ECB’s Villeroy Seeks Debate on Ratings, Not Junk-Bond Buying
ECB’s Villeroy Seeks Debate on Ratings, Not Junk-Bond Buying
(Bloomberg) -- French central bank head Francois Villeroy de Galhau played down the prospect that the European Central Bank would buy junk bonds as part of its pandemic emergency program.
“The debate is probably not urgent,” the Bank of France governor told Germany’s Handelsblatt newspaper in an interview published Sunday. At the same time, he said the ECB must examine whether it can reduce the dependence of its monetary policy on rating companies.
“I rule out that we buy bonds that were rated ‘junk’ before the crisis,” Villeroy said. “On the other hand, if rating agencies downgrade well-rated companies during the crisis, this can reinforce an already negative trend.”
Policy makers stopped short of adding so-called fallen angels — bonds of companies that lost their investment-grade rating due to the pandemic — when the ECB decided this month to almost double the size of its pandemic purchase program to 1.35 trillion euros ($1.5 trillion).
Some have speculated the ECB will eventually add junk bonds to its shopping list after the Governing Council decided in April to loosen rules to accept fallen-angel bonds as collateral in operations with banks. But any decision appears to have been put on the back burner.
Villeroy struck a more upbeat tone about the prospects for euro-area economy, saying the International Monetary Fund’s latest forecast for Europe was too pessimistic. The IMF predict the 19-nation region’s output will shrink by 10.2% this year.
Echoing earlier comments from fellow ECB Executive Board member Yves Mersch, Villeroy signaled the ECB may not use the full envelope of its pandemic program if the situation improves.
Debt Levels
Euro-area countries should reduce their public debt only once the recovery is robust enough, Villeroy said. Increased public spending aimed at tacking the fallout from the pandemic has pumped up government debt, stoking concern about its sustainability in countries such as Italy.
“Europe must not repeat the mistakes made 10 years ago when debt consolidation began too soon after the crisis,” Villeroy said.
With some semblance of stability slowly returning to euro area, the ECB is restarting a strategy review suspended earlier this year. A key topic is the ECB’s price-stability objective, currently defined as inflation of just less than 2%.
Villeroy said the pandemic has intensified deflationary tendencies in the euro area and the ECB will need to take it into account during its debates. Average inflation targeting, where the central bank attempts to make up for a period of undershooting by allowing for price growth to run above its target for some time, was an “open question” that could be tackled during the review.
“Perhaps we will clarify the inflation target and in any case confirm that it is symmetrical,” Villeroy said. “That is part of its credibility.”
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