FRANKFURT (Reuters) - The European Central Bank’s bonds-for-cash scheme, aimed at keeping financial markets running smoothly by supplying them with the most prized form of collateral, is working well but can be adjusted if needed, ECB Director Benoit Coeure told Reuters.
In an exclusive interview, Coeure batted back concern that its bond-lending scheme, designed to alleviate a scarcity of government bonds to use as collateral, was falling short of the mark and already needed a revamp six months after its launch.
“We stand ready to adjust it, if there was a need,” Coeure, who is in charge of the ECB’s market operations, said. “So far the cash facility has worked very well.”
High-rated government debt, such as Germany’s is used by investors as collateral to guarantee their trading positions and borrow cash via repurchase agreements. The so-called repos are a 3 trillion-euro ($3.35 trillion) market and a key source of funding for investment funds.
But aggressive ECB purchases and stricter EU rules are making such debt scarce. Investors have paid record rates to borrow paper at key junctures, such as the ends of quarters and years, ends, to avoid being put into default for failing to come up with collateral in time.
This has left the ECB facing calls to lend more of the government debt it has bought of part of its 2.3 trillion-euro stimulus program.
The ECB and the euro zone’s national central banks received cash worth 18.1 billion euros on an average April day in return for the bonds they had lent out, less than half the scheme’s maximum size of 50 billion euros.
Market participants worried that this was because the allowance was split among the ECB and the seven national central banks participating in the scheme, based on how many bonds they owned.
That meant the Bundesbank, the biggest holder of coveted German bonds, could accept just 15.5 billion euros worth of cash collateral, according to Reuters calculations.
Coeure said the central banks could redistribute some of the allowance not used by others, although he would not disclose how.
“We have flexibility to reallocate part of that capacity,” he said.
With some 370 billion euros’ worth of German government debt now sitting in the coffers of the ECB and of Germany’s Bundesbank, even finding German paper to buy may be proving difficult.
The Bundesbank and ECB have resorted to buying more loss-making, shorter-dated German bonds since February in order to continue the money-printing programme.
This, however, ensured that there will be no shortage for the duration of the programme, Coeure said.
“We don’t see a risk of a shortage of bonds over the duration of programme, until December 2017 and beyond,” Coeure said. “There is scarcity but there will be no shortage.”
Editing by Larry King