ECB Bond-Buying Offer May Fail to Motivate Banks to Sell

Even if the European Central Bank clears all the hurdles to enact a government-bond buying program, there will be one final obstacle: finding motivated sellers.

That’s because banks would earn less from the cash proceeds than from keeping euro-area sovereign debt, says Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. The central bank charges banks for holding cash overnight, part of an earlier strategy to encourage lending. The so-called negative deposit rate is now minus 20 basis points.

“The negative deposit rate is an impediment to large-scale ECB bond buying from banks that will have little incentive to sell their bonds,” Major said in a report to clients yesterday. “They will effectively be taxed if the cash is deposited at the central bank.”

The upshot is that if the ECB does begin buying sovereign bonds it will probably have to raise the deposit rate too, said Major. Making cash more attractive, though, could push up the yields on core bonds such as those of Germany.

An alternative strategy would be for the ECB to focus on costlier longer-term bonds. Banks would then perhaps be willing to sell at the relatively higher price, said Major. The ECB could also bypass banks and try to buy from asset managers.

Pari Passu

At Societe Generale SA, London-based economist Anatoli Annenkov spots another possible problem. If the ECB does buy bonds it will also have to decide whether it’s “pari passu.” That’s Latin for “equal footing” and refers to whether the ECB outranks other bondholders in the case of a default.

While the ECB said it was not pari passu under its 2010 Securities Markets Program, it would be likely to face pressure from Germany to be so under any new bond-purchase plan or risk exposing the European taxpayer to losses.

The result could be that eventually bonds it hasn’t bought are deemed by markets to have a “higher credit risk,” said Annenkov. “So that increases the spreads between countries which is the opposite of what the ECB wants to achieve.”

(An earlier version of this story corrected the language of pari passu.)

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