ECB Insight: Waning Concern at the ECB About Hitting 33% Issuer Limit

24 November, 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank insiders are growing less concerned about the possibility of asset purchases running up against the 33% limit on the share of individual countries’ outstanding debt the ECB can possess, based on recent conversations with Econostream.

The possibility of not being able to buy enough German or Dutch bonds before too long had been seen as a real threat as recently as a couple of months ago. At the September 9 press conference, ECB President Christine Lagarde was asked whether it would be necessary to boost the 33% issuer limit to enable asset purchases to continue unimpeded.

Lagarde deferred an answer to December, saying that the ECB would ‘adjust accordingly if necessary.’

The ECB would naturally prefer not to have to adjust the issuer limit, which it has stated it considers ‘a means to safeguard market functioning and price formation as well as to mitigate the risk of the ECB becoming a dominant creditor of euro area governments.’

Besides running counter to the principles that motivated it in the first place, tinkering with the issuer limit would open the ECB to charges of expediency and inconsistency, and would be interpreted by many as a further sign that quantitative easing had gone too far.

Much more recently, however, one insider who spoke to Econostream was very relaxed about the matter, reporting that the ECB now saw ‘no huge problem’ in this regard as the issuer limit was not a ‘major limitation’ except in more minor jurisdictions where this was perfectly natural anyway.

Another insider said the technical staff of the ECB was currently looking at projected issuance to determine whether a problem could arise, but he, too, was unconcerned.

‘What happens if an important country reaches its 33% limit?’, he asked rhetorically. ‘My answer is that this has happened in the past with some other countries. I wouldn’t expect any different reaction by the Governing Council in the case that Germany reaches this limit. There are some clear precedents on this particular point.’

A third insider was also unworried, pointing to recent inflation developments as a reason to think that the ECB could get by with potentially significantly fewer asset purchases than recently anticipated.

One person pointed out that better-than-expected economic developments had led to some improvement of fiscal situations, meaning the ECB might also have to contend with reduced sovereign bond supply in the coming years.

A related issue is another self-imposed limit on asset purchases, namely the 10% cap applied by the ECB to the share of public sector bond purchases of debt issued by international organisations and multilateral development banks.

‘I think it makes sense’ to raise this, one insider said, ‘especially given the foreseen supply in the context of the Next Generation EU.’

‘It makes sense to operate in this part of the market, it should be politically unobjectionable, it’s something at the European level, the level of risk is low, and on top of that it would be a natural step in the right direction of moving towards a more complete economic and monetary union, because it would be using the European safe asset - the bonds issued by the Commission’, he added. ‘So, for me it would make a lot of sense, even just as a signal, to raise the cap for supras.’

Although the ECB could raise this limit via a relatively simple Governing Council decision, it must be careful not to play too large a role in the market for NGEU issuance, which would then become less liquid. It is also clear that NGEU issuance needs the ECB much less than the ECB needs NGEU debt, which would have little problem finding takers without the central bank’s help. There is no market stability argument for increased ECB involvement here.

On the other hand, the purchases of joint issuance by the ECB are seen by some as less problematic from a monetary financing point of view than the accumulation of national sovereign debt. And to the extent the ECB expanded its purchases of supranational debt, the issuer limit on individual countries’ debt would become less of a constraint.

However, the overarching question remains of how much the ECB needs to buy, and signals recently have been that the amount may be less than recently envisioned. ECB Executive Board member Isabel Schnabel in an interview yesterday reinforced the idea with regard to the pandemic emergency purchase programme (PEPP) that ‘it's not generally assumed that the entire envelope will be used.’

And with respect to an increase in the APP purchase volumes, cited all the other ways in which the ECB already ‘provides a lot of accommodation’ and said that given diminishing returns and increasing side effects, ‘eventually, there will be a shift from asset purchases towards other tools, most importantly our forward guidance.’

Austrian National Bank Governor Robert Holzmann was much more emphatic last week, saying that ‘for me, long story short, this quantitative easing has to stop.’