ECB: Bond market limit increase of 10% – Enlargement of common European borrowing


The Commission’s bond issuance program will reach 80 billion euros in 2021 and this amount is expected to double by 2022

The European Central Bank (ECB) is considering raising the limit on bond markets issued by the European Union , trying to increase its flexibility in the current emergency asset purchase program  (PEPP) as well as to strengthen credit. profile of the historically new joint lending program  of the bloc which started in 2021, according to a publication of the Financial Times on Sunday, October 17, 2021.

The November meeting

Four members of the Governing Council of the ECB told the Financial Times thatwill support the increase of the share of government bond markets issued by international bodies such as the EU, from the current ceiling of 10%.
The plan is expected to be discussed at two special meetings of the eurozone central council in November 2021 on the amounts raised from the financial markets through joint lending.
The plan will need to receive majority support from the 25 members of the ECB’s board and there has been no official comment from the FT.

The oversupply of bonds

This shift in the ECB’s monetary policy strategy comes as the European Commission plans to increase the value of its bonds next year.under the € 800 billion NextGenerationEU Recovery Fund – this is the “tool” agreed in the summer of 2020 to finance the pandemic and will be financed through joint borrowing by Member States.

 The program

Brussels aimed to issue bonds 8 0 billion. Euros for NextGenerationEU year and almost double the amount next year, turning the Commission itself  in one of the largest bond issuers in the EU.
Any e ver and above support moving public borrowing the ECB would be likely to reduce the cost of lending and financing the EU economyand improve the credit profile of the bloc’s bonds as a benchmark for the eurozone – wide bond market – a role previously held by German bonds.

The debt market rule

Also with the increase of the market limit the ECB would be able to support the financial markets without violating the regulation which forbids it to hold more than one third of the public debt of each state.
According to some sovereign debt market analysts, the ECB  could reach these limits for German and Dutch debt by 2023 .
“Lifting the […] limit is one way for the ECBto gain more flexibility in government bond markets and to support the EU’s most important program  (common lending), “said Elga Bartsch, head of macroeconomic analysis at the BlackRock Investment Institute.

Maintaining flexibility

The ECB is expected to announce in December 2021 that the € 1.85 billion Emergency Emergency Purchase Program (PEPP) launched in response to the Covid-19 crisis will end in March.
The four board members said they expected the central bank to consider ways to maintain at least some of the extra flexibility that characterizes PEPP, which is exempt from the national debt market threshold.
One member of the IGC said that the ECB is also working on ways to continue buying Greek government debt, which would otherwise be excluded from its rule of not buying bonds without an investment grade  – another restriction lifted under the PEPP.

Opposition to the “hawks”

However, the idea of expanding the asset purchase program is likely to face opposition from the most conservative members of the ECB’s governing body, including Germany’s Jens Weidmann and Klaas Knot, the Dutch central banker .
They are worriedfor governments to become overly dependent on markets in order to maintain high levels of debt – and call for a return to restrictive fiscal policies.


A crucial factor in the debate will be whether the ECB continues to forecast that inflation will fall below the 2% target next year and remain at that level for the next two years.
The central bank is expected to revise its inflation forecasts and make a new forecast for 2024 next December.
Rising energy prices and supply chain problems have prompted some ECB policymakers to worry that thebank underestimates
inflationary pressures.
However, a sharp brake on bond markets is not expected once the PEPP expires.
Instead, it is widely expected that the central bank will expand its traditional asset purchase program , with a bond-buying rate of € 20 billion a month, in parallel with purchases through the PEPP program.

By 2023

“I expect that they will continue to revise their inflation forecasts until the second half of next year, ” said Frederik Ducrozet, a strategic analyst at Pictet Wealth Management.
“But I still believe that tthe extraordinary asset purchase program will continue until the end of 2023 “.

The «backstop fund»

Several council members said that the ECB could be shifted from the purchase of a fixed monthly amount within the traditional asset purchase program to a total amount of bonds that will be purchased j.
They stressed that it could also to create a new “backstop fund” in addition to the asset purchase program, which will only be used in response to financial market turmoil.


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