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The economic crisis and the crisis of economics Titel How the European Central Bank monetary policy instruments have changed in the recent crisis Authors Clemens Korper Date July 2011 Contents The recent crisis was not a normal recession at all. It was a global pandemic of incomprehensible dimensions. To prevent a depression like in the thirties of the last century governments and central bankers were forced to support the crashing markets with fiscal and monetary stimulators. This paper discusses how the monetary measures of the European Central Bank (ECB) have changed in comparison with their standard measures. It explains what those new monetary instruments had been created for and how efficiently they have been working in the crisis empirically. The first part of the paper shows how the ECB has extended its already existing monetary instruments to serve the money market with enough liquidity to prevent a series of bank defaults. The focus is on the newest invention in the ECB´s monetary policy, namely the Covered Bond Purchasing Programme (CBPP) which is quite similar to his “big American brother” the Quantitative Easing (QE) Programme. The CBPP is from that point of view very interesting because it was never used before in the history of the ECB. The paper will also prove that by contrast with the Federal Reserve´s (Fed) QE the CBPP is only a small market intervention. At the end of that paper, the Security Market Programme will be treated. Without a doubt this programme is the most critical measure ever taken by the ECB. The fact that an independent central bank acts as buyer of government treasury bonds gave rise for critics from several sides. All those different ECB activities created questions of their usefulness and needfulness. The following pages will try to give answers in that respect by showing the grade of efficiency of those new monetary measures. The economic crisis and the crisis of economics 1 Instruments of the ECB used before the crisis 1.1 Introduction The following section gives a short introduction about the used instruments by the ECB carrying out its monetary policy before and after the meltdown in the financial markets and how the ECB has been responding with its “old” and “new” instruments. 1.2 Open market operations Open market operations are a very important and a useful monetary policy instrument, not only for the ECB, but also for other central banks over the world to provide the money market with liquidity in form of loans. By providing the money market with less or more liquidity, the ECB has the indirect ability of supervising the key interest rate in the European money market. One often used instrument to execute this operation is the reserve transaction in form of repurchase agreements and collateralized loans with practically no risk. For its execution the ECB uses the procedure of an auction with the so called “tender” method. There are three forms of tender methods: standard tenders, quick tenders or bilateral procedures. (ECB, 2011, p. 10) The open market operations can be divided into four categories (Executive Board of the ECB, 2011, p. 96): The main refinancing operations (MROs) are reserve transactions which provide banks with liquidity coming from the ECB in a weekly frequency and with a short maturity of only one week. The standard tender method is used in this operation. The longer term refinancing operations (LTROs) are reserve transactions with a monthly frequency and with a maturity of three months. These operations are not used to send signals to the markets in form of interest rates. The diversification of loans happens in an auction, where the highest bidder gets first access to liquidity. Fine tuning operations (FTOs) are used to smooth out different liquidity fluctuations in the market, to keep the interest rates on that level which is preferred by the ECB. These operations belong to the reserve transactions but they can also appear in form of foreign exchange swaps or by the collection of fixed term deposits. Structural operations are a form of reserve transactions and issues of debt instruments by national central banks through standard tenders. These operations are used whenever the ECB wants to adjust the structural position of the Euro system in the financial sector. The economic crisis and the crisis of economics Table 1: Euro systems monetary policy operations Source: Executive Board of the ECB (2011), The monetary policy of the ECB, p. 13 1.3 Standing facilities Compared with open market operations the biggest difference is that banks can use the marginal lending facility to obtain overnight liquidity. The interest rate of these facilities gets fixed by the ECB which is called EONIA – European Overnight Index Average. The EONIA is the ceiling of the overnight money market. Banks have to offer collateral to get access to these facilities. But it is not only an opportunity for banks to borrow it is also possible to park their deposit surplus money at the ECB at an interest rate, which is the floor of the overnight money market interest rate. (ECB, 2011, p. 11) 1.4 Minimal reserves The minimal reserve policy is a strong instrument of the ECB. With that instrument it has the possibility to create liquidity shortages in the money market and is thereby restricting credit institutions in their credit creation. The shortages in the liquidity market make European banks more dependent on liquidity providing operations (see section 1.3 and 1.3) offered by the ECB. That dependence makes it easier for the ECB to control the money market rates. The minimal reserve responsibility of banks depends on their balance sheets and its ceiling is 10 percent. Normally the reserve rate lies between 1.5 and 2.5 percent. (ECB, 2011, p. 11) 1.5 The ECB´s monetary policy before the crisis 1.5.1 How the system worked Every monetary policy decision of the ECB is done with respect to its main target - the price stability. Price stability inside the monetary union is defined as an increase of less but close to two percent of the consumer price index (CPI). Before the financial market collapsed it was a complete no-go for monetary authorities to violate this goal. To achieve this goal the Governing Council sets the key interest rates first (signalling). The market communication in form of that signalling is an important instrument in the hands of the authorities. It affects the future expectations of market participants and so increases the effectiveness of monetary policy. The key rates consist of the minimum bid rate, the main refinancing operations like reserve The economic crisis and the crisis of economics transactions, the interest rates, the marginal lending facility and the deposit facility. These variables build the corridor around the minimum bid rate. The interest rates of the standing facilities limit the range of variation of the EONIA. With that mechanism the Governing Council can steer the short term interest rates. Through changes in the money market interest rates the ECB has the power to set prices at which banks can borrow money on the market. This affects the credit growth rate and asset prices. Together in a pot with external factors this can lead to changes in demand and supply in the goods markets and so they can indirectly influence inflation and keep them under two percent. These external factors or “autonomous factors” which can´t be influenced by the ECB are banknotes in circulation and government deposits for instance. (ECB, 2010, p. 66-68) 1.5.2 Analyzing empirically the ante crisis interest rates The empirical data shows that in the period from 1996 to 2008 the money market rates in the euro system fluctuated in average around a value of about 4 percent. Figure 1: money market interest rates Source: Euro Area Statistics Online (2011), monthly bulletin (slightly modified) The economic crisis and the crisis of economics Compared to other leading economies (USA, Japan) the ECB followed a much higher interest rate policy. After the financial meltdown this policy had been eliminated as a consequence of the bankruptcy of Lehman Brothers on the 15 September 2008. The European Overnight Index Average (EONIA) fell from its normal value that prevailed before from 387 basis points in 2008 to 71 basis points in 2009. This dramatically cut in the EONIA showed how massive the interventions of the ECB have been. After Lehman the London Interbank Offered Rate (LIBOR) reached historical heights because of the huge uncertainty which spreads through the money markets. 1.6 Conclusions To avoid a complete failure of the banking sector and the possibility of another Great Depression the ECB invented and has been adopting some new instruments. The main goal of price stability was pushed to the side. The next section will discuss how the monetary policy has changed and which new instruments are playing a crucial role in fighting the crisis. 2 New instruments used by the ECB in the latest crisis 2.1 Introduction Jean Claude Trichet, the leaving president of the ECB pronounced on July 13, 2009:”Since October 2008, our key policy rate has been cut from 4.25% to 1%. In addition, and just as importantly, we have embarked on a policy of fully accommodating banks’ liquidity needs. This bold and necessary step has avoided a situation in which stressed liquidity conditions spiral into a systemic threat to the stability of our banking system as a whole.” (ECB Press, 2009) This dramatical cut in the key policy rate was necessary to provide the dried up money market with liquidity and to stimulate the whole economy. After the Lehman collapse the assessment of the proper key interest rate set by the Governing Council became much more difficult because of rising uncertainty in the markets. Standard models which have been used to met the main targets (price stability) of the ECB became less reliable than it proved in the past. Now it was nearly impossible to estimate the effectiveness of monetary policy instruments. During the crisis the ECB had to consider different external effects; such as developments in the oil prices or other externalities from the American subprime market. The ECB decision for radical movements in their monetary measures in August 2007 when the first European banks got liquidity problems, the Euro system reacted quickly in that form that the timing (frequency) and maturity of its liquidity providing operations has changed. It also provided liquidity in foreign currencies against a standard Euro collateral set to eliminate the exchange rate risk too. In September 2008 when Lehman collapsed, the turmoil spread over from the US to Europe and to the rest of the world and caused an economically downturn which subdued inflationary pressures. In the following days the Governing Council adopted some standard and non standard measures. The first step was a radical cut of the key interest rates by 325 basis points to a historical low of one percentage point. (ECB Press, 2009) The economic crisis and the crisis of economics 2.2 Enhanced credit support The decrease of the key interest rate was not progressive enough to the ECB. It decided to implement further new techniques to battle the recession. The first new measure was the “enhanced credit support” which provided banks with new credit conditions to make the access to central bank money easier. This was surely an important step because the European economy depends strongly on bank financed loans to the real economy. The main part of external financing of non-financial corporations comes from the banking sector. Especially for small and medium sized companies this was an important measure to tend them with short term liquidity which kept their businesses running. (ECB Press, 2009) The ECB also supplied liquidity to the European banking sector in form of loans denominated in US Dollars. This could be done due to a special partnership with the US Fed. The ECB and the Fed built a swap facility. The Fed agreed to provide Dollar swaps (without any upper limits) against Euro-denominated collateral. In a statement the Fed pronounced: ”These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers” (Reuters, 2010) Now the ECB was able to provide loans denominated in Dollar whenever a bank needs some. This step has been done because the crisis made it very difficult for banks outside the US to refinance their net large holdings of US-Dollar denominated assets. But the ECB also established swap facilities with other European central banks (non-Euro countries); such as the Swiss- and Swedish National Bank. These international corporations were clearly a sign that some lessons have been learned in the Great Depression and that individualism has no longer space in a global crisis. (ECB, 2010, p 68-69) 2.2.1 Summing up the credit support measures All these measures were focused on the banking sector to ease their refinancing and to provide the markets with liquidity. The ECB´s credit support measurers have been: The provision of unlimited liquidity at a fixed rate against adequate collateral in all refinancing operations for banks within the Euro area: In the following of this programme the ECB fixed the main refinancing rate. The ulterior motive for that programme was to support the short term funding of the banks to prevent liquidity risks which would have negative impacts on the availability of credits for households and companies in the Euro zone. (González-Páramo, 2010) The lengthening of the maximum maturity of refinancing operations from three months prior to the crisis to one year: These longer-term refinancing operations (LTROs) reduced the refinancing requirements of banks in the short term. This programme started with a total amount of € 60 billion on November 23, 2007. The LTROs will be carried out through a standard tender procedure. By extending the maturity of these operations it should have positive effects through the normalization of the European money market. (ECB Press, 2008) The economic crisis and the crisis of economics The outright purchases in the covered bond market: The most radical operation of these new instruments was the Covered Bond Purchasing Programme (CBPP). The covered bond market is a very important financial market and the primary financing source for banks. The goal of this programme is reducing yields of bonds to make the refinancing for banks and corporations easier. This will be clearly discussed in section 3. (Beirne, 2011, p. 5) 2.2.2 The extension of the list of assets accepted as collateral The Euro system decided to lower the credit rating for marketable and non- marketable assets from A- to BBB to accept them as possible collateral. The only exceptions are asset backed securities (ABS). In times of the crisis bank assets become less valuable. So the ECB decided to implement some haircuts if the accepted collateral appears to be overvalued with regard to their accounted value. Consequently all BBB assets are suffering a haircut of 5%. These measures enhanced banks to refinance a large share of their balance sheet with the Euro system. The list of assets approved as collateral in their credit operations are: Marketable debt instruments denominated in foreign currencies such as US Dollar, Pound and Yen issued in the Euro area. Haircuts of 8 percent are possible if the ECB is unsure about reliability of this collateral. Euro-denominated credit claims governed by the law of the United Kingdom. Certificates of deposits (CDs) which are traded on non regulated markets are accepted as well, with the possibility of 5 percent depreciation. Subordinated deposit instruments are only accepted if they have an accepted guarantee. Haircuts by these instruments are possible from 5 to 10 percent. With the expansion of the accepted collateral the ECB made a brave step. It was at least one point where the ECB acted much more aggressive than the Fed to prevent a total collapse of the financial markets. (ECB, 2008) 2.3 The phasing out of non standard measures All these credit support measures have been designed for a limited maturity. These measures have been established to compensate the negative effects of the financial crisis and if the situation in the European economy returns to normality they are going to be removed. This is what the Governing Council did. On the 3rd December 2009, they decided to gradually phase out those non-standard measures which seemed to be no longer needed at the beginning of 2010. The first measures which were stopped were the LTROs, which were conducted the last time in December 2009. The other shorter maturity operations followed a few months later. This phasing out enabled banks to resume their task of offering sufficient liquidity to the market. If they had not dismissed these new measures, this could have caused distortions such as excessive reliance on exceptional central bank liquidity and associated moral hazard problems. As we saw in the subprime crises where the money markets had been flooded with liquidity this caused an excessive risk taking behaviour. So the phasing out was a necessary step on the way to financial The economic crisis and the crisis of economics normality. But the abandoning of some operational instruments doesn’t mean that all have been removed after all. The Euro system will continue to provide liquidity to the banking system at favourable conditions. For more details about ECB´s exit strategies see section 3.8.5. (ECB, 2010, p. 70-71) 2.4 Conclusions These credit support measures are not comparable with the QE and other measures which were implemented by the Fed, the Bank of England and the Bank of Japan to boost their economies. As those systems are quite different - Europe needed other solutions. In the Euro system most of the firms are financed externally by banks. In the US and GB they are primarily financed by equity through financial markets (stock markets). This may be an explanation why those countries react differently in the recent crisis. In the next section we will analyze the new invention of the ECB to support the money market with liquidity. 3 The Euro system’s covered bond purchasing programme 3.1 Introduction The CBPP is a programme to stimulate the covered bond market in the European money market. From the view how it works, it is quite similar to the QE programme in the US. Like Roubini formulated suitably: “When the government created a demand for the bonds by buying them up, their price went up, and their yield went down. Because bond prices and bond yields move in opposite directions. That meant they became less attractive as a place for banks to park money.” (Roubini, 2010, p. 128) What Roubini further explains in those simple sentences is that bonds have an inverse relationship between their market value and their yields. If now the ECB buys bonds, the result will be an increased demand for them. But the supply does not change. So, to keep the bonds market in equilibrium, the price for bonds has to rise. When the price rises, the market value of the bond rises too. The coupon and repayment are already fixed when respectively before the bond is being emitted. So the only variable which has the possibility to change is the individual bond yield. In this case it has to decrease. The shrinking of covered bond yields was or is exactly that what was aimed to achieve by that programme. 3.2 Facts and objectives of the CBPP The CBPP was first announced on 7 May 2009 to stimulate the bonds market in the Euro zone. The Governing Council decided to spend an amount of € 60 billion into the programme. The time span, during which the bonds should be purchased, bit for bit, was fixed from the 6 July 2009 to the end of June 2010. All in all 422 different bonds were purchased. From those 422 bonds were 27 percent purchased on the primary market and 73 percent on the secondary market. The maturities of those bonds lie between three and seven years with a modified duration of 4.12 years. (Beirne, 2011, p. 5) The four objectives of this programme were: Pushing the money market term rates further down. The economic crisis and the crisis of economics Make funding easier for credit institutions and enterprises. Encouraging credit institutions to expand their lending and to stop their investing in relatively save long term government bonds. Improving market liquidity in important segments of the private debt securities market. (Beirne, 2011, p. 12) Another reason for this bond financing package of the ECB was that covered bonds provide banks with a refinancing instrument which has a longer maturity than the standard ECB operation facilities. The announcement of the CBPP caused immediately a market reaction. In the secondary market, the market where bondholders trade with each other, the yield spread tightened in the Euro area and lead to a recovery in the primary market. To prevent any uncertainty in the markets the Governing Council decided to present the technical modalities of the CBPP. On the 4 July 2009, Jean Claude Trichet published a detailed programme in the official journal of the European Union. (The Governing Council of The European Central Bank, 2009, p. 1-2) It was stated in this journal that the ECB would purchase covered bonds in the amount of € 60 billion through Euro system´s portfolio managers. These purchases would be conducted in the primary and secondary covered bond market. Eligible bonds for the programme have to fulfil the following criteria: The collateral have to fit with the Euro system credit operation norms. They have to fit criterion in Article 22(4) of the directive on undertaking collective investment in transferable securities (UCITS) or similar safeguards for non-UCITS-compliant covered bonds. UCITS are investment funds suitable for small investors. They must have an issue volume of about more than € 500 million and in any case not lower than € 100 million. Additionally they also must have an AA rating or equivalently rated by at least one of the big rating agencies Fitch, Moody´s, S&P or DBRS. Anyway the rating is not allowed to be lower than BBB-/Baa3. The covered bonds must have underlying assets that include exposure of private or public entities. Error! Reference source not found.Figure 2 shows the accumulated covered bonds of the ECB under the CBPP. Since the ECB bought every day nearly the same amount of bonds the accumulated amount of covered bonds can be illustrated as a quiet linear gradient with a positive slope. The average daily purchase conducted was about € 240 million. So, the whole amount of € 60 billion was diversified over a year. (Beirne, 2011, p. 5) The economic crisis and the crisis of economics Figure 2: accumulated covered bond purchases Source: European Central Bank (2011), The Impact of the Eurosystem´s Covered bond purchase programme on the primary and secondary markets, p. 13 (slightly modified) During the time of the CBPP 148 new eligible covered bonds were issued. The total amount of those issuances reached € 150 billion. High debt countries like Greece saw its first publicly placed covered bonds. Overall 24 new issuers for covered bonds entered the European bond market. Also huge economies like Italy saw a significant increase in the number of new issuers. (Beirne, 2011, p. 13) The CBPP seemed to be successful in the short run when looking at the stats. It seemed to have a boosting effect for the issuer of new covered bonds and was supposed to recuperate the confidence for further investments. Hence market liquidity seemed to improve too. To stop an excessive enthusiasm about the success of the CBPP it must be added that parallel to this some European governments started a guarantee programme for uncovered bonds. This guarantee programmes had a direct impact on interbank and capital markets, which further attracts new investors for uncovered bonds. A government guarantee eliminates nearly all credit risks. This rendered possible or re-opened financing sources for banks in order to stabilize their balance sheets. What kind of problems such guarantees or bond purchasing programmes are causing in form of notably moral hazard is a question that can´t be answered yet. (Beirne, 2011, p. 13) 3.3 The importance of the covered bond markets for the European financial markets The covered bond market is the most important privately issued bond market in Europe. In October 2008 covered bonds were the main funding instrument for Euro area banks. The whole market had a volume of € 2.4 trillion in the year of 2008. This is an improvement of 60 percent against the year 2003 where the market had a The economic crisis and the crisis of economics volume of € 1.5 trillion. This market became more and more important over time. (Beirne, 2011, p. 9) The structure of covered bonds is explained in the following sentences: “Covered bonds are debt instruments secured by a cover pool of mortgage loans (property as collateral) or public-sector debt to which investors have a preferential claim in the event of default. While the nature of this preferential claim, as well as other safety features (asset eligibility and coverage, bankruptcy-remoteness and regulation) depends on the specific framework under which a covered bond is issued, it is the safety aspect that is common to all covered bonds.” (European Covered Bond Council, 2009) This citation makes clear why the volume of this market has exploded in the last years. It is a save investment where investors can basically expect a good compensation in the event of default. In comparison with mortgage backed securities, a financial instrument which gained notoriety in the subprime crises, there isn´t any transfer of credit risk. So, covered bonds gave no incentive for a moral hazard problem - at least for those who sell bonds! The risk of default by the issuer of covered bonds is backed by a pool of normally high quality collateral. In the case of asset backed securities (ABS) the underlying pool of collateral is transferred to a special purpose vehicle (SPV). Through the transfer to a SPV they disappeared from the banking balance sheets. (Beirne, 2011, p. 9) Another reason for those transfers were that so the banks affected would no longer have to be forced keeping high reserve requirements. The complete contrary is the case by covered bonds. Covered bonds remain in the banking balance sheet and so those banks keep only high quality assets. (Roubini, 2010, p. 59). Although there is that advantage over ABS the covered bond market couldn’t nevertheless be immune against the Lehman collapse in the middle of September 2008. As a result of this historically bankruptcy the spreads in the secondary market widened and issuances slowed down in the primary market. The risk aversion of investors rose and the so called “Minsky moment” in Europe set in. ”A sudden aversion to risk, a sudden desire to dismantle the pyramids of leverage on which profits have until so recently depended, is the key turning point in a financial crisis.” (Roubini, 2010, p. 80) This caused major problems for banks because their main funding source deteriorated massively. Through the wide panic in the financial market the trust of banks in each other’s solvency lead to a halt in the interbank money market lending. If this drying up in the interbank money market keeps rising, the real economy can get infected through declining loans by banks. Solvent corporations can become - from one day to another - illiquid and unable to pay their bills or wages to their employees. This was the time when the ECB was forced to react. It decided to manufacture the CBPP that was developed to supply the market with enough liquidity additionally to the measures in section 2. 3.4 Channels by which the CBPP theoretically works The main goal of this programme was to inject money into the economy, to stimulate spending and to keep the banking sector intact. There are four main channels how the CBPP affects the real economy. The primary channel of this programme affects the expectations of investors. This is called the pronouncement effect. Through the announcement of new programmes the ECB gives a positive signal to support the financial markets. This causes more confidence and stimulates future investments. The economic crisis and the crisis of economics New Keynesian models have the strong opinion that asset purchases can only work trough a signalling channel. The second channel which was described by Tobin as the “portfolio balance” effect transmits itself through the announcement of the programme and through the purchasing of the covered bonds. These massive purchases of bonds lead to an increase in bond prices and a reduction of the supply in the market. This reduces the medium term interest rate of those assets and results in a decline of the yields. The third channel is the liquidity premium effect. That effect should have a reducing impact on the liquidity premium. Investors are less refused to invest when they know that there is a big buyer in the market, in our case the ECB, which purchases huge amounts of bonds. They know if they want to sell their assets it is now no problem for them to get rid of it since the taxpayer will have to bail them out. Another important aspect shouldn´t be forgotten. If investors hold different types of bonds to those which the ECB is purchasing or possessing, their yields increase relatively to covered bond yields. The rise in the risk premium increases their income and so their wealth (if it’s hold till maturity) and boosts their willingness to spend. The liquidity premium effect is just a temporary effect because it works only as long as the CBPP is running. The fourth and last channel of the CBPP is the “real economy” effect. When the ECB buys the covered bond from a seller it pays with their reserves. The money a seller gets could in turn be invested into other bonds or could also be used to pump up the real economy. If he or she spends his or her earnings for consumption, production is boosted which helps the economy to pick itself up faster. (Beirne, 2011, p. 10-11) Apart from these channels and effects ECB’s main ambition for this programme was stabilizing markets and giving confidence to potential investors. 3.5 An empirical analysis about CBPP’s impact on the primary market of bank bonds 3.5.1 Empirical long run relations between covered and uncovered bonds before and after the crisis It is empirically proved that the amount of covered bank bonds in circulation has always been higher than those of uncovered bank bonds. During normal times charts of those bonds are used to perform similar to the line you can see in . The economic crisis and the crisis of economics Figure 3: amount of covered and uncovered bonds Source: European Central Bank (2011), The Impact of the Eurosystem´s Covered bond purchase programme on the primary and secondary markets, p. 16 (slightly modified) Both bond markets showed a stable upward trend by a stable spread of about € 100 billion between those bonds. The turmoil of the financial markets in August 2007 disturbed this positive development. While the covered bond market seemed quite unaffected at the beginning of the crisis, the uncovered bond marked went through harsh times. From August 2007 until September 2008 (before the Lehman collapse) the growth of uncovered bonds stagnates. During the worst phase the spread between those bonds reached € 300 billion. It is quite normal or logical that in times of panic and uncertainty investors are showing a higher risk aversion and so they prefer to enter in the save covered bond haven. After the Lehman collapse in September 2008, we observed a complete reverse development in both markets. While the slope of the growing covered bond market became flatter, the uncovered bond market showed an impressive recovery. This phenomenon can be explained by the huge government guarantees for uncovered bank bonds made in the first quarter of 2009. At the beginning of 2009 the covered bond market took a negative development. Only as in July 2009 ECB’s CBPP started and in follow of the issuance of new covered bonds they began to rise again. (Beirne, 2011, p. 16) The last records from January 2011 showed that the spread of covered and uncovered bonds has narrowed to 60 billion. 3.5.2 Empirical long run relations between bank bonds and corporate bonds before and after the crisis The idea behind that empirical analysis is to check whether bank bonds and corporate bonds follow a long-run trend and how much influence the CBPP had on The economic crisis and the crisis of economics those bonds. Corporate bonds are a suitable comparison because both react the same way on common influential factors. The comparison between bank bonds and corporate bonds should make it clear whether the CBPP was really a boost for the bond market or just driven by the substitution of uncovered bonds for covered bonds. Error! Reference source not found.Figure 4 shows the developments of bank bonds (consists of uncovered and covered bonds) and corporate bonds. The scale for corporate bonds is on the left side ordinate and those for bank bonds on the right side ordinate. (Beirne, 2011, p. 16) Figure 4: amount of bank and corporate bonds Source: European Central Bank (2011), The Impact of the Eurosystem´s Covered bond purchase programme on the primary and secondary markets, p. 16 (slightly modified) In August 2007 during the turmoil of the financial crisis the corporate bond market fell in a condition of stagnation for about one year. The bank bond market seemed quite unaffected by the recent crisis until June 2009 where the growth of the bank bond market stocked. After the start of the CBPP (at the beginning of July 2009) the growth increased again. This evidence suggests that the CBPP had a positive influence on the bank bond market. But this short term effect seemed to be triggered by substitution effect of uncovered bonds for covered bonds. The negative development of corporate bonds showed that the CBPP hadn’t any aggregate effect because both bonds normally move in pro-cyclical way. But at the end it can’t be said that the CBPP had no real impact. Without the CBPP it would have become much harder for banks to refinance themselves than with it. The programme made it easier for banks to recover. It is empirically proven that the CBPP is to evaluate positively regarding the covered bond market. But maybe the positive impact on the primary market is not as big as the Governing Council of the ECB expected. Was the effect high enough for paying the price of broken rules and disregard price stability? Or was the amount of € 60 The economic crisis and the crisis of economics billions spent too low to stimulate the European economy? At least the young institution ECB has now some empirical data to learn from. 3.6 Empirical analysis of the CBPP’s impact on the secondary market The secondary market is a market where bond holder trade bonds with each other. On the secondary market the bond holder has two possibilities. He/she can hold the bonds until the end of their maturity to earn the outstanding payments (the coupon and the redemption amount) or he/she can sell them on the secondary market. The next section will show how the secondary market responded to the crisis and to the CBPP. 3.6.1 The announcement effect (short-term impact) This empirical analysis focuses on the impact of the CBPP on the yield spreads of covered bonds in different Euro zone countries. In this case is the yield spread the difference between a covered bond yield of a Euro zone country and a risk free benchmark yield (Treasury bond yield of a country with AAA rating). The observed countries are the two leading economies in Europe, Germany and France and two of the “PIIGS” (is an acronym for high debt countries in the Euro zone that refers on Portugal, Italy, Ireland, Greece and Spain) states Spain and Ireland. Error! Reference source not found.Figure 5 shows how the four country’s covered bond yields reacted to the announcement of CBPP. The hoped effect occurred and it diminished in all four countries. A special case is Ireland which was hit by massive bank insolvencies during the crisis. The Irish covered bond spread increased at 10 basis points on the day of the announcement. Why Irish covered bonds experienced such a counter reaction in comparison with other covered bonds is unknown. The only thing we can exclude is that the Irish yield spread increased because of adverse news. This reaction was only a temporary event and one week after the announcement the spread decreased like in the other Euro zone countries. The German yield difference gave the most positive response. It tightened by 7 basis points on the day of the announcement and declined in the following week on average for 3 basis points. In all four countries the gap decreased more than 4 basis points on average. (Beirne, 2011, p. 19-20) The economic crisis and the crisis of economics Figure 5: covered bond spread (short-term impact) Source: European Central Bank (2011), The Impact of the Eurosystem´s Covered bond purchase programme on the primary and secondary markets, p. 20 (slightly modified) 3.6.2 Long-term impact of the CBPP on covered bond yields To execute an exact analysis of long-term effects of the CBPP; agency bonds will be a suitable benchmark because of their similar market movements to covered bonds. Agency bonds have other suitable advantages too. Namely it allows control for country-specific effects and the agency yields are not strongly affected by floods of liquidity. It’s an agency bond because this type of bond is issued by a government sponsored agency. The offerings of these agencies are backed by the respective governments. Nevertheless they are private entities. In this analysis the two biggest economies in the Euro zone (in fact Germany and France) are compared to observe the long term impacts of the CBPP on their yield spreads. The spread now is the difference between the yield for a covered bond and an agency bond. The German agency is the “Kreditanstalt für Wiederaufbau” (KfW) and the French agency is the “Caisse dÁmortissement de la Dette Sociale” (CADES). Both agencies have a full government debt guarantee. In Figure 6 the spreads of both countries remained mainly stable before the crisis erupted. In the case of Germany it stood around 10 basis points and in France it reached 20 basis points. When the crisis began the spreads in both countries started to grow. The German yield spreads remained in the crisis more stable than the French ones. French covered bond spreads achieved heights of 125 basis points before the CBPP’s announcement. The interesting development in Germany is that ahead of the announcement the spread remained stable and fell at 35 basis points into a negative area after the CBPP had been publicised. That means that after the announcement yields for German covered The economic crisis and the crisis of economics bonds remained smaller than for agency bonds. This is quite surprising because covered bonds have a higher credit risk than agency bonds. In France the announcement had a huge effect too. The covered bond spreads there declined by about 50 basis points and since July 2010 it stood 30 basis points above their pre- Lehman level. (Beirne, 2011, p. 20-21) Figure 6: covered bond spreads (long-term impact) Source: European Central Bank (2011), The Impact of the Eurosystem´s Covered bond purchase programme on the primary and secondary markets, p. 21 (slightly modified) 3.7 Conclusion on the CBPP The collected empirical data of the last sections demonstrated that the CBPP lowered the yields of covered bonds. The shrinking of covered bond yields hasn’t been small during the programme. The yields were clearly cut and so it could offset the upward pressure triggered by the crisis. But the question is if the dampening effect of averaged 12 basis points on Euro area covered bond yields are enough to further new issues of covered bonds? At least it seemed so because finally the empirical analysis made clear that after the announcement and during the programme the issuance of new covered bonds on the primary market increased - especially in critical economies such as Greece and Italy. Due to increase of The economic crisis and the crisis of economics issuances of new covered bonds, ECB accomplished his mission of lowering the overall funding costs of banks successfully. 3.8 Comparing the Fed´s QE with the ECB´s CBPP 3.8.1 Introduction When the federal funds rate was cut to nearly zero in December 2008, the Fed has eventually reached its limits for open market operations. Ben Bernanke (current chairman of the Fed and an expert for what happened in the Great Depression) came up with an idea which was used before during the Kennedy administration in the sixties and the last time in Japan 2006. This idea has the name Quantitative Easing. Ben Bernanke tried to call this revival instrument “Credit Easing” to separate it from the unsuccessful programme of the Japanese but his version hasn´t gained acceptance in public anyway. (Blinder, 2010, p. 1) 3.8.2 What is QE and how does it work? In 2008 when interest rates were close to zero in most of the leading economies, a situation prevails that is called a liquidity trap. Nouriel Roubini formulated it suitably: “It’s what happens when the Fed has exhausted the power of open market operations. That dreaded moment arrives when the Federal Reserve has driven the Federal funds rate down to zero…..it’s almost impossible to drive policy rates below zero. You can’t make banks lend money if they’ll be penalized for doing so. Policy makers find themselves in a serious quandary. They’re in the dreaded liquidity trap.” (Roubini, 2010, p. 66) In this situation conventional monetary policy is useless. Such a case can have dramatic consequences if deflation captures the economy. In such a case the real interest rates are rising and the monetary authorities’ can´t do anything to stop this deflationary impulse. In such situation QE will be a solution. By buying market assets such as bonds, the central bank has the power to decrease risk premiums and flattening the yield curve of these bonds, so they can stimulate aggregate demand. It works the same way like the CBPP in the Euro zone. Another positive side effect of QE is that it can reduce the risk or liquidity spreads of bonds over Treasuries. This can boost investments and consumption too because private borrowing, lending and spending depends on non-Treasury rates. A central bank can do this in the way that it buys risky or less liquid assets or by selling some Treasuries out of their portfolio. So they can steer supply and demand of the asset and Treasury market. By selling Treasuries out of their portfolio a central bank changes its own balance sheet by creating new base money. This market intervention increases than the size of central bank´s balance sheets and this is exactly what can be watched by looking at the Fed´s balance sheet. (Blinder, 2010, p. 2-4) The effectiveness of QE depends mainly on the substitutability across the assets which are traded. If all assets in the markets are perfect substitutes of each other, a purchase of a segment of assets will not change the supply of the market and therefore this won´t have any change on prices or on the yields of these assets. Investors would have the ability to switch to other assets at any time. The economic crisis and the crisis of economics 3.8.3 The extent of the Fed´s QE programme compared with ECB´s CBPP The first Quantitative Easing programme (QE 1) was introduced by the Fed on the 25th November 2008. The initial plan was to purchase Treasury bonds with an authorized height of $ 600 billion. That amount has been extended to the incomprehensible amount of $ 1.725 trillion which is about € 1.185 trillion calculated with the exchange rate from 22 April 2010 (1,455 $/€). The programme started at 1st January 2009 and ended on 31st March 2010. Against this high amount which was pumped into the American economy the ECB´s CBPP with an amount of € 60 billion seems like a drop in the bucket. The main difference between the Fed´s and the ECB´s programme is that the ECB mostly purchased collateralized bonds with maturities of three to seven years. The Fed´s quantitative easing was much more excessive concerning its assets purchasing. QE 1 was generally focused on purchases of direct obligations of housing related government sponsored enterprises (GSEs) and mortgage backed securities (MBS); backed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The idea behind this was to support the mortgage and housing markets, in way that reduces residential mortgage rates. But the Fed bought government bonds as well, like the ECB in its Security Market Programme (The Federal Reserve, 2010). On the 23 August 2010, Ben Bernanke communicated that the Fed will start another Quantitative Easing programme (QE 2) that was authorized for new purchases of Treasuries with an amount of $ 600 billion. The programme was officially announced on 3rd November 2010 and should end on 30th June 2011. (Swanson, 2011, p. 1) 3.8.4 Central bank´s balance sheets rising When in summer 2007 the first waves of the financial crisis showed up, the Fed reacted, in cutting the federal funds rate, much too slowly, most economists criticized. The FOMC (Federal Open Market Committee) cut the federal funds rate down to 2 percent until April 30, 2008. While the Fed was criticized for its slow reaction, the ECB was doing nothing in that way. The ECB´s key interest rate was kept constant, (4 percent) until July 2008. Then the ECB decided to increase the rate at 250 basis points to 4.25 percent because of their concern about rising inflation. This was a complete different reaction to that what the Fed had done before. These actions can be seen in (pink lines). (Klyuev, 2009, p. 4) The economic crisis and the crisis of economics Figure 7: US and European balance sheets Source: Vladimir Klyuev, Phil de Imus and Krishna Srinivasan, Unconventional Choices for Unconventional Times: Credit and Quantitative Easing in Advanced Economies (2009), p. 5, (slightly modified) QE in a weaker form started at the beginning of 2008 when the Fed decided to sell government securities (Treasuries) and bought less liquid assets instead. Through that procedure the Fed tried to support dried up markets with liquidity and to decrease the liquidity premiums of those assets. The real QE programme had started after the bankruptcy of Lehman and changed the liability side of the Fed´s balance sheet tremendously. The Treasury began to prop up the Fed for its QE and deposited there an excess of funds at the central bank. This enabled the Fed to acquire more securities to increase their assets and to widen the lender of last resort abilities. (Stark, 2009) After the Lehman collapse the ECB was constrained to act. Through the widening of the maturities of their standing facilities and other credit support measures, the ECB´s balance sheet grew massively at October 2008 (see ). Another reason for it was that banks had the opportunity to deposit their excess liquidity (which they had borrowed before under special conditions) at the central bank´s deposit facility. At the beginning of 2008 the ECB held € 1.53 trillion in assets and at the end of that year this amount increased to € 2.08 trillion (about $ 3 trillion). That means an increase of 36 percent of the ECB´s balance sheet in one year! In 2009 their balance sheet decreased continuously until the ECB started its € 60 billion costly CBPP, on 6th of July 2009. (Randow, 2009) The failure of Lehman gave the Fed new incentive for even more radical measures. First of all the FOMC pushed the interest rates down to zero in the middle of December 2008. The most remarkable act was the huge expanding of the Fed´s balance sheet through QE. The total amount of assets rose from $ 907 billion on the 3rd September 2008 to $ 2.214 billion on November 12, 2008. That means the balance sheet has far more than doubled within two month (see )! Cranking up aggregate demand became the main priority for the Fed - as pronounced in a press release from December 16, 2008: “The Federal Reserve will The economic crisis and the crisis of economics continue to consider ways of using its balance sheet to further support credit markets and economic activity.” (Federal Reserve, 2008) In those days, after the Lehman disaster, the Fed became very creative in building new facilities like it is the Maiden Lane facility which was designed to help the tattered investment bank Bear Stearns and the financial insurer AIG. The Fed bought almost everything what could be bought on the financial markets. Under its purchases have been securities such as commercial papers to carry non-financial institutions. For that reason the Commercial Paper Funding Facility (CPFF) was founded in September 2008. Not only the asset side of their balance sheets increased to historical heights, also the liability side increased extremely. Bank reserves exploded practically from the before crisis level of about $ 11 billion to an incomprehensible amount of $ 860 billion at the end of 2008. In the following of these massive market interventions the Fed´s balance sheet got extremely leveraged. The Fed´s leverage (debt to equity ratio) rose from 22:1 to 53:1. The high leverage ratios of banks all over the world were a catalyst for the crisis. Is it right of the Fed to follow the same strategy? It will be interesting to see in the upcoming years how the Fed gets rid of this high amount of liabilities. Aside from the high amount of liabilities that the Fed already has accumulated, there is also always the danger that the purchased assets become worthless if diverse bankruptcies or defaults take place. (Blinder, 2010, p. 7-9) 3.8.5 The ECB´s and Fed´s exit strategies Together the ECB and the Fed were working out suitable exit strategies for their non- standard monetary instruments. In matching their decisions they try to avoid uncertainty about rising inflation in the financial markets. Such concerns are not without reason because central banks have experienced huge rises of their balance sheets (see section 3.8.4). Now both central banks try to get rid of it. On the 4th of September 2009, Jean Claude Trichet published some scenarios how the exit strategies for the non-standard measures could look like. The main goal concerning these strategies is still to keep prices stable – which has been the main task of the ECB up to now respectively in the recent past. The ECB has to be transparent to make those exit strategies effective. If this is not the case, fears in public about increasing inflation and uncertainty about the stability of financial markets will come up. This will provoke rising long-term interest rates which harms the recovery of the European economy. (Trichet, 2009) The ECB exit strategies for several financial instruments are: Repurchase agreements: A huge amount of the provided liquidity for banks in the heat of the crisis was equipped with repurchase agreements. So these problems are self-releasing if those banks are still solvent. The widening of the accepted collateral: At the beginning of that measure it was clear that the widening of accepted collateral to a BBB- rating is only temporary. The whole programme was stopped in December 2010. The accepted collateral remains in the ECB´s balance sheet. The economic crisis and the crisis of economics The provision of foreign currency swaps with the Fed will not be maintained if there is no demand for additional Dollar currency in the European financial markets. The plan for € 60 billion expensive CBPP is to hold them in their balance sheet until maturity. So they will shrink over time as a result of their redemption payments. The Fed´s exit strategies are more complex crisis supporting measures than those of the ECB. The complete concept hasn´t been fixed yet but the several speeches of Ben Bernanke gave some insights how the Fed is about to handle it. The key elements of the Fed´s exit strategies are (Blinder, 2010, p. 11-14): The extraordinary liquidity facilities (Maiden Lane, CPFF) which were keenly implemented in the crisis were running out if they wouldn’t have use anymore. The Fed´s implemented CPFF to sustain non-financial institutions were closed on 1st of February 2010. The same happened to the lending facility for primary dealers - the Term Securities Lending Facility. The discount window was closed on 18th of February 2010. It was installed by the Fed for emergency loans to banks with a maturity of 90 days with quasi no penalty. In the case of the assets which were being purchased under QE (mortgage backed securities and asset of government sponsored enterprises) the Fed will have to need stamina. As those asset purchases are primarily responsible for the exploding balance sheet, the Fed can phase those assets out through open market operations. Anyway it will take years if not decades to return to the prior crisis balance sheet level. Another step for lowering the balance sheet is to reduce the quantity of reserves by repurchase agreements and selling securities through open- market operations. As these actions affect the market interest rates, the Fed has to be very careful in doing so. Because of the huge amount of securities the Fed has accumulated over time, the FOMC has to consider different macro signals in the markets to avoid any disturbing or harming of an upcoming recovery of the US economy. 3.8.6 Conclusions of the comparison of the two programmes The biggest problem for an exit strategy in any country is to find the right time to do it. If a central bank stops their non-standard measures too early the growth of the economy will be harmed or rather slowed down. If their strategies are implemented too late, inflation and moral hazard problems either will be boosted. In comparison with the bailout programme of the Fed to those of the ECB it was only a small market intervention taking place in the EU. But as already mentioned both economical systems are quite different regarding many areas. It seems that the ECB was quite more carefully in their intensity of their actions than the Fed did it. The future will uncover what way was the more effective one eventually. The economic crisis and the crisis of economics 4 The Security Market Programme 4.1 Introduction On the 9th of May 2010 the Governing Council publicly announced that under the special circumstances of a European debt crisis and the associated risk for a devaluation of the Euro currency to undertake interventions in the Euro area’s public and private debt securities markets. The Security Market Programme (SMP) is part of the Euro system´s single monetary policy and will only be used for a limited duration. (Trichet, 2010, p. 1-2) 4.2 Facts about ECB’s government bonds purchases The main aim of this programme is to restore an appropriate monetary policy transmission mechanism and to keep the ECB´s main target of price stability upright. The ECB thereby takes into account to do measures which should help to meet fiscal targets, which were adopted in the following of excessive deficit procedures of diverse countries (PIIGS states) and to ensure the sustainability of their public finances. The Governing Council decided that it would be allowed for the Euro system central banks to procure eligible marketable debt instruments under the programme. Which purchases are allowed to implement for central banks in the Euro zone is fixed in Article 1 of the publication of the ECB from the 14th of May 2010: “Under the terms of this decision, Euro system central banks may purchase the following: (a) on the secondary market, eligible marketable debt instruments issued by the central governments or public entities of the Member States whose currency is the Euro”. (Trichet, 2010 p. 1-2) That means that national central banks which are within the Euro zone are allowed to buy government bonds of their home country. This is definitely a questionable step as it harms the independence of national central banks from their governments and this in turn is one of the most fundamental central bank rules. The ECB has bought about € 73.5 billion in government bonds from Ireland, Greece and Portugal until the end of 2010. Figure 8: ECB government bond purchases under the Security Market Programme Source: Megan Greene (2011), Sceptical on the European Risk Board, Article, (slightly modified) The economic crisis and the crisis of economics After the EU bailout package of € 110 billion of emergency loans for Greece had been granted, the ECB had to ‘snatch’ Greek government bonds at the amount of € 25 billion in May 2010. This is also shown in Error! Reference source not found.Figure 8. The amounts of orders for Irish and Portuguese government bonds were much less than those for Greek bonds. (Fernando, 2010) In the critical days of July 2011, when the yields for Italian and Spanish government bonds began to rise, the ECB invested another € 22 billion. So the SMP counts total expenditures of € 96 billion and there is no end in sight until those critical countries are able to give the market signals for a drastic debt reduction. (Reuters, 2011) 4.3 Empirical analysis of SMP’s effects In this section we are going to analyze how the Greek bond returns reacted to the European SMP. Figure 9 shows the development of a 10 year Greek government bond yield. The chart shows how the yield has changed after the ECB had started to purchase Greek bonds in the amount of € 25 billion in May 2010. Figure 9: Reaction of the greek´s government bond yield Source: The Independent (2010), Ben Chu, Did Georg Osborne save the world After the real amount of the Greek debt disaster had been published, (the Greek government had manipulated their balance of payments in the last years) the probability of a Greek default rose steadily. That would imply that a lot of bondholders (most of them are banks from Germany and France) wouldn´t get their money back. Because of the downgrade of Greek government bonds to (BB+/B) in April 2010 the interests increased dramatically. At the beginning of May 2010 they reached a height of 12.45 percent. If this Price for Greek government bonds increases further they wouldn´t be able to issue new bonds or serve their interest payments. After the intervention of the ECB trough massive purchase of Greek government bonds the yield decreased to 8 percent. That proves that this intervention was at least effective to decrease the yield temporary at 4 percent. In June it went up again and stabilized until August 2010 at a value close over 10 percent – what is still high enough. The bond yield from 8 July 2011 lies between 16 and 17 percent and the rating of Greek The economic crisis and the crisis of economics bonds have been downgraded to the status of default! This empirical data show that the SMP had no long-run effects on the bonds and was not enough to justify giving up temporarily ECB’s golden rule of independence of European governments. 4.4 Critical voices on the ECB´s Security Market Programme One of the main critics is that the only thing that the ECB and Euro zone gained of these expensive government bonds purchases from high debt countries like Greece, Ireland or Portugal was time. In the case of Greece dark clouds are gathering together. The massive tax increases implied by their strict saving programme and the shrinking of the Greek economy is making it quite impossible that Greece will be able to pay back their debt burden. The whole rescue programme seemed to be more a bailout for German and French banks, which are the main bondholders of those high debt European countries, than a support for Greek to get out of this self caused mess. As mentioned before, the ECB bought Greek government bonds in May 2010 in the amount of € 25 billion. That is a huge amount of reserve which the ECB invested in government bonds which were meanwhile down rated in the category of default (D). In the best case the ECB will have to accept a haircut. So part of the invested money (reserves of the ECB) will be simply lost. Other critical observers mean that this programme produces massive moral hazard problems for governments with bad fiscal policies. Thus the ECB is sending signals that in the case of an impending bankruptcy of a Euro country it will intervene again and rescue them. This will give such debt “sinners” no incentive to keep a strict fiscal policy discipline. One of the most famous critics on this programme is Axel Weber the president of the German Bundesbank and one of 22 council members in the ECB. Weber has the opinion to stop a further government bond purchasing. He said: ”The risk of “exiting too late” from the emergency measures was greater than pulling out too soon.” (Bloomberg, 2010) That critic on the Governing Council has cost Weber the chance to be the next ECB president in the election terms 2011. Other Governing Council members stand by to this programme and intervened to the harsh critic like the Austrian Governing Council member Ewald Nowotny who argued: ”It makes sense to use it as a safety belt”.(Bloomberg, 2010) The majority of the Governing Council members is having the opinion that exceptional times need exceptional measures. Although there are disagreements among council members over the SMP, it is still running and it will not stop until the European debt crisis is solved or when Jean Claude Trichet has to leave his chair in October 2011 and a new ECB president with new ideas gets elected. 4.5 Conclusions drawn from the Security Market Programme The critic done by Axel Weber may be mainly appropriate. The effects of lowering the governmental bond yield through the SMP have shown only short term effects and the price of losing confidence in the ECB´s independence regarding European governments was too high and therefore not acceptably. The economic crisis and the crisis of economics 5 Conclusions Altogether, after all those empirical facts which had been analysed, the ECB responded too late and not active enough in the crucial span of the crisis. In comparison with the Fed that might be true but if the more drastically measures of the Fed have been more successful than those of the ECB cannot be said yet with certainty. From the actual point of view Europe is recovering better as there are higher growth rates and less unemployment rates than in the US. Both economies have now to handle a huge debt deficit which is threatening the value of their currencies. As a matter of fact the crisis isn’t over yet although many people want to think that. It just entered into a new phase where the former rescuer, namely the governments, got infected as well or put it this way: Many states are already at critical point regarding their deficit. Banks still have a huge amount of leverage and they act in the same manner as before the crisis. The predicted moral hazard problem has occurred. But there are some glimmers of hope too. In the US, the Obama administration reintroduced the “Glass-Steagall Act” which twists commercial banks from investment banks with the purpose to reduce speculation in unlimited dimensions. In Europe, the stricter rules for bank equity of Basel III will become binding for every bank in the European Union. Concerning the change in the European monetary policy it must be said that some measures, like the expansion of the lending facilities in the heat of the crisis, were more than necessary. The CBPP seemed also to be satisfying in some way. To my opinion the SMP didn´t hurt only the credibility in the independence of the ECB; it was also a waste of money because of its mere temporary effects. An orderly bankruptcy of Greece and an investment programme in a productive infrastructure of the high debt European countries with the same amount of money would be much more effective to restore the competiveness of those countries within the global economy. The crisis showed us at least where the European economy is vulnerable and what European central bankers have to change in the future. Euro-countries have to grow together more closely to lose their economical asymmetry and should give the ECB the chance to establish a monetary policy which suits all member countries as good as possible to handle future crisis more efficiently. The economic crisis and the crisis of economics References Belke, A (2010), ‘Financial Crisis, Global Liquidity and Monetary Exit Strategies’, Deutsches Institut für Wirtrschaftsforschung, pp. 2-10. Beirne J, Dalitz L, Ejsing J, Grothe M, Manganelli S, Monar F, Sahel B, Susec M, Tapking J and Vong T. (2011) ‘Impact of the Eurosystem´s Covered bond purchase programme on the primary and secondary markets,’ European Central Bank, NO 122, pp. 3-24. Blinder A S (2010), ‘Quantitative Easing: Entrance and Exit Strategies’, Princeton University, CEPS Working paper No. 204, pp. 1-16. 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