The European Central Bank's Public Sector Purchase Programme (PSPP), the Prohibition of Monetary Financing and Sovereign Debt Restructuring Scenarios

Abstract

While many central banks around the world have pursued quantitative easing programmes in recent years responding to the weak inflation outlook, the European Central Bank (ECB) faces unique legal constraints with respect to its Public Sector Purchase Programme (PSPP) launched in 2015. Most importantly, owing to the prohibition of monetary financing enshrined in art.123 of the Treaty of the Functioning of the European Union (TFEU), the ECB may find itself in the — for the ECB — unprecedented position of a creditor participating in a sovereign debt restructuring while, at the same time, being confronted with severe legal constraints in accepting any debt cut on its sovereign bond holdings. Against this backdrop, this article sheds some light on the potential legal options available to the ECB, should another debt crisis in the euro area materialise. For this purpose, we will also take a closer look at two seminal judgments by European Courts, delineating the legal boundaries within which the ECB may conduct its non-standard monetary policy.

Keywords: European Central Bank, Sovereign Debt Restructuring, Monetary Policy, Quantitative Easing, European Court of Justice

JEL Classification: F34, E52, K41