ECB may expand bond buying in future but no need yet, says board member
The European Central Bank (ECB) may expand its crisis-fighting toolkit in the future but is not planning to do so imminently, a board member said, playing down the possibility of the central bank buying bonds issued by banks or by junk-rated companies.
The ECB last week boosted its Pandemic Emergency Purchase Programme to €1.35 trillion euros (£1.2 trillion), leading to investor speculation that the central bank could expand its shopping list, which mostly comprises government and corporate bonds.
Board member Isabel Schnabel said today that while the ECB was open to the idea of expanding its toolkit, it was not the right time to do so yet.
“We don’t necessarily have to extend our toolbox already right now, but according to how the crisis develops there may be a time when this becomes necessary,” Schnabel said during an online panel discussion.
ECB staff have been working on the possibility of purchasing bonds issued by companies that have been downgraded to junk during the coronavirus outbreak, such as German airline Lufthansa and French car-maker Renault.
While the Federal Reserve is already doing so, Schnabel noted the Fed could count on the US Treasury to bear the first losses on such bonds, something that may be difficult to replicate in the eurozone.
Asked by Unicredit’s chief executive Jean-Pierre Mustier whether the ECB could purchase bank bonds, Schnabel said this may raise a conflict of interest because of the central bank’s role as the sector’s supervisor.
The ECB bought up all of Italy’s new debt in April and May, abandoning its country-specific quotas in a bid to cap borrowing costs for the coronavirus-stricken country.
It also bought up €35bn of commercial paper to help eurozone companies navigate the liquidity squeeze brought on by the pandemic.
Schnabel said the ECB would continue focusing its bond purchases on the countries and markets where they are most needed for the whole duration of its emergency bond-buying programme.
Citigroup analysts warned today that the ECB’s bond buying efforts were falling short of the eurozone’s funding needs.
In a research note, analysts said that the central bank’s latest €600bn boost to its stimulus programme would probably fall around €150bn short of the bloc’s increase in debt supply.
Schnabel’s comments on the bond-buying programme come after reports earlier that the ECB is exploring the possibility of creating a so-called bad bank to warehouse unpaid euro debt, as officials draw up plans to cope with potentially hundreds of billions of euros of unpaid loans in the wake of the coronavirus outbreak.
The project would be aimed at shielding commercial banks from any second economic fallout from Covid-19 if rising unemployment leads to an increase in unpaid debt, Reuters reported.
The ECB declined to comment on whether it was drawing up plans for a bad bank.