Off The Wire
ECB drops cap on debt purchases to boost virus response
FRANKFURT (Reuters) - The European Central Bank has dropped a cap on how many bonds it can buy from any single euro zone country, clearing the way for potentially unlimited money-printing in response to the coronavirus outbreak.
In a legal decision published overnight, the ECB said it would not apply self-imposed limits on a 750 billion euro ($818 billion) bond-purchase scheme aimed at fighting the economic and financial fallout from the epidemic.
This paves the way for the ECB to hold more than a third of any one country’s debt - a level that it is close to reaching with benchmark bond issuer Germany and some smaller countries - and to focus its stimulus where it is most needed and extend it for as long as it wants.
But it also leaves it exposed to legal challenges and accusations that it is bankrolling governments directly.
“In a nutshell, the decision removes virtually all constraints on asset purchases, in a further boost to the credibility of the ECB’s commitment,” Pictet Wealth Management Strategist Frederik Ducrozet said.
Bond purchases have been capped at 33% of each country’s debt, but the ECB said that under the temporary Pandemic Emergency Purchase Programme (PEPP), this limit will not apply.
While the ECB flagged in a March 18 emergency decision that it would “consider” revising these limits, the legal text is evidence that the limits have already been removed.
The change ensures the ECB would find enough bonds to buy even if euro zone governments failed to heed President Christine Lagarde call for the issue of “corona bonds” - a form of joint debt to which Germany and some other northern states remain opposed despite the economic devastation that the epidemic has triggered.
“While the Eurogroup of finance ministers dithers, shying away from sending an impressive signal of solidarity on Tuesday evening, the ECB continues to deliver,” Florian Hense, an economist at Berenberg, said.
Italian government bond yields fell across the curve after the ECB decision was reported.
But dropping the bond limits may invite a fresh legal challenge as the European Court of Justice specifically pointed to these thresholds in a 2018 ruling when it argued that the ECB was not breaching a prohibition of monetary financing.
German critics, who still have a case pending at the German Constitutional Court, have repeatedly taken the ECB to court over bond buying, arguing that the ECB has exceeded its powers while buying over 2.6 trillion euros ($2.85 trillion) of debt since 2015.
The ECB also said it would buy debt with maturity as short as 70 days, compared with one year under previous purchases.
Such a change was necessary as the bank said it would include commercial paper in its portfolio for the first time, but the pool of eligible assets could be expanded significantly if government debt with shorter maturities was also purchased.
The ECB added that its purchases would still be guided by each country’s shareholding in the ECB, the so-called capital key, but the buys would be done in a “flexible” manner allowing for deviations.
The ECB also said it would publish some weekly and monthly data on purchases. The legal text makes no commitment to publish detailed figures, broken down by country or debt instruments.
Reporting by Balazs Koranyi; Editing by Christian Schmollinger and John Stonestreet