ECB Quietly Prepares Global Liquidity Backstop As Euro Debt Wave Builds

Submitted by Thomas Kolbe

Starting in the third quarter of 2026, new rules will apply to the so-called euro repo facility. Central banks worldwide will be able to post up to €50 billion in euro-denominated collateral, such as government bonds, with the ECB in order to obtain euro liquidity from the central bank in cases of acute need. The goal is to guarantee the permanent availability of euro liquidity, replacing the previously time-limited repo lines.

Central banks typically resort to this monetary policy instrument during phases of acute liquidity stress — most recently during the COVID lockdowns. The repo facility counts among the central banks’ immediate crisis tools. The so-called EUREP (Eurosystem Repo Facility for Central Banks) was launched on June 25, 2020, as a short-term liquidity solution for associated central banks: the Central Bank of Kosovo drew €100 million, Montenegro €250 million in short-term liquidity assistance.

Repo auctions generally involve the exchange and short-term pledging of European government bonds for maturities of one to five days, which commercial banks deposit at the central bank in return for liquidity. The collateral is returned after a short period, and the so-called bank reserves are withdrawn again once the liquidity problem has been resolved and the interbank market is functioning properly.

The ECB’s announcement that it will now offer this instrument globally — and over periods of several weeks or even months — raises eyebrows. It suggests that the monetary guardians of the Eurosystem may be anticipating a liquidity crisis in the not-too-distant future.

Euro as a Reserve Currency

The drastic expansion of sovereign debt within the eurozone system may explain why concerns are deepening at the ECB tower. If the two pillars, Germany and France, are each calculating net new borrowing of five percent this year alone — thereby placing a steadily growing volume of bonds on the markets — this generates palpable upward pressure on interest rates. At the same time, investors are asking how strongly the creditworthiness of individual euro states ultimately depends on Germany’s ability to service the mounting debt — a pressure that is manifesting itself in markets.

Interest rates have already been rising for more than three years, particularly at the long end of the bond market. This suggests that confidence among large investors, who traditionally provide the bulk of liquidity in this market, is gradually eroding. Meanwhile, the euro is under pressure internationally: euro-denominated reserves currently account for less than 20 percent of global bank reserves and show a slight downward trend. Similar developments can be observed in the settlement of international transactions, where the euro holds roughly a 24 percent share.

The dominant global actor remains the U.S. dollar, both as a reserve currency with a 59 percent share and in the settlement of international transactions at 47 percent. Against this backdrop, it becomes clear that Europe’s monetary authorities are facing an increasingly challenging combination of rising debt, growing interest rates, and a global environment that does not accord the euro the status of the U.S. dollar — factors that pose serious questions for the Eurosystem’s stability and liquidity.

A severe blow to the euro’s international role was the European Union decision to permanently implement the Russia embargo and halt trade in Russian oil and gas. Russia had been among the few major energy market players willing to allow euro denomination and thus held substantial reserves. That era is over.

However, rumors are circulating that the United States, in the event of a peace settlement in Ukraine, could restore Russia’s access to the SWIFT system. Would the EU then follow suit? A return to the status quo ante might require a different political regime in Brussels and Berlin.

Growing Debt Volume

A fiscal policy U-turn within the EU is also under discussion. Should member states agree on a “two-speed Europe” and implement joint financing of new debt via so-called Eurobonds, this would place the European bond market on an entirely new footing in terms of both volume and structure.

European taxpayers — above all the still relatively less indebted Germans at the federal level — would then stand behind the credit guarantees. In Frankfurt, such a revolutionary step is expected to deliver a massive boost in global demand for euro-denominated bonds.

One unknown in the geopolitical power struggle remains the Federal Reserve. On several occasions last year, the ECB warned of a possible shortage of U.S. dollars within the European banking system. The United States holds a powerful lever here: it can drive up the political price of bridging potential illiquidity through rapid swap lines — short-term loans within the dollar system to European banks and the ECB.

Oversupply of Euro Bonds

The Eurosystem thus faces immense absorption problems. If global demand for EU debt — that is, euro bonds — cannot be generated, interest rates will continue to rise. In light of the massive issuance wave of new euro sovereign bonds, the ECB would be forced to take this debt onto its own balance sheet to keep debt servicing in member states under control.

The expansion of the repo facility into a permanent liquidity backstop therefore appears plausible. Global central banks would have an incentive to accumulate a growing share of euro bonds. Moreover, the volume would be available to gain direct access to the Eurosystem without assembling a portfolio of bonds from individual states. Germany’s relatively low debt level had in fact recently been a problem, as insufficient tranches of German federal bonds were available for larger capital allocations. Chancellor Friedrich Merz and his finance minister are currently eliminating this issue with their present debt policy.

The ECB’s measures thus fit into a broader fiscal policy development that could culminate in a structural expansion of joint debt. By institutionally safeguarding international demand for euro bonds, the central bank is creating the infrastructural preconditions for a potential new debt regime within the European Union — while simultaneously shifting the boundary between monetary stabilization and fiscal support of state budgets.

The European repo facility, once conceived as a rescue umbrella for liquidity problems, is gradually evolving into a classic, expanding debt pool. With eurozone government debt likely to rise from the current 92 percent of GDP to around 100 percent over the next two years, pressure on the ECB to devise mechanisms for distributing this flood of debt across global bond markets will intensify.

Whether this succeeds appears highly doubtful given the euro economy’s chronic economic weakness.

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About the author: Thomas Kolbe, a German graduate economist, has worked for over 25 years as a journalist and media producer for clients from various industries and business associations. As a publicist, he focuses on economic processes and observes geopolitical events from the perspective of the capital markets. His publications follow a philosophy that focuses on the individual and their right to self-determination.