The European Central Bank’s latest round of Quantitative Easing (QE) began this March, with the Bank of Latvia assigned to buy 184 million euros worth of its own bonds each month until September, 2016, as part of the Public Sector Purchase Program. The Baltic Times hears from Kaspars Jansons, the treasurer of Citadele Bank, about the impact of the latest round of QE on the Latvian banking sector.
Is it likely that the Bank of Latvia will manage to reach its assigned level of bond purchases? What are the consequences for the Latvian banking sector if the Bank of Latvia does not reach this level?
There is no way the Bank of Latvia will be able to execute purchases of the size of 184 million euros per 18 months, simply because the Ministry of Finance have not issued that much debt eligible for the Public Sector Purchase Program.
Given the rule ECB may buy only up to 25% of a particular ISIN there are slightly over 700 million euros’ worth of Latvian government bonds available on the market, which is obviously not enough.
To address this issue, national central banks are allowed to fill this gap by purchasing bonds issued by supranationals and agencies as well as ABSs and Covered bonds denominated in euros.
So it’s clearly the case for Latvia that most of the bond buying under QE program will be non-Latvian government bonds.
I don’t think, however, that this will have any adverse impact on the Latvian banking sector or economy in general.
A report by Swedbank suggests the Public Sector Purchase Programme will have “a very limited direct positive impact” on the Baltic economies. Do you share this view?
I do agree that QE will have a limited positive impact on the Baltic economies.
The biggest gainers from the QE program in EU, in general, are — and will be — governments. We can see the constant drop in interest rates that governments have to pay for their debt all across the Europe, with the exception of Greece.
So the only way that benefit can be passed into the real economy is by increased expenditure by governments from the saving they get from their lower debt servicing costs.
Banks play a limited role here, because their lending ability is more impacted by different Capital regulations, rather than liquidity, which is primarily addressed by QE.
Do you worry that this round of QE could encourage a more risk prone environment in the Latvian banking sector?
QE as such does not increase the risks in the Latvian banking sector.
What it does do is push yields lower, even into negative territory; thus investors have to take more duration or credit risk — or both — in order to meet their appetite for returns.
Another consequence of super low and negative interest rates will be, like in the case of Switzerland and Sweden, where the base rates of central banks are close to -1%, the passing on of this low interest rate effect to bank clients. We see this happening for large account balances in those countries and should the euro rate go even more negative, we might see it happen here as well.