ECB sells Telefonica bond after spotting 2-year-old error

By Francesco Canepa

FRANKFURT (Reuters) - The European Central Bank has sold bonds issued by Telefonica Deutschland after realising, nearly two years later, it should never have bought them under its own rules.

The O2-Telefonica bonds, purchased in 2016 and due to mature in November, were removed on Tuesday from a list of more than 1,000 corporate issues bought by the ECB as part of its efforts to boost inflation in the euro zone.

It is the third time that the ECB has been forced to sell corporate bonds it owns after spotting a breach of the rules it has adopted. These aim to limit the risk it takes on through those purchases, which have been criticised by some European lawmakers as unsafe for a central bank.

A spokeswoman for the ECB said the bonds were sold last week because the central bank realised they paid a "step-up coupon", which goes up in value under certain circumstances.

The ECB is barred from buying bonds with complex pay-out structures. Under the issue terms, the coupon on the O2 Telefonica bonds would be increased if the telecoms company were taken over and the credit-worthiness of its guarantor downgraded.

The bond had been bought by the Bundesbank, which carries out the bulk of the ECB's purchases in Germany.

The two previous cases involved debt issued by French chemical group Arkema (AKE.PA) and Belgian mobile telecoms provider Proximus (PROX.BR).

The ECB has also had to sell bonds of mining firm Glencore (GLEN.L) after the entity that issued them moved its domicile outside the euro zone.

Earlier this year, it chose to sell the debt of South African retailer Steinhoff (SNHJ.J) at a steep loss after the company was hit by an accounting scandal.

The Bundesbank and other euro zone central banks have been setting aside cash to cover for potential losses if the debt they bought is written down or written off entirely.

Tuesday's data also showed the ECB had bought debt issued by Swiss luxury group Richemont last week to finance the increase of its stake in Yoox Net-a-Porter.

The ECB does not pick companies and instead aims to buy bonds in proportion to the amount outstanding on the market, provided that they are denominated in euros and issued by firms that are rated as "investment grade" and are not banks.

Such purchases inject money into the euro zone financial system with the aim of pushing low inflation back up towards the ECB's target of just below two percent.

(Reporting by Francesco Canepa; editing by David Stamp)