Helicopter Money Last Chance Saloon at the European Central Bank

The European Central Bank's plan to buy corporate bonds is bigger and badder than analysts previously thought. But if it fails to jump start the euro zone, Mario Draghi is running out of options.
Mr. Draghi is doing all he can and may do more. The sky's the limit.


When the European Central Bank begins purchasing corporate bonds in June, governor Mario Draghi will have a much larger shopping list than previously thought.

HSBC estimates that corporations have a windfall of €820 billion ($918 billion) coming their way, double what analysts originally expected.

And though it's still unclear how much of the ECB's €80-billion monthly shopping list will consist of corporate bonds, Barclay's and ING have doubled their prognosis from €5 billion to €10 billion.

Mr. Draghi also has significant leeway in terms of where he can go shopping. Though the European Central Bank  is restricted to buying bonds denominated in euros with six-month to 31-year maturities, they don't have to be issued by euro zone companies.

Just because a bond theoretically qualifies for purchase doesn't mean the ECB wants to buy it. Jamie Stuttard, HSBC analyst

The bank can purchase bonds from foreign corporations with subsidiaries in the 19-member currency union. Corporate bonds already used by banks as collateral to obtain loans from the European Central Banks are probably high on Mr. Draghi's shopping list.

This would include British companies such as Vodafone, Rolls Royce and National Grid; U.S. companies such as Caterpillar, Coca Cola and General Electric; as well as Russian companies such as Gazprom, Lukoil and Russian Railways.

And a company doesn't need a particularly good credit rating for the central bank to purchase bonds from it. Only one of four major ratings agencies – S&P, Fitch, Moody's and DBRS – needs to give a corporate bond an investment-grade rating to qualify it for purchase.

That means the European Central Bank can purchase corporate bonds rated below investment grade by multiple agencies. Bonds issued by Fresenius Medical Care, Energias de Portugal, Remy Cointreau and Telecom Italia would all be eligible under these rules.

The bank can also buy bonds from insurers and the banking units of automakers such as BMW, Daimler and Volkswagen. It's barred only from buying bonds from proper banks.


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It's still unclear, however, just how far Mr. Draghi will push the envelope when buying corporate bonds.

"Just because a bond theoretically qualifies for purchase doesn't mean the ECB wants to buy it," Jamie Stuttard, an analyst with HSBC, told Handelsblatt.

Purchasing corporate bonds is one of the only tools Mr. Draghi has left to jump start the euro zone. The European Central Bank already purchases billions in state bonds, has reduced interest rates to zero and has imposed negative interest rates on money deposited by banks in its vaults.

With few options remaining, speculation has grown that Mr. Draghi could turn to so-called "helicopter money" as a last resort if the corporate bond-buying program doesn't have its desired effect.

Helicopter money is shorthand for a number of different scenarios in which a central bank puts money directly in the hands of consumers.

A central bank could literally write checks to individuals. It could also permanently hold state bonds, thereby freeing governments from paying them back. This would give policymakers more room to stimulate their domestic economies through tax cuts or increased spending.

Mr. Draghi sparked a furor in Germany last month when he called helicopter money a "very interesting concept," albeit one that hasn't been closely studied by the bank yet.

Germany's central bank chief, Jens Weidmann, sharply criticized the idea in an interview with the Funke Media Group.

"Whether and how citizens are given money is a highly political decision that governments and parliaments have to make," Mr. Weidmann said. "The central banks don't have a mandate to do it because a massive redistribution would be connected with it."

Article 123 of the Lisbon Treaty and Article 21 of the central bank's statute forbid the central bank from giving money to governments. But Article 20 of the statute gives it broad leeway to adopt new instruments to fulfill its mandate, which includes supporting the European Union's economic policies.

An analysis by Deutsche Bank found that the European Central Bank has the legal power to deliver helicopter money in the most controversial way – by writing checks.

"Ironically, the ECB has the greatest leeway when it comes to the particularly unconventional form of helicopter money – central bank checks for private households," the analysts concluded.

But for now, this is hypothetical. When asked on Thursday, Mr. Draghi said the ECB has "never discussed" helicopter money.


Norbert Häring is an editor with Handelsblatt, focusing on monetary policy and financial markets. Andrea Cünnen works at Handelsblatt's finance desk in Frankfurt, reporting on the bond markets. To contact the authors: [email protected] and [email protected]