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Steinhoff scandal leaves ECB with financial issues of its own
December 7, 2017 / 3:09 PM / 5 days ago

Steinhoff scandal leaves ECB with financial issues of its own

FRANKFURT, Dec 7 (Reuters) - The accounting scandal embroiling household goods retailer Steinhoff could place the European Central Bank in a tricky position as one of the embattled firm’s creditors.

The South African group, owner of chains around the world including Britain’s Poundland, revealed “accounting irregularities” on Wednesday and parted ways with its chief executive, sending its shares and bonds into a tailspin.

The ECB bought Steinhoff’s bond last summer, as part of its stimulus programme.

“In this programme, the risk of a business is transferred from the private to the public sector,” said Helmut Siekmann, a law professor at Frankfurt’s Goethe University.

“This case shows the risk is too high in comparison to the benefits.”

With the ECB close to running out of government debt in some countries, corporate bonds are likely to take a growing share of the ECB’s 2.55 trillion-euro ($3.01 trillion) asset purchases.

The central bank does not say how much it owns of each bond but aggregate figures show its holdings of corporate debt to be close to 130 billion euros.

Germany’s Bundesbank, which would bear the brunt of any loss as the ECB’s single largest shareholder, has warned of the dangers associated with the scheme and started setting aside money for them.

The ECB owns Steinhoff senior bonds, the last to be written off or converted into shares if the company goes down.

While the possibility is remote, a conversion would leave the ECB with a conundrum.

Its statute does not prohibit it from owning equities. But the rules that it has given itself for choosing which bonds to buy only allow for bonds, and relaxing them would likely meet with political resistance in Germany.

The Steinhoff case also puts the ECB in the uncomfortable position of being a lender to a company accused of financial wrongdoing.

This gives fresh ammunition to critics in the European Parliament calling for the ECB to adopt ethical criteria when choosing which corporate bonds to own.

The argument was raised last year when German carmaker Volkswagen, whose bonds have been bought by the ECB, was accused of cheating in emissions tests.

“The ECB must implement a high ethical standard,” Reinhard Hans Bütikofer, a member of the European Parliament and the German Green party, said.

“Maybe the present scandal could convince the ECB to follow the old saying ‘once bitten, twice shy’.”

An ECB spokesman did not comment. (Editing by Andrew Roche)

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