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Lagarde draws line on how far ECB largesse can go

·2-min read
FILE PHOTO: European Central Bank President Lagarde addresses the European Parliament in Strasbourg

FRANKFURT (Reuters) - European Central Bank President Christine Lagarde drew the line on how far the ECB could go in helping virus-stricken euro zone countries on Wednesday, saying lending to governments directly would be illegal and handing out cash to citizens difficult.

The ECB is on course to buy 1.1 trillion euros ($1.19 trillion) worth of mainly sovereign bonds this year to keep credit cheap for governments, households and companies struggling with the pandemic. It has pledged to do even more if needed.

With the Bank of England already lending to its own government, investors have been speculating about which other central banks would follow suit as the world grapples with the worst recession in almost a century.

But Lagarde drew the line at buying debt directly from euro zone governments and poured cold water on the notion of "helicopter money" drops for households.

"The Treaties have been understood to mean that primary market purchase of government debt, i.e. the direct financing of governments, would undermine the capability of this objective to encourage such disciplined budgetary policy," she said in a letter to a member of the EU Parliament published on Wednesday.

This suggested the ECB would continue hoovering up bonds only on the secondary market even if it comes close to owning a third of the debt of countries such as Germany and Portugal.

Writing to another member of parliament, Lagarde added that the provision of helicopter money has never been discussed by the ECB policymakers and proposals floated so far in the public debate lacked concretness.

"In many cases, these proposals do not fully address the associated operational, accounting and legal complexities nor provide a comprehensive cost-benefit analysis of the full economic and monetary impact," Lagarde said.

The ECB has been the main source of stimulus for the euro zone's economy since the coronavirus crisis started. Squabbling EU states are moving closer to agreeing to use their joint long-term budget to restart growth but the bloc's summit on Thursday will defer any final decision on contentious details.

($1 = 0.92 euros)

(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Angus MacSwan)

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