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--Fears Using New Capital Key Could Look Like "Punishing Italy"
--Twist-Like Programme Could Boost Longer-Term Debt Buys
     LONDON (MNI) - The European Central Bank could sidestep the politically
charged reshuffling of rules governing its bond purchases, but make the
so-called capital key more flexible as it considers a possible Twist-like
reinvestment of its maturing debt portfolios next year, ECB sources said.
     The key, which caps the ECB's purchases of individual eurozone countries'
sovereign debt according to their contribution to the central bank's capital, is
due for rebalancing, but this would cut Italy's share at a time when the
spending plans of the country's populist government have put its sovereign bond
prices under pressure. MNI reported in September that the political sensitivity
of the capital key decision was likely to delay announcement of its plans for
reinvestment of maturing bonds after the asset purchase programme ends as
anticipated in December, and it now appears the central bank might simply decide
not to apply the new weightings.
     While the updated version of the capital key would not imply big changes in
the amount of different countries' bonds that could be purchased, with
weightings adjusted by no more than a percentage point, the Governing Council
will still probably stick with the old one, "to avoid the impression Italy is
being punished," one ECB source told MNI, in a comment echoed by other officials
at the bank.
     Another ECB source said the key could be followed in a more flexible
manner. While reinvestment would not mimic the Federal Reserve's famous
"Operation Twist", in which it used the proceeds of bill sales to buy
longer-dated bonds, it would have some similar features. The Fed's Twist was
aimed at keeping longer-term interest rates lower to make it easier for
companies and households to borrow.
     "Even though a Fed-style Operation Twist is off the table at the moment and
it's not even being evaluated by the technical committees, there could however
be less rigid restrictions placed on what kind of bonds to be re-purchased -
i.e. whether long, medium or short-term ones," the second source said.
     "The capital key is likely to remain the underlying, generic guideline to
follow, but we could end up having a more lenient approach to it," said the
source. "There could however be less rigid restrictions placed on what kind of
bonds to be re-purchased - i.e. whether long, medium or short-term ones."
     The first ECB official said discussion on a Twist-like operation was still
at the working level and a decision on the matter could come in Governing
Council meetings in October or December, as the central bank weighs
uncertainties over Brexit, Italy and emerging-market economies.
     But, if the ECB decides to maintain the maturity profile of its stock of
bonds then longer-dated securities would have to be bought to replace those that
come due, the first source said.
     An ECB spokesman said he had no comment on the capital key or reinvestment.
     Once determined, the shape of the reinvestment programme will have
long-reaching implications.
     "It (reinvestment) is a fundamental element (of monetary policy goals) and
so far, there has been no discussion over its expected duration, which will
stretch over a prolonged period of time," the second ECB source said.
     "The truth is: nobody at present within the ECB has any idea of what 'for
quite a long time' means".
--MNI London Bureau; +44208-865-3829; email:
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