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MNI INTERVIEW: ECB Should Ditch 33% Limit, Says Honohan

By Luke Heighton
     FRANKFURT(MNI) - The European Union should jettison its 33% limit on buying
any one country's sovereign debt in a move that would "be a game-changer for
markets for years to come" as it focusses on "pressure points" in bond markets,
the former governor of the Central Bank of Ireland told MNI.
     The ECB could also adopt Bank-of-Japan-style yield curve control, Patrick
Honohan said in an interview, which came as eurozone sovereign bonds came under
heavy selling pressure, with Italian 10-year yields jumping more than 60 basis
points at one point.
     "I'm firmly of the view that it doesn't need to be constrained by the 33%
issuer limit, especially for the countries whose spreads are most volatile,"
Patrick Honohan said. The ECB will "get more impact for its QE, in terms of
delivering monetary policy, by concentrating on where the spreads are high. The
effectiveness of its QE is enhanced when it buys in the most volatile markets.
     "Another idea is to follow the Japanese model of yield control. In other
words, to switch from quantitative guidance on the ECB's asset purchases to
yield guidance," he said, adding that the impact of the virus, while very large,
was still impossible to quantify.
     "We don't know how long it's going to be, therefore we don't know the scale
of the ECB liquidity needed. But it will be big. The consequences of this will
be a game-changer for markets for years to come."
     --EIB BONDS
     Honohan, a member of the ECB's Governing Council from 2009 to 2015,
indicated the European Council could also decide that all coronavirus-related
spending will be paid for collectively through the European Investment Bank
(EIB), given that the EIB's borrowing capacity would not be in doubt and the
fact the ECB already buys EIB bonds.
     "The ECB will effectively have to fund deficit spending," he said, "but not
directly. In practice deficits are desirable and necessary, the ECB recognises
this and should make it easier for governments. It won't fund them, but it will
act in the financial markets in a way that makes funding deficits easier."
     Honohan said he would "not rule out" the ECB buying equities, "but it
wouldn't be very high on my list of things it would be possible to do. The
problem is in the debt market, rather than the equities market. Then there are
all the problems of judging which equities to buy, ETFs, etc."
     A rate cut in key interest rates of 10bps, when the rate is already -50bps,
would send a signal, he continued, but would be unlikely to make any material
difference, while Outright Monetary Transfers would be a "heavy-handed tool to
use in the context of a common shock affecting everybody."
     "OMT and conditionality are tied together very firmly," he explained. "That
means a programme, that means a huge amount of politics, and it's likely to
split European governments apart rather than bring them together. If Italy wants
to go into a programme it certainly opens the door to OMT. The ECB will do it;
everybody knows that programme is there. But I think they can do that without by
other means. But if you want something without conditionality, don't do OMT."
     Helicopter money, in the sense of a gift to every household, "doesn't at
all seem to address the current problem, he said, because the 90% of households
whose income has not been impacted is not going to need help. Nor are they going
to spend the extra money. "What's needed now is something more targeted," he
     Honohan called for swift fiscal interventions, adding: "The markets are
jumpy on all fronts, so this is not a time for hesitation, leading to
unnecessary economic distress and longer-term damage. "It's a mistake to assume
that economies can take care of themselves, and that it's a question of national
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$X$$$,MT$$$$,MX$$$$,M$$EC$,MFX$$$,MGX$$$]

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