ECB Bond Purchase Program Almost Done?

Though as I write the official release has yet to appear here, the FT is already reporting that the ECB only acquired about €1 billion in sovereign bonds last week, down from the €4 billion or so seen in previous weeks and the €16 billion that occured during its first week. The winding down of the program was quasi-predicted here a few weeks ago.

One interpretation of what has happened with this program is that the ECB reluctantly launched the program despite some internal disagreement to ease tensions in sovereign debt markets, and that once the Stabilisation Mechanism funds were put in place, they have been quick to head for the exit.

Increasingly, it seems unlikely that the ECB will at any point engage in large-scale purchases on the secondary market aimed at keeping access to the primary market open for a specific country such as Ireland. Rather, a closing primary market will instead lead to a country to tapping the Stabilisation Mechanism funds.

Of course, one cannot completely rule out the ECB will re-activate the program on a larger scale if tensions start to mount again. But I wouldn’t bet on it.

Update: Official announcement confirms the figure at 796.5 million.

7 replies on “ECB Bond Purchase Program Almost Done?”

The Financial Times reported earlier an item of positive news: China last week bought several hundred million euros of Spanish bonds as Asian investors returned to the Eurozone peripheral market after a two-month hiatus. The Asian giant applied to buy as much as €1bn.

The FT says China’s State Administration of Foreign Exchange, or Safe, which manages the reserves under the country’s central bank, was allocated up to €400m of Spanish 10-year bonds in a debt deal last Tuesday.

Of the €6bn raised, two-thirds were bought by international investors, of which 14% was purchased by Asians. Safe bought about half of the Asian allocation. In a similar 10-year deal in January, Spain sold just 5% to Asian investors.

Moody’s Investors Service today downgraded Portugal’s government-bond ratings to A1 from Aa2, saying the Portuguese government’s financial strength will continue to weaken over the medium term.

“The Portuguese government’s debt-to- GDP (gross domestic product) and debt-to-revenues ratios have risen rapidly over the past two years,” said Anthony Thomas, senior analyst in Moody’s Sovereign Risk Group.

In its first bond sale since the bail-out in May, Greece was able to raise €1.25bn. The offer was oversubscribed, with bids totalling €3.6bn. The terms of the bonds require Greece to repay the loans in three months, at a return rate of 4.65%.

Ten-year bonds yield 757 basis points, or 7.57 percentage points, more than German debt. While that’s down from a record 965 basis-point spread on May 7th.

14 German banks are reported to have passed stress tests.

Of course, one cannot completely rule out the ECB will re-activate the program on a larger scale if tensions start to mount again. But I wouldn’t bet on it.

I would tentatively take that bet. Clearly the ECB does not want the Eurosystem to have to be involved in the next titanic intervention to head off, or more likely to respond to, the next European banking crisis. It would much rather the EFSF or some other European organ do all the work while the ECB tends its battered reputation. But it’s also clear that, like every other institution that matters, that if it is presented with a simple choice between intervention on its part and an imminent financial collapse, the ECB will intervene like mad. No More Lehmans TM. So ECB and the Eurosystem is playing chicken with the member states and the rest of the European apparatus; the question is whether it will win the chicken-match. (I’m happy to dismiss the possibility that there will be no European sovereign-debt or banking crisis in the near-to-medium-term future.)

The ECB has made some aggressive early moves: shutting down the purchases and the one-year repos is a good way to throw the ball into the EFSF’s court. But like a staggering drunk, the rest of the EU has obvious deficiencies in judgement and co-ordination which give it a major advantage in a chicken match. There seems to be no consensus on exactly how or in response to what the EFSF money will be spent. Likely this will not be decided until the next crisis arrives, at the earliest. Nor is it clear what plan B will be if the EFSF and its mere €750bn fails to work like a charm. The odds that the ECB will be left alone facing another Hollywood-or-bust decision at 7pm are good.

What nobody seems to contemplate is not the possibility that the ECB buying has stoped but that the selling has stoped.
The SMP was never about buying bonds, it was about stabilising the market, about creating a two way market. If there are no more aggresive sellers of bonds then the Eurosystem will not chase the market higher: price discovery will happen between private investors, as it should be.

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