ECB risks running out of bonds to buy unless rewrites rules

LONDON (Reuters) - The European Central Bank could run out of government bonds to buy within a year if it does not relax its own restrictions on purchases, dealing a blow to its mission to boost growth in the euro zone and lift inflation.

The tower of the new European Central bank (ECB) (R) is pictured next to the former market hall 'Grossmarkthalle' at the site of the new ECB headquarters in Frankfurt, September 11, 2014. REUTERS/Ralph Orlowski

The central bank may have to consider measures such as scrapping its ban on buying bonds yielding less than its deposit rate or even extending the scheme to include corporate debt, particularly if it increases the size of the 60 billion euros ($66 billion) a month programme, as some analysts expect.

Otherwise it risks running out of the bonds it can buy from some countries, including Germany - Europe’s biggest economy and the euro zone’s lowest-risk borrower.

The quantitative easing (QE) scheme, launched in March last year, is restricted by several rules aimed at limiting its risks: as well as the yield limit, the ECB cannot hold more than a third of any country’s debt or of any specific bond issue. It also can only buy bonds in proportion to each country’s contribution to the ECB’s capital, the so-called capital key.

The ECB is widely expected to cut its deposit rate by 10 basis points to -0.4 percent on March 10 and economists polled by Reuters say the size of the bond-buying scheme could also be extended by 10-30 billion euros a month.

ABN Amro said if monthly purchases were increased to 70 billion euros, the 33 percent country debt limit would be reached in Germany and Finland before the programme ends in March 2017. In Portugal, the limit will almost be reached.

Its calculations are based on an assumption of no change in yields. If yields rise, the pool of eligible bonds increases.

UniCredit rate strategist Luca Cazzulani said: “The shortage of bonds is most relevant for (German) Bunds and you have to find a solution. Otherwise the programme will run into problems.”


The ECB could scrap the limits on the proportion of a country’s bonds it can buy - but such a move could be contentious among some euro zone states and officials where countries such as Portugal, which was bailed out in 2011, are involved.

If Lisbon needed to restructure its onerous debt pile in the future, the ECB would find it hard to avoid any losses if it held more than a third of its debt.

Any changes to the capital key rule could also face opposition from some euro zone states and officials as it could lead to the ECB shifting more to buying bonds from countries with higher debt levels.

A more likely possibility, say some analysts and policymakers, is for the ECB to drop the limit on buying bonds yielding less than the deposit rate.

The would increase the pool of eligible assets by hundreds of billions of euros. It would, however, expose the ECB to higher potential losses.

The ECB has said it will review and possibly reconsider its monetary stance in March but that no specific measures or instruments have so far been discussed. It said work would be done to make the full range of policy options available to the Governing Council, if necessary.

Kim Liu, senior fixed income strategist at ABN Amro, said that even if the ECB did not raise its monthly purchases, it was likely to hit its self-imposed limits in Germany within a year.

“This is the reason why we think the ECB will need to resort to more drastic measures, like removing the deposit rate floor for purchases,” he said.

About 600 billion euros worth of bonds are trading below the current deposit rate of -0.3 percent across the euro zone, according to Liu.


ECB President Mario Draghi has indicated that the bond-buying scheme could continue after March 2017 if the central bank had not reached it target of bringing euro zone inflation to near 2 percent. Inflation is currently running at about zero.

Assuming the ECB continues with the monthly purchases of 60 billion euros, DZ Bank analyst Hendrik Lodde said the ECB could hit its self-imposed limits on bond buying in Germany around mid-2017 and a little earlier in Portugal.

Another possibility to avoid hitting such limits is expanding the debt maturity range. The ECB currently buys bonds with a maturity of between two and 30 years. If they included bonds with a one-year maturity, that could also increase the available pool of assets.

Another way to expand QE without immediately threatening the ECB’s limits could be through purchases of corporate bonds - and some funds appear to be positioning for this already.

Eric Vanraes, fixed income portfolio manager at EI Sturdza Investment Funds, said an expectation that the ECB would need to expand the assets it holds is a reason why his fund has increased exposure to the bonds of government-owned companies that might be included under an expanded QE programme.

These include Gas Networks Ireland and France's Aeroports de Paris ADP.PA.

($1 = 0.9069 euros)

Editing by Pravin Char