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ECB is considering boosting the purchase of EU recovery fund debt

The European Central Bank is considering raising restrictions on the purchase of EU-issued bonds in order to increase the flexibility of asset purchase schemes and improve the status of Block’s groundbreaking joint debt program launched this year.

Four members of the ECB Governance Council told the Financial Times that they would support increasing the share of public sector bond purchases for debt issued by international organizations such as the EU from the current limit of 10%. rice field. They look forward to discussing this idea at two special councils starting in November to determine how much support will be provided to financial markets starting next year. This plan requires majority support from the 25 members of the ECB Council. The ECB declined to comment.

European Commission Bonds to be issued Next year, under the € 800 billion Next Generation EU Recovery Fund, the vehicle agreed in the summer of 2020 to fund a pandemic response with jointly funded debt from Member States.

Brussels has issued € 80 billion in bonds to the fund this year and aims to issue almost twice that amount next year, making the EU itself one of Europe’s largest bond issuers. Additional support from the ECB could help reduce EU funding costs and improve Block’s bond status as a regional benchmark. This is a role previously dominated by the German Bund.

The tendency to buy more EU bonds also helps to support financial markets without violating the rules prohibiting the ECB from owning more than one-third of each country’s government debt. Some analysts believe that by 2023 the debt limits of Germany and the Netherlands could be reached.

Erga Balti, Head of Macro Research at the BlackRock Investment Institute, said:

The ECB will announce in December that the Pandemic Emergency Purchase Program (PEPP), a € 1.85 billion bond purchase scheme launched in response to the Covid-19 crisis, will end in March.

Four council members said they hope the central bank will consider ways to maintain at least some of the additional flexibility associated with PEPP, which is exempt from purchase restrictions by the national government. rice field.

One of them said the ECB is also working on ways to continue buying Greek government debt. Otherwise, you will be excluded by the rules for purchasing bonds with a credit rating below investment grade.

However, the idea of ​​expanding asset purchases could meet opposition from more conservative members of the ECB’s governing council, such as Jens Weidmann of Germany and Klaas Knot of the Netherlands.

These so-called hawks are usually uncomfortable with the ECB issuing bonds, and the government is overly dependent on purchases to support high levels of debt, especially except during critical times of crisis. I am concerned about.

The decisive factor in the debate is whether the ECB will continue to predict it. inflation Next year it will fall below the target of 2% and will stay there for the next two years. The central bank will update its inflation forecast and will release a new forecast for 2024 in December.

Soaring Energy price And supply chain bottleneck Some ECB policy makers have urged banks to worry about underestimating future inflation. Nonetheless, few analysts expect the ECB’s bond market support to cease significantly once the PEPP expires. Instead, they broadly predict that central banks will expand their traditional asset-purchasing programs, which have purchased € 20 billion in bonds a month in parallel with the purchase of PEPP.

Frederik du Closet, Strategist at Pictewealth Management, said: “But I think the asset purchase program will continue until the end of 2023.”

Some members of the council said the ECB could move from buying fixed monthly debt through traditional asset purchase programs to targeting total purchases overall. In addition to their asset purchase programs, they also said they could create new “backstop funds” that would only be used to respond to financial market turmoil.

François Bill Roy de Garhow, Governor of the Central Bank of France and a member of the ECB Council, Said last week Banks added that they could maintain the ability to purchase additional assets in an emergency, adding that “theoretical possibilities for their use would probably mean that they do not actually need to be used.”

ECB is considering boosting the purchase of EU recovery fund debt

Source link ECB is considering boosting the purchase of EU recovery fund debt

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