ECB needs to create more room for manoeuvre for a new bond purchase programme

The ECB is preparing to resume net new purchases of EMU government bonds (PSPPs), which it could announce at its September meeting. A continuation of the PSPP would, however, be severely limited in time under the current programme conditions. In the case of Germany, the ESCB should already reach the issuer limit after about seven months.
A change in the PSPP conditions is therefore often discussed. In practice, however, adjustments are likely to be much more difficult than generally assumed. An increase in the issuer limit from currently 33% to 50% could not only violate the ban on monetary state financing, it would also have virtually no effect without the adjustment of the issue limit. However, a change in the current emission limit of 33% would also raise questions. All EMU government bonds issued since 2013 contain a Euro area model Collective Action Clause (CAC). If the ECB were to hold more than 33% of the outstanding capital of an issue in the future, it would at least have to abandon its previous politically neutral stance. The bank’s stance could then be decisive, especially in crisis situations in which, for example, a debt rescheduling would have to be voted on and the other creditors would not be in agreement. The CAC problem would not arise if the ECB raised the issue limit only for older non-CAC bonds. However, their low market liquidity could lead to a situation in which bonds of sufficient volume would not be available at all. From a market perspective, the simplest solution would be to change the purchase key. Italian and French bonds would also be sufficiently available in the longer term. However, such a move would attract political criticism from the ECB, as it would reduce incentives for reform and increase the risks for taxpayers across EMU.
If the ECB plans comprehensive QE measures over a longer period of time, it will therefore have no choice but to consider extending the existing APP to include additional asset classes – despite the new problems this would entail. For example, the market is intensively discussing the possible purchase of shares on the model of the Swiss central bank SNB. Whether the ECB will also consider buying bank bonds, on the other hand, is highly controversial. Many market observers see a conflict of interest here with regard to the supervisory function of the central bank.

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