LONDON At the height of the euro zone debt crisis in 2012, ECB President Mario Draghi's problem was how to convince investors to hold on to European bonds. Now he faces a struggle to make them sell.
Weeks before the European Central Bank begins a program to buy about 1 trillion euros of euro zone government bonds, banks, pension funds and insurers across the continent are hoarding them for regulatory or accounting reasons.
That may complicate implementation of the quantitative easing program, aimed at reviving growth and inflation in the euro zone. The ECB might have to pay way above market prices, or take additional measures to encourage investors to sell.
"We prefer to hold on to them," said Antoine Lissowski, deputy CEO at French insurer CNP Assurances. "The ECB's policy ... is reaching its limits now."
Banks, which buy mainly short-term bonds, use government debt as a liquidity buffer. Selling would force them to invest in other assets, for which -- unlike government bonds -- regulators ask banks to set cash aside as a precaution. Alternatively, they can deposit money with the ECB, at a discouraging interest rate of minus 0.20 percent.
Insurers and pension funds typically buy long-term debt. They could make hefty profits selling to the ECB. But the money would have to be re-invested in other bonds whose yields would be much lower than their long-term commitments to clients -- a regulatory no-no.
In 2012, many euro zone bonds offered double-digit yields. Today, Greece aside, the bloc's highest yielding debt is a 30-year Portuguese bond offering 3.30 percent.
Between a quarter and a third of the market carries negative yields, meaning investors pay governments to park their money in debt. In Belgium, a country whose rates are taken as indicative of the euro zone average, benchmark 10-year bonds BE10YT=TWEB yield 0.7 percent, just above record lows around 0.5 percent.
"If we were to sell bonds, we would make huge capital gains, but we will then have to reinvest that money at a yield of 0.5 percent, set against liabilities at 3.50-3.75 (percent)," said Bart de Smet, the CEO of Belgian insurer Ageas.
Dutch banks ING ING.AS and Rabobank RABN.UL, Spain's Bankinter (BKT.MC) and rescued lender Bankia (BKIA.MC) and France's BNP Paribas (BNPP.PA) said they were unlikely to sell when the ECB comes knocking.
"The volume of sovereign bonds we own at the moment is not linked to monetary policy," BNP Paribas deputy CEO Philippe Bordenave said. "It's linked to the regulation."
If Greece were to leave the euro, selling pressure might increase, but Grexit is seen as an outside risk.
Banks are big holders of government bonds, especially in the more indebted states that most need ECB support. In Spain and Italy, they own a quarter of the market, or around 600 billion euros combined on a net basis. In Germany, banks own over 250 billion euros of public debt.
UBS estimates local pension funds, insurers and mutual funds own 20 to 25 percent of the domestic government bond market in Belgium, Italy and the Netherlands.
One of the Swiss bank's rate strategists, Nishay Patel, says this hoarding is likely to force the ECB to buy more bonds maturing in 5 to 10 years to meet its trillion euro target.
He calculates that if 45 percent of the ECB's purchases are in that sector, 35 percent in shorter maturities and 20 percent in longer ones, the ECB would be able to stay below its self-imposed cap of not owning more than a quarter of any one bond.
Holders of 5- to 10-year debt are likely to be hedge funds or other asset managers that bought government bonds in anticipation of the ECB entering the market.
"The ECB have a lot of flexibility in the sense that they haven't disclosed what amounts they would buy in certain segments of the curve," Patel said.
If the ECB gets desperate, some analysts say, it could raise its deposit rate to zero to encourage banks to sell.
Regulation and central bank purchases, along with efforts by indebted governments to reduce issuance, are among the reasons global demand for bonds is almost $700 billion above supply, according to a JPMorgan estimate.
But everything has a price. RBS strategists see a 40 percent chance that ECB purchases would help turn German 10-year Bund yields negative this year.
"There's a lack of bonds to meet current demand globally, so it's going to be difficult to see a lot of sellers," said Patrick O'Donnell, portfolio manager at Aberdeen Asset Management, who does not plan to sell.
"The risk is that if the ECB is serious about buying at the rate of 60 billion a month, the price impact could be quite material."
(Reporting by Carolyn Cohn, Nishant Kumar and Marius Zaharia in London, Leigh Thomas in Paris, Jesus Aguado in Madrid, Toby Sterling in Amsterdam and Jonathan Gould in Frankfurt; Writing by Marius Zaharia; Editing by Nigel Stephenson, Larry King)