Cancelling central-bank-held government bonds

Proposals to cancel government bonds held by the Eurosystem would lower measured public debt and interest payments at no cost to anyone outside the central bank. In the eurozone, though, the decision belongs to the Eurosystem as a whole, and fixing the fiscal framework achieves the same room for manoeuvre more simply.

The ECB and the national central banks together form the Eurosystem. Bonds a national central bank bought in the ECB's purchase programmes are held for the system, so any cancellation would be a decision for the ECB's Governing Council, not for one country. A unilateral move would raise questions of fairness among member states, and if every country cancelled its debt at once the existing fiscal rules would leave them with too little room to spend, or, with large new spending everywhere at the same time, could add to inflation.

Cancellation does lower measured debt, and therefore interest costs, and a central bank with negative equity can carry on operating. The money mostly goes round in a circle, though: interest the treasury pays the central bank comes back as central-bank profits, and a bond the central bank has bought is already out of the market. The root problem is the fiscal framework. Raising or reshaping the deficit limit would give governments the same room directly.

If cancellation changes so little, why propose it? It shows something important: debt held by a currency's own central bank is not a burden in the way household debt is. The constraint that actually binds is the fiscal framework.