Are European Companies Ready for Life Without Draghi?

Not going to be easy, especially for “zombie” companies.

In 2017, the German constitutional court raised doubts about the legality of the ECB’s bond-buying program. But instead of ruling on the matter, it passed the buck on to its European superiors, the European Court of Justice (ECJ). As the German judges well knew, the chances of the ECJ ruling against the ECB on such an important matter are tiny. And in the highly unlikely event that it did, the ECB’s QE party would have already probably ended.

Over the last 18 months the ECB has reduced its bond purchases from roughly €80 billion a month to around €30 billion in January. But nearly all of the reductions over the first three months this year came from government bonds, while it largely maintained its purchases of corporate bonds.

At last count the ECB had a total balance sheet of €4.54 billion, more than any other central bank on Planet Earth, of which €149 billion are corporate bonds that it has acquired since June 2016.

But there are signs that the ECB has quietly begun to taper its corporate-bond buying program. The rate of purchases under the Corporate Sector Purchase Programme dropped 50% in April to about €700 million per week, down from €1.4 billion during the first quarter, analysts at Deutsche Bank pointed out. That could mean the ECB is starting a “stealth taper” in order to wean the European bond market off the corporate debt purchases it began in June 2016, Deutsche Bank said.

But are the companies that benefited from the ECB’s largesse ready for life without Draghi? There’s no doubting the ECB’s bond buying has exacerbated distortions in the corporate bond market — distortions that were first engendered by the central bank’s low interest rate policy. Yields came crashing down and spreads narrowed…

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