27 November 2015

Reuters: Adding municipal debt could extend ECB bond-buying until late 2018

Essentially, incorporating debt issued by the likes of Paris and Bavaria opens a vast new market for the European Central Bank, helping it avoid running out of bonds to buy. According to data from Thomson Reuters IFR, almost $500 billion of bonds issued by European cities and regions are in circulation, the large majority of which are German.

The move into this field is being considered by the bank, which is widely expected to announce further easing measures next week designed to prop up fragile growth and low inflation in the euro zone.

The ECB now mainly buys sovereign debt under QE, but also agency, asset-backed, covered and some state-backed corporate bonds.

The addition of regional debt would add a further 6-10 months because it would prevent any bottleneck in the German sovereign market, where most QE purchases are made.

Extending QE well into 2018 depends on the ECB being able to buy the maximum amount in each bond, which could prove difficult in practice because some holders may not want to sell.

The calculations are based around the current rules of the programme, under which the ECB only buys debt maturing in two-to-30 years and can hold up to a quarter or a third of each bond, depending on its terms. Purchases of debt as a share of overall QE is limited to each country's contribution to the ECB's capital.

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