ECB not debating abandoning capital key in QE buys - sources

The headquarters of the European Central Bank (ECB) is illuminated with a giant euro sign at the start of the "Luminale, light and building" event in Frankfurt, Germany, March 12, 2016. REUTERS/Kai Pfaffenbach/File Photo

FRANKFURT (Reuters) - The European Central Bank is not currently considering buying government debt out of proportion to euro zone countries’ shareholding in the bank and the hurdle for abandoning this capital key is high, sources close to the ECB said on Friday.

Bond markets rallied on Friday after Bloomberg reported that the ECB was considering giving up the capital key due to a shortage of German paper, which investors see as safe and have piled into in the aftermath of Britain’s vote to leave the European Union.

But sources familiar with the ECB’s thinking said that several other changes would be first considered before any such move, which would be have heavy political ramifications, especially in Germany, where many are already uneasy about the ECB’s quantitative easing.

In case of shortage of papers to buy, it would first consider raising the limit on how much it can purchase of each bond issue that is not protected by collective action clauses, the sources said. Or it would amend rules about which assets it can buy to expand the eligible pool.

“As in the past, we’ll amend the rules if necessary but it’s not on the agenda now,” a Governing Council member, asking not to be named, told Reuters. “I would expect such changes to be quite technical. The capital key would be political, however.”

The ECB declined to comment.

Reporting by Balazs Koranyi and Francesco Canepa