
bloc's long-running debt crisis, Michael Krautzberger, head of
European fixed income at BlackRock Inc. (BLK), said in an interview
with Dow Jones Newswires.
Mr. Krautzberger at BlackRock--the world's largest money manager--said
that ECB President Mario Draghi's recent public commitment to do
"whatever it takes" within the central bank's mandate to tackle the
euro-zone malaise represents a "milestone in the crisis." The ECB will
take lessons from its earlier now-dormant original bond-buying
program, which failed to control rising yields in fiscally-frail euro
member states, he said.
While he would be "stunned" if the central bank published specific
upper limits on bond yields for any particular countries, as some
press reports have recently suggested, Mr. Krautzberger said such an
approach is not essential for bolstering confidence.
"Rhetoric and size is more important than the form the bond-buying
program takes," said Mr. Krautzberger at the fund, which manages
assets worth $3.35 trillion.
"Past ECB rhetoric around interventions was uncoordinated and never
had the power to turn the market, but this is a significant step-up in
the power of intervention," Mr. Krautzberger said. Having the ECB as a
safety net when buying government bonds is a key part of making the
fund "less defensive than at other points in the crisis... Every
financial asset needs a buyer of last resort," he said.
The ECB first started buying under-pressure bonds for Greece in May
2010, later expanding the scheme to encompass Ireland, Portugal, Italy
and Spain. But it has not bought bonds in the open market for 23
weeks, in a move seen as forcing governments in the euro area to fix
tax and spending issues.
When it bought bonds in the past, the ECB's interventions were
volatility-fighting responses to selloffs. Purchases were disclosed in
aggregate totals, but the ECB didn't say when it was active in the
market, and nor did it disclose in advance the countries whose bonds
it would buy. That was seen as a defensive policy, and it failed to
achieve its aim of trimming borrowing costs.
In the monthly ECB press conference Aug. 2, ECB President Mario Draghi
pledged that the central bank would buy short-dated Spanish and
Italian government debt to force borrowing costs lower--a statement
that Mr. Krautzberger described as a "very sensible recognition of
reality."
The change of tone has already led BlackRock to boost its holdings of
Spanish and Italian debt.
"We are overweight Italy, while we are pretty neutral on Spain, from
having an underweight position [previously]," Mr. Krautzberger said.
Considerable uncertainties remain over the structure of the new
bond-buying program. The ECB distanced itself earlier this week from
reports that it planned to cap Spanish and Italian yields at
pre-determined levels, saying that it is misleading to speculate on
decisions that had not yet been taken.
Some analysts expect a more structured style of bond-buying than the
first round, along the lines of the Bank of England's quantitative
easing program, where the relevant bonds to be bought, along with
dates and amounts, are all announced in advance.
That would be "more powerful" than the earlier ad-hoc model, but
either method would have the potential to force borrowing costs lower,
provided the ECB is prepared to intervene with sufficient size,
according to Mr. Krautzberger.
Still, hurdles remain before the ECB can pull the trigger on a fresh
round of bond purchases. Mr. Draghi has made it clear that the central
bank will intervene only if fiscally-frail member states ask for aid,
enrol in a formal cost-cutting program and adhere to a strict set of
economic reform pledges.
Spanish Prime Minister Mariano Rajoy has requested open-ended bond
purchases of his country's debt by the ECB, but he has so far not
taken the first crucial step towards that: signing up to the rigors of
a full bailout through the euro-zone's temporary rescue fund.
Mr. Krautzberger expects a government debt bailout request from Madrid
to materialize sooner or later, although the recent benign tone in
bond markets will encourage the Spanish government to wait until after
its next major bond auction in early September, when it can better
gauge investor demand for Spanish debt.
While the current optimistic tone that the ECB will act forcefully to
keep fiscally-frail countries' borrowing costs lower for longer has
pushed yields to multi-month lows, Mr. Krautzberger feels that the
central bank will have to maintain a consistent message to keep
investors on-side and not let borrowing costs return to unsustainably
high levels.
This "only works if the ECB continues to be determined both in speech
and deeds," he said.
Write to Nick Cawley at nick.cawley@dowjones.com and Tommy Stubbington
at tommy.stubbington@dowjones.com
(END) Dow Jones Newswires
August 22, 2012 10:19 ET (14:19 GMT)
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