The European Central Bank has given itself an unprecedented level of flexibility in its plan to buy €750 billion in additional bonds to contain the financial fallout from the coronavirus pandemic, which analysts say could leave it open to legal challenges.
Almost all constraints that applied to the ECB’s previous asset-purchase programmes have been removed or significantly loosened, according to the legal decision detailing the ECB’s latest plan, which was published on Wednesday night in the official journal of the EU.
The details of the new programme support the declaration by Christine Lagarde, the ECB's president, who said on Twitter after it was announced last week: "There are no limits to our commitment to the euro."
Describing the decision as "a bombshell", Pictet Wealth Management strategist Frederik Ducrozet said: "There is a risk that the ECB faces legal risks and a political backlash down the road." But he added that it "strengthens the ECB's quasi-fiscal support to the most vulnerable sovereign states".
Crucially, a self-imposed limit to buy no more than a third of any country’s eligible bonds will not apply to the extra €750 billion of bonds it has committed to buy this year in response to the coronavirus crisis under its Pandemic Emergency Purchase Programme.
This so-called issuer limit was put in place to ensure that the ECB does not buy so many bonds that it is accused of directly funding national governments, which is against EU law.
The question of whether to raise the issuer limits divided the ECB’s governing council last week. One camp that included the German and Dutch central bank chiefs argued against even saying it was considering lifting the limits, while another more dovish group proposed immediately raising the limits to remove any doubts among investors about the central bank’s remaining firepower. Ultimately, it said it would consider raising the limits if needed.
The limits were cited by the European Court of Justice as one of the justifications for its 2018 ruling that the ECB’s asset-purchase programme was legal after it was challenged in the German constitutional court for being “monetary financing” of governments.
While its bond purchases are still bound by a rule requiring them to be made in proportion to the relative size of each country’s economy and its contribution to ECB capital – known as the capital key – the central bank gave itself plenty of wriggle room on this too.
“Purchases under the PEPP shall be conducted in a flexible manner allowing for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions,” the ECB said in this week’s decision.
The central bank also expanded the criteria for eligible securities under the new programme to securities with a maturity of more than 70 days, compared with its previous restriction to buy only securities with maturities between one and 30 years.
Changes everything
Mr Ducrozet said “this also changes everything” because about three-quarters of Germany’s planned €150 billion of extra borrowing this year will be in the form of bills with a maturity below one year and these will now be eligible to be bought by the ECB.
The ECB has consistently said that the issuer limits are not a binding constraint on its asset purchases and as more European countries are expected to issue large amounts of debt to fund their responses to the coronavirus pandemic it will ease the pressure further.
Florian Hense, European economist at Berenberg, said: “This shows once again that, once it comes to actions of a seriously impressive scale in the euro zone, the ECB is the only institution capable of that, at least so far.”
He added that the chances of any legal challenge at the German constitutional court in Karlsruhe could be blunted by the time limitation of the end of this year for the €750 billion of extra asset purchases by the ECB.
“The duration of the programme is somewhat the last remaining limit, a limit potentially crucial for green lights by Karlsruhe,” said Mr Hense. – Copyright The Financial Times Limited 2020
