European Central Bank board member Isabel Schnabel played down an imminent expansion of the ECB’s crisis-fighting tools on Wednesday, pouring cold water on the notion of buying bonds issued by banks or by junk-rated companies.
FILE PHOTO: Chancellor Angela Merkel speaks with Isabel Schnabel, director of resort of markets, research and statistic at the European Central Bank, during the award ceremony for the Order of Merit of the Federal Republic of Germany at Bellevue Palace in Berlin, Germany, January 31, 2020. REUTERS/Annegret Hilse/File PhotoThe ECB boosted its Pandemic Emergency Purchase Programme to 1.35 trillion euros ($1.54 trillion) last week and investors have been speculating over whether it will add new assets to its shopping list, which is mostly comprised of government and corporate bonds.
Schnabel said the central bank was open to that prospect if needed but the time hadn’t come yet.
“We don’t necessarily have to extend our toolbox already right now, but according to how the crisis develops there may be a time when this becomes necessary,” Schnabel said during an online panel discussion.
ECB staff have been working on the possibility of including bonds issued by companies that have been downgraded to junk during the coronavirus outbreak, such as German airline Lufthansa (LHAG.DE) and French car-maker Renault (RENA.PA).
While the Federal Reserve is already doing so, Schnabel noted the Fed could count on the U.S. Treasury to bear the first losses on such bonds, something that may be difficult to replicate in the euro zone.
Asked by UniCredit’s (CRDI.MI) chief executive Jean-Pierre Mustier whether the ECB could buy bank bonds, Schnabel said this may raise a conflict of interest because of the central bank’s role as the sector’s supervisor.
The ECB scooped up all of Italy’s new debt in April and May, setting aside its prescribed national quotas to cap borrowing costs for the indebted, virus-stricken country.
It also bought 35 billion euros of commercial paper to help euro zone companies navigate a liquidity squeeze.
Schnabel said the ECB would continue focusing its bond purchases on the countries and markets where they are most needed for the whole duration of the PEPP.
Estonian central bank governor Madis Muller said earlier the ECB should limit how much its bond purchases deviate from each country’s shareholding in the bank, while Slovakia’s Peter Kazimir wished they could end “as soon as possible”.