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MNI (London)
--ECB Seen Phasing In New Capital Key For Reinvestments Over Time
--Some Pushing Back On New TLTRO; Needs Europe-Wide Case
     LONDON (MNI) - The European Central Bank is expected to announce at next
week's meeting that it will phase in its new rules governing purchases of bonds
under its reinvestment plans, as it shifts its focus to maintaining the QE stock
and reinvesting its maturing securities, eurosystem sources told MNI.
     A rebalancing of the ECB's capital key -- adopted by the ECB this week and
effective January 1 2019 -- reduces the weight of some countries, like Italy,
while raising that of others including Germany. Moreover, some sources noted the
capital key may need further rejigging after March 29 2019 if the UK does leave
the EU and the Bank of England's stake must be redistributed.
     An abrupt change to the new capital key would be potentially problematic,
not only because of the potential market ramifications for fiscally weaker
governments but also because the bank already holds very high quantities of
German debt. However, some ECB officials noted that there was already a degree
of discretion in overall capital key allocations and that would certainly be
     As a result, officials will probably decide to make the transition to the
new key a gradual one, an ECB source said, and the central bank might allow
itself two to three years before its stock of bonds reflects the new guide. This
would amount to a commitment to keep its balance sheet stable for that period,
the source said.
     Purchases might stray from the key from month to month, due to the pattern
of redemptions, the source added.
     Another source noted that the guiding rules will remain in place under the
amended capital key, and "reinvestments will likely not be a different programme
from that under APP ... the underlining rules remain the same".
     Another source preferred less precision over the time frame, in the hope
that financial markets would be convinced reinvestments would continue for as
long as necessary.
     Reinvestment could also prove a useful tool if the withdrawal of asset
purchases prompted tighter monetary conditions. ECB chief economist Peter Praet
suggested in a recent speech that the proceeds from shorter-term maturing debt
could be invested in longer-duration paper in order to flatten any steepening of
the yield curve. But there is little prospect of such an operation, reminiscent
of the Fed's "Operation Twist" in 2011, for the moment, a eurosystem source
     Officials pointed to the fact that the ECB has already slashed its bond
buys without significant negative effects.
     "We are not really tightening. The APP stock remains the same and we
reinvest," an ECB source said.
     Other matters considered within the ECB include a possible fresh round of
targeted longer-term refinancing operations. Loans made under earlier E740
billion TLTRO programmes expire in 2020 and 2021, and some of these will stop
counting towards banks' net stable funding ratios around mid-2019, with Italian
banks particularly exposed.
     ECB officials have told MNI that a fresh round of TLTROs has been
considered, but this time one ECB official said that while some countries are
lobbying for the funding, others are pushing back.
     The ECB must still decide whether there is a general need on the part of
eurozone banks for more TLTRO money, or whether it would merely ease the funding
requirements of some banks, the official said.
--MNI London Bureau; tel: +44 203-586-2225; email:
--MNI London Bureau; +44 203 865 3829; email:
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MNI London Bureau | +44 203-865-3812 |