ECB on 1 trillion euros and counting with government debt buys
[FRANKFURT] After 18 consecutive months of buying government bonds to pump up the economy and raise inflation, the European Central Bank's holdings hit a landmark last week - 1 trillion euros (S$1.5 trillion).
Whether the scheme - to which the ECB added 11.14 billion euros of government bonds in the week to Sept 2 - is working remains to be seen, especially as it is hard to gauge how bad the euro zone economy would have been without the purchases.
One and half years after the ECB started buying state debt, results are mixed at best. Bank lending has rebounded but it remains sluggish and inflation is still stuck near zero.
The ECB's policy-making body will meet again on Thursday and, while President Mario Draghi is not expected to make any announcement, he may hint at the prospect of extending the asset-buying scheme beyond its current end date in March.
But prolonging the purchases again would be challenging when the ECB has already bought so much, because it risks further distorting market prices and even running out of eligible bonds.
The ECB has already had to stop purchases in Estonia and found no bonds to buy in Luxembourg last month. In Portugal and Slovakia it has been acquiring fewer bonds than the rules of its programme dictate.
Germany, France, Italy and Spain were again over-represented as, overall, the volume of purchases slowed to 50.5 billion euros in August from 69.7 billion in July.
Germany's government bonds with a maturity of up to 10 years already trade at a negative yield, which means that if an investor bought that debt now and held it to maturity they would get less money than they paid.
Some corporate credit bought by the ECB, including some debt issued by Swiss food group Nestle and French telecoms operator Orange, also yield less than zero.
To make room for more purchases, the ECB would consider raising a limit on how much of each bond issue it can own or looking at new asset classes, sources told Reuters earlier this year.
Abandoning the so-called 'capital key' rule - which dictates that purchases be proportionate to how much each country has paid into ECB's capital - was seen as the least palatable option, the sources said, because it would leave the banks exposed to political and legal challenges.
REUTERS
KEYWORDS IN THIS ARTICLE
BT is now on Telegram!
For daily updates on weekdays and specially selected content for the weekend. Subscribe to t.me/BizTimes
Banking & Finance
Prudential shutters Hong Kong wealth unit Pulse
JPMorgan, Nomura limit Segantii exposure on Hong Kong case
UOB awards Wong Kan Seng over S$400,000 in shares
Singapore eyes giving law enforcement agencies more power to probe money laundering offences
Seventh money laundering accused to plead guilty on May 23
DBS hires chief of Ping An’s tech group to be its new chief information officer