By Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) – European Central Bank President Christine Lagarde has a concrete reason for putting pressure on euro zone governments to finance the fight against coronavirus with joint debt — avoiding trouble with the courts.
These common “coronabonds” would be a rare, tangible example of solidarity in the 19-country currency bloc, which is still deeply divided along national lines and marred by bad blood from the debt crisis of the early 2010s.
More prosaically, they would also give the ECB more debt to buy as part of its multi-trillion euro stimulus program and allow it to stay within a legally sensitive cap on owning more than one-third of any one country’s bonds.
“They could circumvent all the difficulties with the issuer limit and capital key with a coronabond,” said Carsten Brzeski, an economist at ING in Frankfurt.
He noted that the so-called issuer limit, which the ECB is nearing for Germany and some smaller countries, had been vital to seeing off challenges to its asset purchases in the European Court of Justice and Germany’s constitutional court.
The central bank now faces a tough choice between either raising that limit or buying more bonds from other countries — deviating from another rule dictating that debt be bought in proportion to each euro member’s shareholding in the ECB.
Either solution would expose the ECB to fresh attacks from Markus Kerber and other conservative German academics who have accused the central bank in a series of lawsuits of bankrolling indebted governments and distorting financial markets.
Coronabonds would help the central bank out of a tricky situation because they would be issued by a European Union institution and would not count towards the national limits, even if the cash is used to fund national stimulus measures.
The ECB needs coronabonds to come soon and be big.
It is likely to hit the 33% limit in Germany as early as June and no later than September, depending on the pace at which it buys German bonds and how much new debt Berlin issues, according to analysts at BofA Securities.
And the new bond issues would need to be in the hundreds of billions of euros to make a difference — something that is likely to face opposition from Germany and the Netherlands, which have long resisted the idea of common borrowing.
“Coronabonds would change everything if they come but that is a very big ‘if’,” Pictet strategist Frederik Ducrozet said.
Germany’s constitutional judges are due to rule on the legality of the ECB’s sovereign debt purchases on May 5 — a long-awaited verdict that was expected to bring a five-year court saga to an end.
But the ECB’s decision last week to expand its bond purchases for this year to 1.1 trillion euros and lift constraints if needed has set the scene for new challenges by the likes of Kerber, an attorney and finance professor.
He has described the ECB’s latest package as a “power grab” and denounced the central bank’s “dictatorship” in an opinion piece published on the website of the Tichys Einblick magazine.
“The march into the sovereign ECB dictatorship seems to have been mapped out,” Kerber wrote.
For others, however, the issue of common debt to fight the coronavirus outbreak would mean much more than just circumventing a legal obstacle and could morph into a moment of truth for the euro zone.
“We’re in a now or never moment,” Danske Bank strategist Piet Haines Christiansen said. “If you can’t agree on debt mutualization in such a social crisis, it may never be done.”
(Reporting by Francesco Canepa and Balazs Koranyi; Editing by Catherine Evans)