The European Central Bank's plan to buy company bonds has fired up credit markets, allowing big groups such as Magnum ice-cream maker Unilever to borrow almost for free, but its effect on the euro zone economy is likely to be small. Company debt is the latest addition to a growing list of assets the ECB is buying in a bid to revive the euro zone economy by stimulating lending.
But company executives remain cautious about investing or hiring because they are downbeat about global growth. They suggest cheap ECB loans, which come as borrowing costs are already at record lows, will not improve their mood. A number of companies contacted by Reuters, including Germany's Deutsche Telekom and French car maker Peugeot, said they welcomed the drop in the cost of raising money but this would not lead them borrow more.
"This has no impact on the amount we plan to borrow," a spokesperson for the German telecoms group said. German auto supplier Bosch said the benefit of raising cheap cash needed to be weighed against the punitive charge levied by banks on the money parked by corporate clients.
The ECB imposes a penalty charge on banks that hoard cash, leading some lenders to pass this on to companies. The central bank has already slashed borrowing rates, launched a 1.74 trillion euro ($1.98 trillion) money-printing programme and is about to start paying banks to take its money via a new scheme. But it has little to show for it so far, with inflation still stuck near zero. Some see an additional risk in the ECB taking on private debt without collateral, but ECB rate setters have publicly defended the plan.
"It goes from the central bank directly to the target group, which is the entrepreneurs," Estonian central bank governor Ardo Hansson said this week. Details about how this should happen are scant. For example, the ECB has not said how many corporate bonds it will buy when the programme starts in June. Traders polled by Reuters expect purchases of 8 billion euros per month, but forecasts range from 2 billion to 20 billion euros, with little clarity about how large the programme will eventually be.
Even estimates about the size of the market for eligible bonds vary widely - between 444 billion and 800 billion euros, according to IFR, a Thomson Reuters market news and analysis service. The ECB merely said it would buy debt issued by companies that are based in the euro zone, have an investment grade rating and are not banks, provided that they meet some technical parameters. It has not set a minimum size for the bond issues it can buy, with a view to including "small firms" - which are typically in greater need of cash than large corporations.
But it is unclear how this will work in practice given that smaller European companies tend to borrow from banks rather than on the market, or they are junk-rated. Irish central bank governor Philip Lane said the corporate bond purchases will free up cash for bank lending to smaller enterprises because large companies will finance themselves on the market instead. Indeed, some bluechip companies are cashing in on ultra-easy market conditions.
Unilever and Sanofi both sold bonds with zero coupons this month. Sales of investment-grade corporate debt have surpassed 60 billion euros since the ECB announced the programme in March - well above volumes in the year up to that point, according to IFR data. But there is little direct evidence this will translate in more spending or hiring. Italian motorway operator Atlantia, for example, said new sales of bonds would be used to pay back existing debt.
If recent history in the United States is anything to go by, some companies could take advantage of the ECB's largesse to buy back shares or take over rivals. This might benefit their shareholders but would do next to nothing for inflation. A central bank source said the ECB stands ready to change the terms of its corporate bond programme if it realised it mainly resulted in share buybacks.
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