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The European Central Bank's (ECB) new €750 billion asset purchase programme - announced in response to the coronavirus outbreak – could leave it open to legal challenge as its own bond-buying limits will not be applied in the context of the new initiative.
The ECB had traditionally had a rule that it will not buy more than 33 per cent of any country’s bonds in order to avoid being accused of directly funding national governments, which would amount to a contravention of EU law.
However, this rule will not apply to the new ECB Pandemic Emergency Purchase Programme (PEPP) of private and public sector securities, which was launched to “counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus”.
The ECB’s Governing Council has ruled that “to the extent some self-imposed limits might hamper action that the Eurosystem is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks faced.” It added that the limits should “not apply to PEPP holdings”.
Upon the launch of the programme, ECB president Christine Lagarde said: “We are fully prepared to increase the size of our asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed. We will explore all options and all contingencies to support the economy through this shock.”
However, analysts have now warned that the absence of bond-buying limits applicable to the PEPP could leave the ECB vulnerable to legal challenge.
Describing the ECB’s decision to not apply bond-buying limits to the PEPP as a “bombshell”, Frederik Ducrozet, a senior economist at Pictet Wealth Management, told the Financial Times: “There is a risk that the ECB faces legal risks and a political backlash down the road.” Though he added: “It strengthens the ECB’s quasi-fiscal support to the most vulnerable sovereign states.”