The European Central Bank (ECB) has started its new emergency bond purchase program. “The ECB will examine all options and options to help the economy cope with this extraordinary shock,” said the central bank.
For the first time, the ECB is foregoing an important self-imposed limit for its new purchases. According to a document published by the central bank late on Wednesday evening, the previous rule that the central bank may buy a maximum of a third of all government bonds in a euro zone should not apply to new purchases.
This allows the central bank to be much more flexible when making purchases. So far, it was stipulated that the ECB may only buy a maximum of one third of government bonds in a euro zone.
With this, the central bank also wanted to counter the suspicion that it was exceeding its mandate with the purchases and was operating state financing. The Federal Constitutional Court and the European Court of Justice have been dealing with the issue for years. A decision by the German constitutional judges was postponed from March to May because of the virus crisis.
Government bonds in demand among investors
The 33 percent limit is also intended to avoid legal problems in the event of default. It can happen that the ECB has so many bonds from a country that rescheduling is no longer possible without their approval. In this case, the ECB would run the risk of blocking debt restructuring because it could not waive its claims based on its mandate.
The ECB also made it clear that it would accept the same treatment as private investors (“Pari Passu”). This is important because otherwise private investors may face disadvantages, for example in the event of debt restructuring. This can drastically reduce the demand for the securities, lead to substantial price losses and thus run counter to the effects of the ECB purchases.
Bonds with a shorter maturity are also to be bought, as the ECB document shows. In principle, it is also conceivable that the ECB will expand its new purchases or continue them in the coming year without reaching its own limits.
On the financial markets, government bonds from France, Italy, Spain and Greece rose above all on Thursday. You should have benefited both from the start of the purchase itself and from the softening of the purchase rules. The prices of the securities rose significantly, in return the yields fell.