ECB should examine new plan to buy bonds if the crisis instrument ends

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The European Central Bank is considering a new bond-buying program to prevent market turmoil if emergency purchases expire next year, officials familiar with the matter said.

The plan would both replace the existing crisis instrument and complement an older, perpetual quantitative easing program that is currently taking on € 20 billion ($ 23.1 billion) in debt each month, officials, who asked not to be named, said because the discussions are confidential.

No decisions were made, it said. An ECB spokesman declined to comment on the report, but noted that staff are discussing a wide range of ideas that are not necessarily presented to the Governing Council or Executive Board.

Such an initiative would serve as an insurance measure if the planned end of the € 1.85 trillion pandemic emergency purchase program known as PEPP leads to a market sell-off of bonds from highly indebted countries like Italy in March, officials said.

As part of the plan, purchases would be made selectively, it said. This would circumvent a rule common to both existing programs that central banks must buy debt in proportion to the size of each country’s economy.

This rule has been in place since large-scale asset purchases began in 2015. It is intended to allay concerns that the ECB is funding governments, which is prohibited by law.

Aware of the market crisis that gripped Italy at the start of the pandemic, ECB policymakers are trying to smooth the exit from existing emergency stimulus settings while also curbing investor speculation now that governments are looking to build up debt to finance Massive fiscal support is even more exposed.

Italian debt

German federal futures and the euro ticked higher for a short time in the report that appeared after the end of the European trading session. The currency stayed lower that day, trading around $ 1.1552.

Italian bonds have led to a sell-off of European bonds in the past two weeks, with 10-year yields climbing 25 basis points to 0.89%, their highest level since June. The same interest rate on Spanish debt is 0.47%.

The yield difference between Italian and German benchmarks – a closely monitored risk indicator 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 postponed an update of the monetary policy stimulus to December next year. She said in a Bloomberg TV interview in July that the pandemic program could be followed by a “transition to a new format” without going into detail.

Vice President Luis de Guindos said on Monday that the ECB will decide at its last monetary policy meeting of the year “what alternatives there are to this program -” if alternatives are needed “.

(Updates with market reaction in the 8th paragraph.)

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