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Tuesday, April 16, 2024

ECB studying new bond-buying plan to replace existing crisis tool

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The European Central Bank is studying a new bond-buying program to prevent any market turmoil when emergency purchases get phased out next year, according to officials familiar with the matter.

The plan would both replace the existing crisis tool and complement an older, open-ended quantitative-easing scheme that’s currently acquiring 20 billion euros ($23.1 billion) in debt every month, said the officials, who asked not to be identified because the discussions are confidential. 

No decisions have been made, they said. An ECB spokesperson declined to comment on the report, while noting that staffs discuss a wide array of ideas that aren’t necessarily presented to the Governing Council or the Executive Board.

Such an initiative would act as an insurance measure in case the scheduled end in March of the 1.85 trillion-euro so-called Pandemic Emergency Purchase Program, known as PEPP, prompts a market selloff of bonds from highly indebted countries such as Italy, according to the officials. 

Under the plan, purchases would be conducted selectively, they said. That would circumvent a rule applying to both of the existing programs that requires central banks to buy debt in relation to the size of each country’s economy. 

That rule has been in place since large-scale asset purchases started in 2015. It’s intended to assuage concerns that the ECB is financing governments, which is something forbidden by law.

Cognizant of the market crisis that engulfed Italy at the start of the pandemic, ECB policy makers are trying to smooth the exit from existing emergency stimulus settings while keeping a lid on investor speculation, now that governments are even more exposed after building up debts to fund massive fiscal support. 

Italian debt

Italian government bonds rose, sending the yield on 10-year securities down almost 3 basis points to 0.86 percent as of 07:34 a.m. in London. The bonds have sold off in Europe over the last two weeks, with yields rising around 20 basis points.

The difference in yield between benchmark Italian and German debt—a closely watched gauge of risk for the region—is currently around 107 basis points, testing the upper end of its multi-month range. 

ECB President Christine Lagarde and her colleagues have delayed to December an update to the path of monetary stimulus next year. She said in a Bloomberg TV interview in July that the pandemic program could be followed by a “transition into a new format,” without elaborating. 

Vice President Luis de Guindos said Monday that the ECB would decide at its final policy meeting of the year “what alternatives there are” to that program—“if any alternatives are needed.”

Read full article on BusinessMirror

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