MNI INTERVIEW: Court Ruling Won't Deter ECB: Ex-Mkt Ops Head

--Answer Will Be Found To Court Outcome Or Risk Bundesbank 'Torn Apart': Papadia

By Les Commons

     LONDON (MNI) - The European Central Bank is unlikely to hold back on

further easing measures if needed in the wake of the recent German

constitutional court ruling and there are no technical limits to how far the

central bank can push its balance sheet to achieve its aims, a senior former

central bank official told MNI in an exclusive interview.

     The German government and the Bundesbank will find a way to avoid the court

ruling having any "practical implications" as failure to do so "could tear the

Bundesbank apart" as it would be faced with two competing obligations: "comply

with the German court ruling or with the EU treaties, which oblige it to do what

the ECB's Governing Council decides," said Francesco Papadia, former director

general of the ECB's markets operations department.

     In early May, the court ruled the ECB would have to prove the

'proportionality' of it's Public Sector Purchase Program, which raised questions

over the future viability of the bank's pandemic rescue measures.

     --INSTITUTIONAL RISK

     In practical terms, whatever activities the Bundesbank is conducting on

behalf of the Eurosystem could be executed by other members and substituting for

the Bundesbank "is not an issue," Papadia said. However, he noted that the

institutional risk is serious as non-action by the German central bank would be

a "kind of mutiny from a very important Eurosystem NCB."

     Papadia sees last week's EUR600 billion increase in the envelope of the

Pandemic Emergency Purchase Program to EUR1.35 trillion sending an important

message, reflecting President Christine Lagarde's initial reaction to the court

ruling that the ECB would be "undeterred" to act when needed.

     It shows the ECB is "not frightened" to reinforce PEPP if it judges it

necessary, he said, noting that it also showed it was prepared to act even as

the European Commission and several capitals outlined fresh fiscal stimulus.

     --NO LIMITS

     Papadia didn't see any technical limits to how far the ECB could push its

balance sheet to achieve its goals, seeing only the Governing Council's

agreement as a barrier.

     "On the policy side, Lagarde gave the impression that the decision to

increase PEPP was based at least on consensus, so it was not a difficult

decision, hinting to the fact that there should not be insurmountable

difficulties in doing more, if needed," he said, noting her emphasis on

returning to "inflation-control" language offered more room for expansion if

inflation stayed lower for longer.

     Papadia seemed to be fairly relaxed with current policy execution, seeing

little need for either a twist operation out of shorter-dated core bonds into

longer maturities. Nor is he too keen on a yield curve control approach, trying

to limit medium and long-dated yields rising, although he is a little more open

to this option.

     On future policy options, Papadia expressed scepticism as to whether the

ECB could buy stocks, even though the central bank has no legal limitations

preventing it and Japan's actions over many years has created a template.

     "I think it is more likely today for the ECB to buy bank loans rather than

stocks. But if it did come to buying stocks, it would do it like the Bank of

Japan: not single equities but a package of equities in the form of Exchange

Traded Funds," he said

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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