Friday, 11 October, 2019
ECB WILL RUN OUT OF GERMAN BONDS TO BUY IN JUST OVER A YEAR IF IT FOLLOWS CAPITA
* 11-Oct-2019 12:16:54 – ECB WILL RUN OUT OF GERMAN BONDS TO BUY IN JUST OVER A YEAR IF IT FOLLOWS CAPITAL KEY, SOURCES SAY
* 11-Oct-2019 12:16:54 – ECB POLICYMAKERS WOULD RATHER BEND CAPITAL KEY THAN CHANGE ISSUER LIMIT, SOURCES SAY
* 11-Oct-2019 12:16:54 – PAST PRACTICE OF FLEXIBILITY ON CAPITAL KEY COULD GIVE ECB `BEYOND A YEAR’ TO BUY GERMAN DEBT, SOURCE SAYS
* 11-Oct-2019 12:16:55 – ECB POLICYAMKERS HAVE LITTLE APPETITE NOW TO SIGNIFICANTLY INCREASE SHARE OF PRIVATE DEBT IN QE — SOURCES
ECB has one year of German debt to buy before limits, sources say – Reuters News
11-Oct-2019 12:17:01ECB-POLICY/BONDS (URGENT)
By Balazs Koranyi, Francesco Canepa and Frank Siebelt
FRANKFURT, Oct 10 (Reuters) – The European Central Bank can
buy just over one year’s worth of German bonds under its new
asset-purchase programme and must bend its own rules to keep the
scheme running longer, risking fresh internal and legal
conflict, two sources familiar with the process said.
Facing weak growth and low inflation, the ECB decided last
month to start buying debt indefinitely. That opened a rift in a
normally collegial Governing Council — conservative
policymakers felt they had been strong-armed into a scheme that
will be difficult to manage and exit.
Opponents of the purchases — the central bank chiefs of the
euro zone’s biggest countries, France and Germany, among others
— argued that the purchases should have been an emergency tool.
Indefinite buying could conflict with the safeguards the ECB set
up to keep it legal, they said.
Those safeguards include buying no more one third of each
country’s debt and buying bonds according to each country’s
shareholding in the ECB, commonly known as the capital key.
But if both rules are strictly followed, just over one
year’s worth of eligible German bonds are left on the market,
the sources said. That will force the new ECB president,
Christine Lagarde, to solve a difficult problem created by her
predecessor.
To delay hitting this wall, policymakers would prefer
“bending” the capital key and buying fewer German bonds rather
than changing the issuer limit, two other sources, with direct
knowledge said.
The ECB has already deviated from the capital key in the
past. By sticking to this practice, the ECB could buy German
bonds “beyond a year,” a fifth source, familiar the ECB’s
decision-making, said.
An ECB spokesman declined to comment.
Deviating from the capital key does not have direct legal
implications, so it would be easier to defend in a court of law,
where the programme has already been challenged by a group of
German academics. But it could be politically risky, since it
would put Germany, the biggest opponent of the programme, at a
disadvantage.
Still, it would take time for any divergence to become
significant, and the ECB can argue that past purchases also
deviated as the bank sucked up extra debt in Italy, Spain and
France to make up for countries where it could not buy.
The ECB’s holdings of Italian, Spanish and French debt are
currently 8.4%, 7.4% and 3.9% above their quotas, according to
Reuters calculations, which exclude Greece because it is not
eligible for purchases.
The problem is that the share of German debt is already 1.3%
percent behind the capital key, an argument for some that the
ECB is bankrolling profligate countries at the expense of
virtuous Germany.
But the capital key is supposed to apply to the stock of
government bonds, now totalling 2.1 trillion euros on the ECB’s
balance sheet.
So it will take time for the new government bond purchases,
which are likely to be in the region of 15 billion euros a month
if history is anything to go by, to affect the total in a
material way.
The European Court of Justice has already cleared the bond
purchases, dismissing a challenge by the German academics. But
it said that safeguards, such as the ECB’s self-imposed rules,
are necessary to ensure the bank does not finance governments, a
major taboo under European law.
Changing the issuer limit could fuel a fresh legal
challenge, and the ECB’s legal committee has already highlighted
this risk, the Financial Times reported earlier.
Indeed, the German complainants, headed by the Berlin
professor Markus Kerber, also indicated that the new bond
purchase change the nature of the programme, so courts should
have a fresh look.
Another option the ECB could consider would be to buy more
private-sector debt to rely less on government bonds, but three
of the sources said there was little appetite for this.
The ECB has already been burnt on the bonds of scandal-hit
South African retailer Steinhoff in earlier purchases. Many in
the Governing Council argue that a bigger presence in the
private-sector market would unduly lower risk perception.
Still, any method to prolong German purchases only buys the
ECB a limited amount of time before the issuer limit is reached.
Lagarde will have just months to solve this, the sources said.
A solution is also pressing because the ECB pledged bond
purchases until just before it starts raising interest rates.
Markets don’t expect that until 2025, well after it will hit its
limits in every country.
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