Bayer-Monsanto: an infamous wedding facilitated by the ECB
By purchasing bonds from Bayer, the ECB has
indirectly facilitated the takeover of Monsanto which was finally
approved two weeks ago.
By Stan Jourdan and Graham Caswell.
When Reuters wrote back in May that in theory the ECB could buy debt issued by Bayer, which said on Monday it would finance its cash bid for Monsanto with a combination of debt and equity, we thought it would only be a theoretical case. We hoped the ECB would not dare actually do that. Unfortunately, this turned out to be a very real situation.
According to the list of bonds purchased by the ECB (operationally by the German Bundesbank) under its quantitative easing programme, the ECB reveals clearly that it purchased a number of bonds issued by Bayer AG and its affiliate, Bayer Capital Corporation B.V. The ECB does not disclose the amount of bonds it holds. Those bonds' rates are extremely low, a little more than 1 percent. Those low rates are clearly a consequence of the ECB's intervention in the corporate bonds markets. To sum up, there are two ways the ECB is helping Bayer to achieve the Monsanto takeover:
(1) It bought bonds directly from Bayer.
(2) By purchasing corporate bonds massively on the markets, it is pushing down rates for large corporations, hence lowering borrowing costs on other bonds that are not necessarily owned by the ECB.
To be fair, Bayer will still need much more than the ECB's contribution under QE to complete its €59 billion takeover (Bayer also plans to issue more equity in the coming years). However it's clear that the ECB did lend to Bayer, although it will not say how much.
As we predicted in July, the ECB is making access to finance even cheaper for big corporations, and is encouraging corporate concentration over the development of SMEs. But for what purpose? There is little evidence that the Monsanto-Bayer deal will create more wealth, or more jobs, or will generally contribute to the well being of European citizens.
In fact, as the European Parliament controversially debated recently, Monsanto is precisely feared and denounced by a large number of NGOs for selling harmful products for humans and the environment. Following the merger Bayer-Monsanto will supply roughly a quarter of the world's seed and pesticide market, thus reinforcing further the market concentration.
The Bayer-Monsanto deal is just one example of cheap ECB money encouraging corporate concentration over the development of SMEs, and a further example of the the absurdity of the logic behind the ECB's quantitative easing programme. The ECB is basically helping big companies by lowering their borrowing costs, hoping to make those investments unprofitable for investors so that they will then turn their money onto SMEs. This is nothing less than an old-school top-down approach. It is 'trickle-down' economics at its worse.
On Monday, pressed to justify the ECB's corporate bond buying programme by MEP Ernest Urtasun, Mario Draghi declared: “the argument that this would support large corporates. And therefore, and therefore what? Does this deprive the small corporates? That's the key question. (...) Large corporates receive support from our corporate programme and free space in the banks' balance sheet for supporting SMEs.”'
The assumption underlying Draghi's defense of corporate QE is that the corporates would have borrowed anyways. What this assumption ignores is that the availability of QE money is changing corporate behavior in the direction of mergers and acquisitions. The ECB's corporate QE is already accounting for over half of net issuance from ECB-eligible companies (and rising rapidly) and mergers and acquisitions are currently the biggest contributing factor to the growth of credit lending in the euro area. In other words, corporate QE is clearly distorting the market in favour of non-productive financial operations.
By reversing its logic and directing its QE directly to people and/or sustainable investment, the ECB has an opportunity to improve the efficiency of its policy, while contributing more tangibly to the development of the Eurozone economy and the wellbeing of European citizens. It should start looking into alternative options now.
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