Leseprobe
Contents
Index of figures
Index of tables
Index of abbreviations
1 Introduction
2 European Sovereign Debt Crisis
3 Non-standard monetary policy measures of the ECB
3.1 Outright Money Transactions
3.2 Public Sector Purchase Programme
4 Analysis of the PSPP in relation to Article 123 (1) TFEU
4.1 Economic perspective
4.2 Bundesverfassungsgericht
4.3 Judgment of the European Court of Justice
5 Conclusion
5.1 Achievement of objectives
5.2 Future outlook/ perspectives
List of Sources
Index of figures
Figure 1: Yields on Ten Year Sovereign Bonds, October 2009 to June 2012
Figure 2: Government bond yields* in selected countries and the euro area
Figure 3: Inflation rate in the EU and Euro area from 2010 to 2020
Figure 4: Government bond yields* in selected countries and the euro area
Figure 5: Deviations from the ECB capital key during the PSPP
Figure 6: Sovereign bond purchases of the Eurosystem under the PSPP
Index of tables
Table 1: Loans to private sector from domestic banks and other credit institutions (percent of GDP)
Table 2: Eurosystem holdings under the asset purchase programme
Table 3: Bond purchases and deficit financing
Index of abbreviations
Abbildung in dieser Leseprobe nicht enthalten
1 Introduction
„Whatever it takes“1 – three simple but effective words had the desired effect and calmed the government bond markets in the summer of 2012, whose developments in the wake of the European sovereign debt crisis had led to immense financing difficulties for some member states of the euro area. Even more, the statement by Mario Draghi, then president of the European Central Bank (ECB), underlined the determination with which the ECB is willing to prevent a possible break up of the euro area. The measures taken by the ECB have included interest rate cuts, negative interest rates and purchase programmes of various assets. However, the ECB's measures did not meet with the exclusive approval of experts, they sometimes caused harsh public criticism and even the judiciary, in form of the Bundesverfassungsgericht (German Federal Constitutional Court) and the European Court of Justice (ECJ), had to address the issue.
Against this background, this assignment aims to examine whether the monetary policy of the ECB infringes Article 123 (1) Treaty on the Functioning of the European Union (TFEU) which states the prohibition on monetary financing of member state budgets. To begin with, the origins of the European sovereign debt crisis are explained. The paper then outlines selected non-standard monetary policy measures taken by the ECB to mitigate the effects of the crisis, in form of Outright Money Transactions (OMTs) and the Public Sector Purchase Programme (PSPP). The fourth chapter focuses on the PSPP and analyses the programme against the background of Article 123(1) TFEU.
2 European Sovereign Debt Crisis
During the first decade of the 21st century, the total lending to the private sector has significantly increased in some euro area countries which are referred to as the GIIPS-States.2
Table 1: Loans to private sector from domestic banks and other credit institutions (percent of GDP)
Abbildung in dieser Leseprobe nicht enthalten
Source: Modeled after Lane, P., Sovereign Debt Crisis, 2012, p. 52
The consumption- and property-related credit boom was fueled by the ability of national governments to borrow in a common currency, the Euro, which eliminated previous exchange rate risks, bore lower interest rates and facilitated access to funding. Consequently, inflation increased in these countries and could no longer be regulated by a national fiscal policy because of the common currency.3 At the same time, current account imbalances increased across the euro area with countries like Portugal (-9.2 percent of GDP) and Greece (-9.1 percent) running large deficits and countries like Germany running a surplus (5.1 % of GDP). Permanent current account deficits then turned into government debt.
Moreover, in the wake of the global financial crisis of 2007-2009, European banks have been exposed to high losses in the U.S. market in asset-backed securities. This led to a banking crisis in the euro area. As a result, most states in Europe had to bail out several of their affected banks with recapitalization loans, which strongly deteriorated debt-to-GDP ratios. Furthermore, because of the global financial shock in 2008, cross-border financial flows came to a standstill with investors repatriating capital to the home markets and reassessing their international exposure level.4 These developments severely affected the euro area countries with the greatest dependence on external funding, especially from international short-term debt markets. In Ireland and Spain, the property bubble burst and banks that had made many property-backed loans had to face large capital losses due to abandoned construction projects and falling property prices. The scale of the recession in the euro area and rising estimates of losses on bad loans within the European banking sector negatively impacted sovereign bond values, as investors perceived that a crises-ridden banking sector entails fiscal risks.5
In 2009, several euro area states, i.a. Ireland and Spain, reported larger-than-expected increases in deficit-to-GDP ratios. On top of that, in late 2009, Greece announced a revised budget deficit forecast of 12.7 percent of GDP for 2009, more than quadruple the 3 percent of GDP limit provided for in Art. 126 TEU. Moreover, the newly elected Greek government revealed that its former government had severely underreported the country’s budget deficit in previous years.6 This news in turn led to increasing fears of a possible sovereign default in the euro area and European institutions and the financial community reevaluated the creditworthiness and economic situation of certain euro area member states. Rising spreads on sovereign bonds in the euro area were the consequence.7
Figure 1: Yields on Ten Year Sovereign Bonds, October 2009 to June 2012
Abbildung in dieser Leseprobe nicht enthalten
Source: Modeled after ECB Statistical Data Warehouse Long-term interest rate statistics, accessed on 15.03.2020
These developments triggered a downward spiral for some euro countries, from which they were no longer able to free themselves under their own steam.8
3 Non-standard monetary policy measures of the ECB
The ECB forms the core of the Eurosystem, which includes the National Central Banks of those countries that have adopted the euro as their currency.9 In order to lower volatility in the financial markets and to increase liquidity, the ECB has initiated several measures in the wake of the European debt crisis.
3.1 Outright Money Transactions
On 6 September 2012, the Governing Council introduced the Eurosystem’s Outright Monetary Transactions (OMTs). OMTs are an instrument allowing the ECB to buy sovereign bonds in secondary markets to a potentially unlimited extent. The Governing Council may decide freely on the start, continuation and suspension of the programme.10 The right to conduct outright purchases of bonds is provided for in Article 18.1 of the Statute of the ESCB.11 The initiation of the OMTs terminated the previous Securities Markets Programme (SMP).12
According to the Governing Council, the OMTs aim to safeguard the monetary policy transmission and the singleness of the monetary policy with a view to achieving the ECB’s primary objective of price stability. More detailed, the ECB intended to address “severe distortions”13 in government bond markets by announcing the OMTs. The transactions are intended to drive up prices of government bonds and to cut the yields, which cuts the amount of interest the euro area countries have to pay on their debts. The ECB focuses on purchases of short-term bonds with maturities of between one and three years.
To increase the effectiveness of OMTs, the Eurosystem declared in the relevant legal act that it accepts the same treatment as private investors or other creditors regarding bonds issued by euro area countries and purchased through OMTs. Thus, if a country defaults on its debts, the Eurosystem will have to bear the losses just like any other party. This is aimed to encourage investors to continue lending money to the euro area countries that have high debt-to-GDP ratios.
In order to conduct OMTs, the respective member state must already take part in an appropriate European Financial Stabilisation Mechanism/ European Stability Mechanism (EFSM/ESM) programme. Additionally, strict conditionality to these programmes is mandatory to ensure and maintain fiscal discipline in the concerned member states, and moreover, shall be monitored by the International Monetary Fund.14 These EFSM/ESM programmes have to further include the option of primary market purchases and the respective member state has to have bond market access. Since no euro area country has been fulfilling these criteria so far, purchases by the Eurosystem have not yet been made.15 Nevertheless, the mere announcement of the programme, following Mario Draghi’s promise to do “whatever it takes”16 to preserve the Euro, had the desired calming effect on the sovereign bond markets.17
Figure 2: Government bond yields* in selected countries and the euro area
Abbildung in dieser Leseprobe nicht enthalten
Source: Modeled after ECB Statistical Data Warehouse Long-term interest rate statistics, accessed on 15.03.2020
3.2 Public Sector Purchase Programme
The European quantitative easing Public Sector Purchase Programme (PSPP), under which the Eurosystem has conducted net purchases of public sector securities, is part of the Asset Purchase Programme (APP). The APP further compromises the Corporate Sector Purchase Programme (CSPP), the Asset-Backed Securities Purchase Programme (ABSPP) and the Third Covered Bond Purchase Programme (CBPP3).18 The securities covered by the PSPP include nominal and inflation-linked central government bonds, but also bonds issued by regional and local governments, recognized agencies, international organisations and multilateral development banks located in the euro area.19 The purchases are conducted on a monthly basis by the ECB and the NCBs, in proportion to their respective share in the ECB’s capital key, in the secondary markets only. The share of the NCBs’ book value of the purchase volume amounts to 90%, and the ECB’s share is 10%.20
According to the Governing Council, the programme was launched to counter the insufficient degree of monetary accommodation, which bore the risk of a prolonged period of low inflation. Moreover, when implementing the PSPP, the Council referred to the key ECB interest rates already being at their lower bound and the ongoing private sector purchasing programmes to underline the importance of the PSPP for achieving price stability, an inflation rate below, but close to 2% in the euro area.21
From its introduction in March 2015 until February 2020, the Eurosystem has purchased government bonds amounting to 2,129 billion euros under the PSPP.22
Table 2: Eurosystem holdings under the asset purchase programme
Abbildung in dieser Leseprobe nicht enthalten
* At amortised cost, in EUR millions, at month-end
Source: In https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html , accessed on 12.03.2020
The annual inflation rate stood at 0.2 % in 2015 and at 1.8% in 2018, prompting the Governing Council to further extend the PSPP.23
Figure 3: Inflation rate in the EU and Euro area from 2010 to 2020
Abbildung in dieser Leseprobe nicht enthalten
Source: Modeled after https://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do, accessed on 16.03.2020
As of January 2019, this took place in form of reinvestments made of the principal payments from maturing securities held in the PSPP portfolio, distributed over the entire year to avoid a temporary market dominance. Additionally, net purchases of public sector securities have been carried out again as of November 2019.24
The bond purchases of the Eurosystem are currently limited to 33% of a single PSPP-eligible security (issue share limit) of regional and local governments or recognized agencies. They can also not exceed 33% of the outstanding securities of that government or agency (issuer limit). The issuer and issue share limit for EU supranational bonds currently amount to 50%. Moreover, only securities with a remaining maturity between one year and less than 31 years are eligible under the PSPP. Both limits, the maturity restriction and the initial prohibition to purchase bonds at a negative yield at maturity have been adjusted in the course of the programme’s existence to ease the smooth implementation.25 Furthermore, the programme’s modalities include a blackout period, which prohibits the Eurosystem to immediately buy sovereign bonds after their issuance. This period should be obeyed to allow the formation of a market price.26 In Addition, the PSPP conditions state an equal treatment of all bondholders. Thus, the ECB does not have a preferred creditor status and would therefore also be subject to potential losses.27
[...]
1 https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html, accessed on 08.04.2020.
2 Cf. Lane, P., Sovereign Debt Crisis, 2012, p. 49.
3 Cf. Bialek, N., Eurozone Crisis, 2015, p. 48.
4 Cf. Lane, P., Sovereign Debt Crisis, 2012, p. 49-57.
5 Cf. Ergen, B., ECB mandate, 2016, p.3-4.
6 Cf. Lane, P., Sovereign Debt Crisis, 2012, p. 49-57.
7 Cf. Ehmer, P., ECB, 2017, p. 530.
8 Cf. Lane, P., Sovereign Debt Crisis, 2012, p. 49-57.
9 Cf. https://www.ecb.europa.eu/ecb/orga/escb/html/index.en.html, accessed on 29.02.2020.
10 Cf. https://www.ecb.europa.eu/pub/pdf/other/mb201209_focus01.en.pdf , accessed on 02.03.2020.
11 Cf. https://www.ecb.europa.eu/ecb/legal/pdf/en_statute_2.pdf; https://www.ecb.europa.eu/pub/pdf/other/mb201210_focus01.en.pdf, accessed on 02.03.2020.
12 Cf. https://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html , accessed on 03.03.2020.
13 https://www.ecb.europa.eu/pub/pdf/other/mb201209_focus01.en.pdf, accessed on 03.03.2020.
14 Cf . https://www.ecb.europa.eu/pub/pdf/other/mb201210_focus01.en.pdf, accessed on 03.03.2020.
15 Cf. https://www.bundesbank.de/en/tasks/monetary-policy/outright-transactions/terminated-announced-programmes-625984#tar-1, accessed on 04.03.2020.
16 https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html , accessed on 08.04.2020.
17 Cf. ECB Statistical Data Warehouse Long-term interest rate statistics, accessed on 27.03.2020.
18 Cf. https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html#pspp, accessed on 08.03.2020.
19 Cf. https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html#pspp; https://www.ecb.europa.eu/ecb/legal/pdf/oj_jol_2015_121_r_0007_en_txt.pdf, accessed on 10.03.2020.
20 Cf. https://www.ecb.europa.eu/ecb/legal/pdf/oj_jol_2015_121_r_0007_en_txt.pdf, accessed on 10.03.2020.
21 Cf. https://www.ecb.europa.eu/pub/pdf/other/eb201501_focus01.en.pdf, accessed on 13.03.2020.
22 Cf . https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html, accessed on 13.03.2020.
23 Cf. Afflatet , N., Monetary Financing, 2019, p. 562-566 ; https://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do, accessed on 16.03.2020.
24 Cf. https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html#pspp, accessed on 16.03.2020.
25 Cf. https://www.ecb.europa.eu/mopo/implement/omt/html/pspp-qa.en.html, accessed on 20.03.2020.
26 Cf. https://www.ecb.europa.eu/ecb/legal/pdf/oj_jol_2015_121_r_0007_en_txt.pdf, accessed on 10.03.2020.
27 Cf. Grle, F.; Grund, S., PSPP, 2016, p. 2 .