Disproportionate Purchase of High-Debt Country Bonds Even Before the COVID-19 Crisis

Even before the coronavirus pandemic, Eurosystem central banks were increasingly buying disproportionately large amounts of bonds issued by highly indebted euro area countries. In addition, the rules of the purchase programmes have been continuously relaxed since 2015. These are the findings of a study on the ECB’s sovereign purchase programmes, conducted by researchers of ZEW Mannheim with the support of the Brigitte Strube Stiftung.

“The COVID-19 pandemic and the deepest recession in the post-war period are currently providing the ECB with convincing arguments for handling its new purchase programme PEPP very flexibly. At present, the outbreak of panic on the bond markets must be prevented by all means. However, this does not justify the fact that the old PSPP purchase programme had already increasingly violated its own rules by the end of 2019,” says Annika Havlik, co-author of the study and a researcher in the “Corporate Taxation and Public Finance” Department .

In a first step, the study examines how rules of the Public Sector Purchase Programme (PSPP) and the Pandemic Emergency Purchase Programme (PEPP) evolved over time. For the PEPP activated in March 2020, important rules of the PSPP were overridden on the grounds that the coronavirus-induced recession poses extraordinary challenges. But also for the PSPP, which started in 2015, it has been found that initially very strict limits had been increasingly become laxer even before the COVID-19 crisis. This applies, for example, to eligible issuers, maturity restrictions, yield restrictions, as well as issue and issuer limits that were still in force at the beginning of the PSPP. The rule that the Eurosystem shall base its allocation of bond purchases according to the euro country’s share in the ECB capital key was also increasingly relaxed.

In 2020, the PEPP led to a far-reaching relaxation of the remaining rules. The Eurosystem now even accepts the purchase of more than one third of all bonds issued by a single issuer, which gives the ECB a blocking minority in future creditor negotiations. “The ECB has accepted, at the latest with the PEPP, to assume the role of a strategic creditor for eurozone countries. In future, the Governing Council of the ECB will thus be involved in deciding whether or not a highly indebted euro state can restructure its bond liabilities,” comments co-author and ZEW research department head, Professor Friedrich Heinemann.

The empirical analysis shows that, even before the outbreak of the coronavirus pandemic, the allocation of bond purchases already deviated clearly from the capital key in favour of the highly indebted countries France, Belgium, Italy and Spain. For each of these four countries, the stock share held by the Eurosystem increasingly deviated from the ECB capital key between 2015 and 2019. This even contradicts the already relaxed PSPP rules, which still define the capital key as the relevant compass for accumulated stocks. Since the beginning of the coronavirus crisis, the disproportionate purchase of Spanish and Italian bonds has increased dramatically, even in the old PSPP programme, with Italy’s share of PSPP purchases between March and May exceeding the country’s capital key by 13 percentage points.