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--Many ECB Governing Council Members Oppose June PEPP Top-up
--PEPP Expansion Likely By September
--ECB May Approve PEPP Reinvestment In June
LONDON (MNI) - Many members of the European Central Bank's Governing
Council would oppose adding to its EUR750 billion Pandemic Emergency Purchasing
Programme at this week's meeting, preferring to wait for up to several months,
ECB sources told MNI.
While some officials said a EUR500 billion-plus expansion was possible on
Thursday, most said the central bank was likely to keep its powder dry for the
The reinvestment of PEPP principal payments could be announced on June 4,
and forward guidance may be strengthened, sources said. The inclusion of junk
bonds in the ECB's QE is under consideration, but significant hurdles remain and
a decision is not imminent, they said.
While the PEPP will eventually be expanded, one senior Eurosystem official
said to do so three months into a nine-month programme would appear "a little
bit panicky." European proposals for a post-coronavirus rescue package have
relieved some pressure for immediate ECB action, the official noted.
In the longer-term, the official feared the German Constitutional Court
could rule that the PEPP -- not subject to issuer limits or the ECB's capital
key -- provides banned monetary financing.
"If we have to expand the PEPP we will probably do so," the official said.
"But in the longer run a problem will emerge on the horizon with the prohibition
of monetary financing, and that means we have to somehow be out of the programme
before any such court case could be completed."
Even so, exiting PEPP may involve "various shades of grey," the official
"Reinvestments need to be a temporary phenomenon, but you could envisage
that during the recovery phase that you would reinvest, so that you keep the
accumulated stock of PEPP at a constant level until GDP is back where it was
A second senior ECB source said he "would be very surprised if there was an
increase in [PEPP] this month," though "it will come, possibly in September."
"I think we must take the chance to wait and hold some firepower for the
recovery phase or as a reserve against a possible 'second wave'," the official
continued, noting that June's Eurosystem staff macroeconomic projections for
2020 will be "very bad,"
"We may announce the likelihood of an increase later in the year, rather
than just say we are prepared to, but again, I think there is no need to [use]
PEPP reinvestments are "a foregone conclusion" and an announcement "is
coming [...] possibly this month," the source said, adding that forward guidance
may be strengthened. "But we are already committed to lower for longer and all
surveys seem to understand that ultra accommodative policies will be in place
for an awful long time."
PEPP reinvestments are "very likely" to be announced at some stage, a third
well-placed source said. However: "I don't expect any topping up of PEPP, not at
this meeting, nor over the next few months
"We might need to wait for a significant negative event to further boost
PEPP, such as signals of a virus rebound that triggers a domino effect across
the eurozone. Having said that, the global outlook can change rather quickly,
prompting new measures overnight, so nothing can be ruled out." Rate cuts "are
always there, but not for now," the source added.
PEPP's size and composition could be expanded in coming months, a fourth
official indicated, saying Thursday's meeting would present "more of a holding
pattern than a big event." The suggestion that forward guidance might be
"tweaked" was "going in the right direction," the source added.
--SOME THINK PEPP TOP-UP POSSIBLE
One person, though, also with knowledge of Governing Council deliberations,
said there was pressure for a PEPP top-up from the ECB, as well as from some
national central banks, and that a EUR500 billion expansion by June 4 was the
"the most likely option." A sixth central bank source said there could be an
increase of up to EUR750 billion on Thursday, but added "Sometimes they decide
on the day."
The question of whether the ECB should purchase junk bonds, was, one
official said, "the most difficult one," adding that "other central banks have
credit guarantees from the sovereign. That is not going to work in Europe. This
is a real credit risk. If you start buying fallen angels, etc., there will be
massive defaults in this portfolio."
There is "not much enthusiasm left" within the Governing Council for rate
cuts, the official said, though were inflation to go down and real interest
rates go up "we'll have to think about that."
The ECB "is there to close spreads," between Italian and German government
bonds, the official confirmed, although "where the spread has been recently is
not excessive [...] Is 200, 250bps a fair spread? Probably."
An ECB spokesperson declined to comment to MNI for this article.
--MNI London Bureau; +44 203 865 3829; email: email@example.com