The ECB limited its sovereign debt buys of Portuguese and Irish bonds last month due to concerns about hitting its purchase caps, central banking sources said, in a move that could mean those countries stand to benefit less from the scheme.
With almost a year left of its quantitative easing programme, the ECB is already nearing a self-imposed limit of holding a third of the countries’ debt due to the large amounts of bonds it bought under previous crisis-fighting measures.
This became an issue when the ECB increased its monthly asset buys to €80 billion in April from €60 billion. Data shows that so far purchases have increased by more than 50 per cent in most eurozone countries but only by 16 per cent in Portugal and 33 per cent in Ireland.
Two sources familiar with the situation said the ECB and national central banks that conduct the buying had supplemented Portuguese and Irish bonds with the debt of supranationals to avoid having to curtail buying of their debt radically or even having to cut them off completely.
The curtailed buying means that the ECB’s sovereign debt purchases will deviate slightly from the countries’ shareholding in the central bank, called the capital key, possibly muting the positive market impact of the scheme in Portugal and Ireland.
The ECB declined to comment, while the Bank of Ireland said it is “purchasing a limited amount of supranational bonds on behalf of the Eurosystem, along with a number of other national central banks”. The Bank of Portugal was not immediately available to comment.
Eurozone central banks can top up their QE purchases of sovereign bonds with the debt of development banks or the bloc’s bailout fund to maintain asset purchases in proportion to their ECB shareholding. These so-called ‘supranational’ bonds can be from institutions without any ties to the particular country.
While QE has pushed borrowing costs in the eurozone to record lows in many countries, some investors say that uneven purchases of sovereign debt could mean vulnerable countries like Portugal do not benefit as much as the bloc’s largest economy, Germany, thereby escalating political tension in the region.
“If the ECB is going to target purchases on some sovereigns at the expense of other sovereigns, then effectively you have got an unequal application of that monetary policy,” said Mark Dowding, a portfolio manager at BlueBay Asset Management.
“In extremis, you are saying that this is going away from a trend where you are trying to bring Europe together, and it is looking more like something that could push Europe apart.”
The sources said the ECB was keen to keep both countries in the programme until the projected end of the scheme in March 2017, but said that the buying could still fluctuate over time and that the ECB also reviews its issuer limit every six months.
Left over from its Securities Markets Programme, a scheme launched in 2010 to tackle an escalating debt crisis, the ECB held €9.7 billion of Irish debt at the start of 2016 while its Portuguese holdings stood at €12.4 billion. Since the start of QE, the ECB has bought €11 billion of Irish debt and €16.2 billion in Portugal.
The ECB’s issuer limit also suggests that if Greece joins the programme, ECB purchases will be severely curtailed as the bank is already one of the bigger holders of Greek debt.
The ECB has already stopped purchases in Cyprus because the country does not have the necessary credit rating and keeps sovereign buys limited in several countries, like Estonia, for liquidity reasons.