Bundesbank President Joachim Nagel is in favor of a passive meltdown in the planned reduction of the ECB’s trillion-dollar government bond holdings. “The simplest and most transparent approach to reducing the balance sheet would be not to replace expiring bonds,” Nagel explained in a presentation at a monetary workshop in Darmstadt. The President of the Bundesbank is keeping an eye on the bonds from the older APP bond purchase program, which the European Central Bank (ECB) wanted to use to boost the economy from 2015 onwards. Currently, the purchased portfolio of papers in this program is around 3.3 trillion euros.
“If we no longer replace maturing bonds in the APP portfolio, the bond portfolio will automatically decrease: month by month by the respective maturities,” Nagel explained. In his estimation, the markets would be able to cope well with such a passive phase-out from the first quarter of 2023 onwards. The stock exchanges are sufficiently resilient. The monthly maturities are said to be significantly lower in the near future than past monthly purchase volumes. So far, maturing papers that were acquired as part of APP have been fully replaced by the currency watchdogs.
From Nagel’s point of view, such an approach, for which ECB Vice President Luis de Guindos had recently advocated, would underline the determination of the Governing Council to combat inflation. It also alleviates the problem of collateral shortages and also reduces excess liquidity. ECB President Christine Lagarde had promised that the euro watchdogs would decide on important decisions to reduce bond holdings at the upcoming interest rate meeting on December 15th.