The European Central Bank's quantitative easing program was intended to lower borrowing costs and boost investment within the euro area, but much of the windfall ended up on the balance sheets of banks outside the eurozone, according to a study by the Bank for International Settlements.
Between January 2015 and the end of 2018, the ECB purchased €2.6 trillion of assets, of which 82% were eurozone sovereign bonds. The ECB bought around 50% of those bonds from non-eurozone investors during the first three years of the QE program up to the end of 2017, according to Hyun Song Shin, who led the study. During that same period, euro-denominated deposits outside the single currency area increased by €190 billion.
QE was designed with the intention that investors would sell their lower-risk government bonds and reinvest the proceeds in higher-risk assets, increasing their prices and lowering their yields. This would boost the wealth of the investors and stimulate their lending, while the lower borrowing costs for bond issuers would boost investment in the real economy.
However, much of the cash did not reach its intended target. QE triggered a "sharp reversal" in the behavior of non-eurozone investors, who were net purchasers of euro assets before the program began, BIS said.
Those sales were dominated by just seven countries, which accounted for close to 90% (€2.4 trillion) of all non-euro area investors' holdings before QE began, namely Denmark, Japan, Norway, Sweden, Switzerland, the U.K. and the U.S.
U.K. investors were the biggest sellers, cutting their exposure to euro area debt by more than 50% during the period of the study. U.K. nonbank financial institutions sold the most, cutting around €300 billion of their combined €560 billion exposure in the period.
U.K.-based investors may have retained roughly a fifth of the proceeds from bond sales as euro-denominated deposits.
While Denmark, Sweden and Switzerland also cut their euro area holdings significantly, the BIS noted that the "upward slope to the euro area yield curve and the flattening of the U.S. yield curve made hedged Japanese investment in euro area government bonds relatively attractive, even with low yields."
Net foreign buying of euro area debt securities stayed negative during 2018 with €100.2 billion of outflows, according to ECB data. While that could be partly attributed to investors shedding German bonds due to QE, flight from Italian assets due to fears over the country's swollen debt load also contributed, according to David Owen, chief economist at Jefferies.