Central Banks

Loophole may clear the path for the ECB to purchase more state debt – report

Reuters reports, citing officials from the central bank

The report states that there is an obscure clause in government bond contracts that may help the ECB to clear a key hurdle to launching a fresh stimulus programme by allowing it to own even more government debt.

For some context, one of the main issues with the ECB’s debt purchases in the past is that they didn’t have the capacity to own more considering that there is a issuer limit that prevents them from being the ‘blocking minority’ should a country apply for debt restructuring.

But according to the sources in the report, they are saying that this constraint may be circumvented by stripping central banks of their voting rights. This means that it will allow the ECB to own more than 1/3 of each euro area country’s debt.

That being said, putting the idea into motion is easier said than done as this so-called “disenfranchisement clause” has yet to be discussed by the governing council and it will likely face opposition on legal and political grounds, says Reuters.

I reckon this will certainly be a cause of concern in practice if the ECB chooses to buy up a lot more of one country’s debt than others. Free government financing anyone? Can you imagine the number of fingers that will be pointed towards the governing council on any slight suspicion of biasness? Geez.

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