FRANKFURT (Reuters) – The European Central Bank has ditched a cap on how many bonds it can buy from any single euro zone country, clearing the way for potentially unlimited money-printing as it scales up its response to the coronavirus outbreak.
Fishermen sit at the Main river near the European Central Bank (ECB) during a partial lockdown in Frankfurt, Germany, March 22, 2020, as the spread of the coronavirus disease (COVID-19) continues. REUTERS/Kai Pfaffenbach
Major central banks are lining up to pump ever-growing amounts of cash into the financial system to counter fallout from the virus, which is expected to trigger a global recession this year.
The ECB made its move – a historic and potentially divisive one – overnight, saying in a legal document it would not apply self-imposed limits under a new 750 billion euro ($818 billion) bond purchase scheme aimed at shoring up governments, businesses and households in the face of the epidemic.
The document 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 including Portugal.
It will also allow the ECB to focus its stimulus where it is most needed and extend it for as long as it wants without resorting to its emergency bond purchases, known as Outright Monetary Transactions, two sources told Reuters.
But it leaves the ECB exposed to legal challenges and accusations that it is bankrolling governments directly.
NO MORE CONSTRAINTS?
Under its long-running asset purchase scheme, the ECB has capped bond buys at 33% of each euro zone state’s debt, but the bank said that for the temporary Pandemic Emergency Purchase Programme (PEPP) – which began on Thursday – the limit will not apply.
“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.
While the ECB flagged on March 18 that it would “consider” revising the limits, the legal text is evidence that they have already been removed, in a step that even caught some within the ECB by surprise.
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 joint “coronabonds”.
Germany and some other northern states with high credit ratings, which would de facto guarantee such bonds, remain opposed to this form of common euro zone debt 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.
Government bond yields in Italy, the epicentre of the pandemic in Europe and the country where it has killed most people, fell across the curve after the ECB decision was reported [GVD/EUR]. Yields of other southern European sovereigns did the same.
But dropping the bond limits may invite a 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 on monetary financing.
Critics in Germany, where a Constitutional Court case is still pending, have repeatedly taken the ECB to court over bond buying, arguing it has exceeded its powers while buying over 2.6 trillion euros ($2.85 trillion) of debt since 2015.
“The central bank is fighting for the preservation of the euro currency and… to protect essential parts of the currency area – Italy – from the markets,” finance professor Mark Kerber – a party to the case – told Reuters.
“In practice, the ECB is uncontrolled and uncontrollable.”
The ECB also said it would buy debt with maturities as short as 70 days, compared with a one-year minimum 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 would be carried out 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.
($1 = 0.9138 euros)
Additional reporting by Frank Siebelt; Editing by John Stonestreet