The European Central Bank could scupper future eurozone debt restructurings if it increases the amount of a country’s bonds it can buy under its economic stimulus programme, a top debt lawyer has warned.
The problem, on the radar of European authorities suffering a hangover from the 2012 crisis, has been pushed to the fore by expectations the ECB will need to raise limits on its bond purchases to keep its quantitative easing scheme on track.
Kai Schaffelhuber, a partner at law firm Allen & Overy, said that if the ECB permitted itself to buy more than a third of a country’s debt it would make a restructuring of privately-held bonds more difficult, a move that could increase the likelihood of taxpayer rescues.
In a debt restructuring, a quorum of investors, which can vary in size, has to agree the terms of a deal.
The ECB cannot participate because it is forbidden from directly financing governments.
“They (the ECB) should avoid a situation where they are holding so much (of a) debt that a restructuring becomes virtually impossible,” said Schaffelhuber, whose firm worked on Greece’s 2012 debt restructuring. A public backlash at the billions of euros spent in bailing out eurozone countries and their banks over the last six years has given rise to a raft of legislation aimed at ensuring private investors share the pain in future defaults.
Yet desperate to lift growth and inflation, the ECB and national central banks started buying government bonds early last year in order to drive down countries’ borrowing costs and spur cheaper lending to businesses.
The ECB initially limited its purchases to 25 per cent of each individual bond and a third of a country’s outstanding debt, saying it wanted to mitigate the risk of becoming a dominant creditor of governments. After six months it raised the issue limit to a third for all bonds, except for a minority which have specific restructuring clauses known as collective action clauses.
Some market analysts think the ECB could raise either one or both of these thresholds again, as soon as September, amid signs it is approaching overall limits in Portugal and Ireland, and as yields on many German bonds fall below the ECB’s deposit rate – the lower limit for purchases.