With speculation rife over whether European Central Bank president Mario Draghi is planning to restart bond purchasing on Thursday, it seems wise to take a look at the conditions that need to be met before the ECB and the European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) can start buying up bonds. Happily for Draghi, there are no special restrictions on his own institution deciding to restart the Securities Market Programme. All he needs to do is convince a majority of the ECB's governing council that it would be a net benefit to the eurozone.
The EFSF is a lot trickier, having a few other hurdles in place. Courtesy of Société Générale:
| Along with the ECB, the EFSF can also buy in primary and secondary markets. But for that to happen, the conditions are rather stringent:
- A country needs to submit a request. But Spain’s Tesoro [treasury] said on Monday that it is not looking for official buying of its debt.
- Some kind of macro conditionality is needed - a macroeconomic adjustment programme and/or precautionary programme, in the form of a MoU (Memorandum of Understanding).
- Germany’s Bundestag, for secondary market purchases, through the 9-member Haushaltsausschuss committee, needs to give its approbation.
- The ECB needs to give its approbation, after completing a study, for secondary market purchases |
It is the third point here that’s the most interesting. That is largely because, contrary to how the SocGen note presents it, things aren’t as clear cut as they should be. Last year, the German government granted the Bundestag new powers of oversight as a quid pro quo for approving expanded powers for the EFSF, including the right to buy government bonds.
The confusion seems to lie in whether that approval extended to all purchases of government bonds by the EFSF, or if the Bundestag (or specifically the Haushaltsausschuss, the budget committee) has reserved the right to grant or deny approval to individual spates of bond buying. SocGen clearly favours the latter school of thought, although Ciaran O'Hagan, head of European rate strategy at the bank, concedes there is some ambiguity in how things would operate.
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| © Deutscher Bundestag / Simone M. Neumann |
After looking into the matter, Vincenzo Scarpetta - a researcher at think tank Open Europe - doesn't see quite so much ambiguity, noting that Bundestag approval is required for any EFSF action. The German constitutional court has allowed matters that require secrecy or speed - such as bond purchases - to be delegated to the budget committee, but all actions will require approval in some form from the parliament.
Nomura’s senior political analyst, Alastair Newton, also doesn’t see quite any ambiguity - but in a rather different way. When questioned on whether Bundestag approval was needed to start bond purchasing up he responded: “That’s not true. In principle, the Bundestag approved of the EFSF buying bonds last year.” He does, however, agree that German chancellor Angela Merkel would need to seek approval before making any further concessions in the European Council.
If Newton is correct, this state of affairs might not continue for much longer as the ESM – if ratified by the German constitutional court on September 12 – will not necessarily operate under the same set of rules as the EFSF. At any rate, Germany – and every other eurozone member state – will have a veto over ESM bond purchasing. It seems likely that the German representative will be bound to seek permission from parliament before casting a vote.
In practice, SocGen's O'Hagan thinks it shouldn't be too much of a problem if the EFSF does need to seek the budget committee's approval. "This isn't a major obstacle. All of the requirements in the note are things that can be negotiated around," he says.
Even if it doesn't prove to be a practical barrier, the lack of clarity over what needs to be done in the instance of EFSF bond purchasing is a concern. One can only hope that the EFSF knows who they do and do not need to seek permission from.