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LONDON: The European Central Bank has been snared by its own ambiguity. European lawmakers have called for it to be more transparent about its corporate bond purchases. Though the demands are flawed, they are a reminder of the problems that arise when authorities meddle in private credit.

It's easy to see why members of the European Parliament have written to the ECB asking for greater transparency, according to the Financial Times.

The central bank has bought 85 billion euros of company bonds since June last year. The programme has had a big impact: the average spread on the IHS Markit iTraxx Europe index - which pools credit default swaps linked to company debt - has fallen by around 30 basis points since the programme was announced. That raises suspicions some companies have benefited from a hidden public subsidy.

The ECB already discloses quite a lot about the scheme, although not in a user-friendly manner. The euro zone's 19 national central banks publish the securities they have bought, but not the amounts. The ECB says it tries to buy in proportion to the amount of debt outstanding. Analysts at M&G reckon the central bank's biggest exposures are to global brewer AB InBev French utility EDF and Telefonica of Spain.

Disclosing the actual purchases would not reveal that much, though. For one, it wouldn't answer the question of which companies have benefited most from ECB buying. Risky companies with relatively small amounts of debt outstanding could have seen a bigger drop in their borrowing costs than big multinationals.

It's unlikely that the ECB has been deliberately targeting specific companies: its main priority has been to find sufficient bonds to buy. Basing purchases on some kind of pre-set formula would still involve some degree of selection, as companies with the most debt outstanding may be more leveraged. Moreover, it could hand a windfall to traders who try to anticipate official buying.

Even so, the debate highlights a broader conundrum: Central banks aren't supposed to allocate credit to companies. However they go about it will leave them open to accusations of favoritism or secrecy. As the ECB prepares to wind down its bond-buying programme, the corporate scheme should be quickly culled.


Copyright Reuters, 2017





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