MNI SOURCES: Early Work On ECB Crisis Tool Focuses On Legality

Work by the European Central Bank on a new tool to cap any blow-out in bond spreads is still at a preliminary stage and is focussing on the legal design of an instrument that could be used without need for approval by eurozone member states, Eurosystem sources told MNI.

The Governing Council has still to discuss the possible tool, and the terms under which it would eventually be deployed would also probably be the subject of argument, with different opinions likely between national central banks as to which levels of spreads would constitute “fragmentation” of monetary policy transmission, one source said.

“Could there be a way to a new tool? Potentially, but I think it is far too soon for any new one to be laid out,” a source said, noting that reinvestments from the ECB’s Pandemic Emergency Purchase Programme would be the preferred method for capping any market fragmentation in the near term.

GERMAN CONSTITUTIONAL COURT

One objective of the tool would be to avoid any block on its use from individual eurozone countries, the source said, pointing to the scrutiny by Germany’s Constitutional Court of the Outright Monetary Transactions announced during the eurozone crisis in 2012. Use of the OMT is also tied to participation in a European Stability Mechanism programme, which would require approval by member states.

Putting a new tool on a sound legal basis would be key, other sources said.

Both ECB President Christine Lagarde and Chief Economist Phillip Lane have in recent speeches mentioned the possibility of a new tool to secure policy transmission as monetary settings normalise.

An ECB spokesperson declined to comment on the matter.