By Balazs Koranyi and Francesco Canepa
(Suggestion by Petros Petrikkos)
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.
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 epicenter of the pandemic in Europe and the country where it has killed most people, fell across the curve after the ECB decision was reported. 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