Bond-buying: from the ECB to the EFSF?

An ECB council member has pointed out the possibility of bond-buying duties shifting entirely to Europe’s rescue fund. “That would be one way to have additional flexibility that at times might be found useful,” Cyprus’ central bank governor Athanasios Orphanides told Bloomberg. Senior French officials say they back the plan, though Germany – the fund’s biggest contributor – remains reluctant.

The six AAA-rated euro member states are apparently meeting to discuss the rescue fund in advance of a wider eurozone finance ministers meeting this afternoon. As well as changing the fund’s mandate to allow the purchase of bonds, one change under consideration is simply to increase the reserves at the fund’s disposal. But Austria’s finance minister has called instead for efficiency improvement and sees no “acute” need for an enlargement, while Slovakia’s PM would prefer an increase in the ECB‘s capital, saying such a move would be “more systematic”.

The EFSF can call upon €440bn at present – a sum inspiring “shock and awe” initially, but now considered “too small“. But in practice only about €250bn could be drawn down without risking a downgrade to debt issued by the facility. One way to tackle this, as FT Alphaville pointed out today, would be to accept a downgrade for the fund’s debt. That way, all €440bn could be used. Alternatively, the EFSF could issue tranches – debt with different ratings.

These are unlikely to be popular suggestions, not least because they would affect market demand for the bonds, which is currently extremely high. The debt, sold at AAA and therefore in theory riskless, is thought to offer yields at c.75bp premium to equivalent German bonds.

The ECB would welcome a change to the EFSF mandate, which would allow the central bank to focus once again on inflation. The ECB has been keen to wean banks off this non-standard support measure, and has encouraged governments to do more. The EFSF is a limited company backed by all euro member states (bar Estonia, which hasn’t quite done the paperwork yet, and Greece and Ireland which are receiving aid and are therefore excluded temporarily).