securities market programme

Ralph Atkins

Is Jens Weidmann, Germany’s Bundesbank president, rallying opponents of the European Central Bank’s government bond purchasing scheme? The Frankfurter Allgemeine Zeitung reports he hosted a secret meeting on Tuesday in the wine region that surrounds Frankfurt. Those apparently invited included Yves Mersch and Klaas Knot, his counterparts from Luxembourg and the Netherlands who are similarly conservative-minded.

Germany is awash with conspiracy theories these days about the ECB, and the idea that Mr Weidmann would want stiffen the sinews of other opponents of its bond buying – which has exceeded €70bn in the past six weeks - might appear plausible. I have heard an alternative version of the story, however. 

Maybe charity doesn’t pay, after all.

The founding assumption of my earlier post has proven incorrect, for which I apologise. To set the record straight, ECB national accounts show that the central bank held more like 18 per cent than 8 per cent of bonds bought to aid sovereigns in distress. 

After reaching a modest Ireland-crisis-high of €2.7bn last week, the ECB’s bond purchases have fallen sharply to €603m. With the cost of debt in Spain and Greece again reaching record highs, is this sort of quantity enough?

Many will say not, especially after bond purchases during the Irish bail-out were revealed last week to be just €2.7bn. What with the bail-out panic and the ECB quadrupling the minimum bond purchase size from €25m to €100m, most had expected a far larger increase in the central bank’s shopping bill. Of course, bearish markets can be subdued with large rumours instead of large purchases – but it’s not a strategy that can work for long.

The ECB’s controversial bond buying programme continues to increase, in spite of vocal opposition from high profile figures such as Axel Weber. Last week, €2.7bn eurozone bonds settled – thought to be almost entirely government debt of struggling economies such as Ireland and Portugal.

Perhaps surprisingly, the figure rose following the Ireland bail-out: last week, €2bn settled. The number remains modest compared to the start of the programme, during the Greek crisis, when in one week €16bn bonds were bought. 

European Central Bank action to calm tensions in eurozone bond markets must remain firmly controlled, otherwise the euro’s monetary guardian risks “losing everything we have”, one of its most ­senior policymakers has warned.

Mario Draghi, Italy’s central bank governor, says in an interview with the Financial Times that large-scale purchases of government bonds could threaten the ECB’s freedom to act without political interference and break European Union rules. 

ECB support for struggling sovereigns is at its highest since July. Data just released show that €1,965m bonds bought by the European Central Bank settled last week.

This number is expected to continue to rise. The FT reported on Thursday that the ECB was buying Portuguese and Irish bonds in €100m tranches, four times the previous clip size.

Ralph Atkins

To me, it was pretty clear that Jean-Claude Trichet, European Central Bank president, was leaving all options open when he gave evidence to the European Parliament late on Tuesday. That can only mean the chances of a significant scaling-up of the ECB’s government bond purchases have increased. It may not happen, but at least the possibility would appear to be on the table. Here are my answers to some of the obvious questions:

Why? The ECB could decide that at least parts of the bond markets have become dysfunctional, pricing in risks of default that do not reflect the fundamentals of countries such as Spain. The original purpose of its Securities Markets Programme, launched in May, was to restore the proper functioning of the monetary transmission mechanism, which was a way of saying it would correct dysfunctional markets. An escalation of the bond purchases could also be justified on monetary policy grounds – if there were a risk of asset price deflation.

When

The ECB didn’t buy any bonds last week, following an abstemious week the week before. Under the Securities Market Programme, the ECB has been supporting peripheral eurozone members by buying government securities since sovereign debt troubles in Greece in May.

Recent Irish and Portuguese sovereign debt woes prompted a resurgence in this (highly unusual) ECB activity, but the overall trend is clearly downwards (no doubt to Axel Weber’s delight). Markets have been calmer since the IMF-EU bail-out of Greece and the creation of the EFSF. Pity Mr Weber wants to phase that out, too.

The ECB has stepped up its purchases of securities, but viewed in context it’s small fry. Last week, €237m was spent on “securities held for monetary purposes”; the week before it was €173m; the week prior, €142m. (They are the three barely discernible rightmost blue boxes on the chart.)

Confining ourselves to this three-week ‘trend’ is misleading, however. Low level purchases fluctuate. Four weeks ago, €337m were bought. 

It’s as good as zero. The ECB has apparently reduced its bond purchases to €9m for the week to August 7 — a mere 0.055 per cent of the initial €16.5bn outlay when the programme began in May and not even visible on the chart, below. Peripheral countries’ bonds were bought to keep demand up and yields (ie the government cost of debt) down. The eurozone crisis has abated since then — except, perhaps in Greece — so this highly unusual measure has arguably run its course.


*Ralph is away