By Francesco Canepa
FRANKFURT (Reuters) – An obscure clause in government bond contracts may help the European Central Bank clear a key hurdle to launching a fresh stimulus programme by allowing it to own even more government debt, according to central bank officials.
With the euro zone’s growth and inflation prospects dimming, ECB President Mario Draghi has strongly hinted at more monetary easing in the form of interest rate cuts or new asset purchases.
But after hoovering up 2 trillion euros (£1.8 trillion) worth of public sector bonds in the past four years, the ECB has precious little room for buying more, if it is to respect a self-imposed ban on owning more than a third of each country’s debt.
This so-called issuer limit is designed to prevent the ECB from becoming a “blocking minority” if a country applies for a debt restructuring and its bondholders have to vote on it.
This limit already looms large in smaller jurisdictions such as Finland, the Netherlands and Portugal, curtailing the ECB’s firepower if it launches a new programme.
But under possible solutions studied by staff of the euro zone’s 19 national central banks, this constraint may be circumvented by stripping central banks of their voting rights, two sources familiar with the matter said.
This would be done through a clause, known as “disenfranchisement”, which excludes bondholders directly connected to the issuer of a bond from votes.
That way, the ECB and the national central banks that carried out the bulk of the government bond purchases under the previous programme could go over the issuer limit and still avoid getting involved in any vote on debt restructuring.
An ECB spokesman declined to comment.
ECB President Mario Draghi said last week the central bank had “flexibility” within its mandate, adding that a recent ruling by the European Court of Justice on its bond purchases gave it “broad discretion … in using all (its) tools in a necessary and proportionate way”.
(Graphic: ECB is close to debt-holding limit in several countries link: https://tmsnrt.rs/2ZI03Ug).
The logic for taking away the central banks’ voting rights is based on the premise that they would not be free to vote in favour of taking a loss on their holdings because that would tantamount to directly financing the government that issued that debt.
This is prohibited by EU Treaties.
This interpretation of the disenfranchisement clause had yet to be discussed by the ECB’s policy-making Governing Council and it was likely to face opposition on legal and political grounds.
For starters, the EU body which oversaw the introduction of this and other Collective Auction Clauses (CAC) in 2012 said at the time national central banks were a prime example of a state institution that should keep its voting rights.
“Euro area national central banks … have autonomy of decision,” the EU’s Economic and Financial Committee said at the time. “Their holdings of these securities will be enfranchised under the model CAC,” it added.
The committee, whose members include representatives from governments, the European Commission and the ECB itself, also said that bondholders should not be excluded because of the supposed predictability of their vote.
Under CAC rules, major changes to a bond’s terms, such as a haircut or maturity extension, must be approved by 75% of bondholders present at a meeting where at least two thirds of creditors are gathered.
Second, some ECB policymakers object to the very notion of owning so much of any one country’s debt on the grounds that it would blur the line between stimulating the euro zone economy and financing a government, albeit indirectly.
This has been a long standing objection of opponents of the ECB’s bond-buying programme in richer countries such as Germany, which fear it may turn into a tool for bankrolling their indebted neighbours in southern Europe.
(Editing by Alison Williams)