If You Buy It, They Will Build It
The European Central Bank seems eager to buy debt almost without discretion — or at least without the discipline to stick to its self-created safeguards. This lack of caveat emptor is likely to create a selection bias where the ECB lends money to precisely the wrong companies, reminiscent of liar loans during the housing crisis. How will the ECB handle the inevitable corporate defaults? Will it take ownership? Will it extend and pretend?
The European Central Bank’s corporate-bond-buying program has stirred so much action in credit markets that some investment banks and companies are creating new debt especially for the central bank to buy. In two instances, the ECB has bought bonds directly from European companies through so-called private placements, in which debt is sold to a tight circle of buyers without the formality of a wider auction.
It is a startling example of how banks and companies are quickly adapting to the extremes of monetary policy in what is an already unconventional age. In the past decade, wide-scale purchases of government bonds — a bid to lower the cost of borrowing in the economy and persuade investors to take more risk — have become commonplace. Central banks more recently have moved to negative interest rates, flipping on their head the ancient customs of money lending. Now, they are all but inviting private actors to concoct specific things for them to buy so they can continue pumping money into the financial system.
The ECB doesn’t directly instruct companies to create specific bonds. But it makes plain that it is an eager purchaser, and it lays out the specifics of its wish list. And the ECB isn’t alone: The Bank of Japan said late last year it would buy exchange-traded funds comprising shares of companies that spend a growing amount on “physical and human capital,” essentially steering fund managers to make such ETFs available to buy.