ECB exit strategy & exit costs to get some attention today – MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the Bundesbank President and ECB Council Member Jens Weidmann will today present the Bundesbank’s annual accounts and potential losses for Germany due to the ongoing QE program is likely to get some market attention given Weidmann a year ago acknowledged the potential need to set aside funds to cover considerable potential losses as QE is terminated and rates begin to rise.

Key Quotes

“Given German paper yields the most negative rates in the euro-zone these purchases are guaranteed to lose money if held to maturity. At present those losses are easily covered by the income generated by banks placing funds at -0.4%. However, as market rates rise the income generated on the deposit account will be lost. Given Germany buys the largest quantity of paper under the ECB QE program and at the most negative, the implications are greatest for Germany.”

“This could play into politics this year with QE deeply unpopular in Germany and greater attention to this issue would likely play into underpinning support for populist parties like AfD. While AfD has nothing like the support of the National Front in France or the Freedom Party in the Netherlands, the recent rise of the SPD under Martin Shulz means even further modest gain in support for AfD raises the prospect of the CDU/CSU losing power in the elections later this year.”