Divergence of Italian PEPP Purchases from Capital Key Smaller than Before


ZEW Study on the ECB Bond Purchase Programmes

The study examined the government bond purchases in terms of their allocation among eurozone countries over time.

The ECB is about to decide on the future of its bond-buying programmes. A new study by ZEW Mannheim with the support of the Brigitte Strube Stiftung examined the government bond purchases in terms of their allocation among eurozone countries over time. The results show that since the beginning of the pandemic the share of purchases of government bonds from Cyprus, Italy, Slovenia, Spain and Ireland under its two purchase programmes, PSPP and PEPP, has significantly exceeded the ECB’s capital key. The PSPP programme has already been active since 2015, while the PEPP was launched in March 2020 to cushion the effects of the COVID-19 crisis. The deviations of the share of purchases from the ECB capital key, which serves as a benchmark, are smaller this year than in 2020. While Italy’s PEPP shares were still clearly above the national capital key in the first year of the pandemic at 13.1 per cent, they deviated by only 2.5 per cent from January to September 2021.

Despite this recent approximation of purchases to the ECB capital key, the bond holdings of the euro central banks show a very high imbalance in relation to the economic output of the euro states. For Spain, Portugal and Italy, the ratio to GDP is already close to 40 per cent. For other eurozone countries such as the Baltic states, Luxembourg, Malta and Ireland, this ratio is below 15 per cent. According to the study, the ratio of the stock  of  public  sector  securities  in  the  national  central  banks’  balance  sheets  to government debt is already almost 30 per cent on average in the eurozone. This means that for more and more countries the issuer limit of 33 per cent has been exceeded. The issuer limit refers to the maximum share of an issuer’s outstanding securities that the ECB is prepared to buy under the PSPP. Above this limit, the ECB Governing Council has a blocking minority in future negotiations on a debt cut. “As a result, the ECB is increasingly becoming the most powerful lender calling the shots in future debt crises,” says Professor Friedrich Heinemann, head of the ZEW study.

The ECB has limited PEPP purchases until March 2022 and set a ceiling of 1,850 billion euros. The ZEW study has made a projection of the purchase volume until March based on the current pace. The results show that purchases are likely to exhaust exactly the maximum volume set so far. “However, this also means that there is hardly any leeway for additional purchases in the event of economic setbacks caused by the pandemic over the winter months,” ZEW co-author Carlo Birkholz summarises the result.

According to the study, Greece stands out in that the ratio of PEPP purchases of Greek government bonds to GDP is currently 18 per cent, far exceeding all other euro countries. “When it comes to financing the effects of the COVID-19 crisis, Greece is more dependent on the PEPP than any other euro country,” says Friedrich Heinemann.

The authors of the study conclude that the ECB Governing Council faces a difficult decision on the future of the bond-buying programmes. “The Governing Council’s decision will be a balancing act. On the one hand, it urgently needs to scale back bond purchases as the economy normalises so as not to be accused of engaging in monetary government financing. On the other hand, it is uncertain whether some highly indebted eurozone states will be able to remain liquid without these bond purchases,” summarises Friedrich Heinemann.

General documents

ZEW expert brief “Magnitude and Capital Key Divergence of the Eurosystem’s PSPP/PEPP Purchases”