14 Nov 2021

On the selling of sovereigns held by the ESCB to the ESM

A revised proposal

Stefano Micossi

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This paper presents an in-depth review of the proposal by Micossi (2020) and Avgouleas and Micossi (2021) to transfer a substantial share of the sovereigns acquired by the European System of Central Banks (ESCB), both during and before the pandemic, to the European Stability Mechanism (ESM). This is necessary to avoid the potentially disruptive impact of releasing these sovereigns onto financial markets once the monetary policy justifications for the ESCB to hold these sovereigns has been exhausted. Consequently, the ECB would be freed of the risk of fiscal dominance and the financial stability of the euro area would be strengthened. This note argues that the ESM is legally entitled to do this under the Treaty on the Functioning of the European Union (TFEU) and the ESM Treaty (TESM) as an expansion of its basic mission to preserve the financial stability of the eurozone, regardless of any separate monetary policy justification. The main operating instrument for this kind of financial assistance would be the purchase of sovereigns by the ESM from the ESBC under the secondary market support facility of Article 18 TESM. With appropriate modifications of Article 18 – which would not require ratification by the Member States – the conditionality applied by the ESM would mimic that already designed for the precautionary assistance facility of Article 14 TESM, as described in the new Anne III of the reformed TESM. There would be no obstacles for the ESM to leverage its capital as required to finance its sovereign purchases and this would not endanger its Triple A rating. The availability of the safe assets in large amounts issued by the ESM would help strengthen the overall international role of the euro.

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