PEPP and PSPP: Highly Disproportionate Purchase of Italy’s and Spain’s Bonds

The Eurosystem’s bond purchases since the beginning of the COVID-19 pandemic deviate significantly from the ECB’s capital key in terms of their allocation among eurozone countries. Relative to the capital key, Italian government bond purchases deviated by as much as 25 per cent between March and September 2020, while Spain’s share of purchases exceeded its national capital key by eleven per cent, Belgium’s by seven per cent, and Slovenia and France’s by three per cent each. 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 Eurosystem currently buys government bonds under two different programmes. In the PSPP (Public Sector Purchase Programme), which has been running since 2015, the ECB capital key is still considered a binding benchmark. This key is calculated according to a country’s population and economic output, and determines the national central banks’ shares in the ECB. For the new crisis programme PEPP (Pandemic Emergency Purchase Programme), which has been running since March, the ECB Governing Council, however, wants to apply greater flexibility.

The ZEW study reveals a surprising result for both programmes: Although the PSPP rules set by the ECB Governing Council prescribe a stricter orientation to the capital key than the PEPP, the deviations under the PSPP are even greater than under the PEPP. While under the PSPP purchases of government bonds from Italy exceeded the national key by 17 per cent, the deviation is even higher under the PSPP, namely at 45 per cent. For France, the separate analysis of both programmes even shows a reverse relation: While French public sector securities are bought far below proportion under PEPP, they are given a massive overweight under PSPP. Germany’s bonds are bought almost exactly in proportion to its capital key in the PEPP, but are massively underweighted, by 46 per cent, in the PSPP.

“The differences between the two programmes are remarkable. To look at the PEPP alone would be misleading. It almost gives the impression that the Eurosystem is doing balance sheet cosmetics. For the overall view shows that the capital key is actually ignored to an even greater extent than the PEPP figures alone suggest. To get the big picture, the combined analysis of both programmes is therefore indispensable,” says Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” and co-author of the study.

The analysis also provides evidence that the Eurosystem started buying disproportionately large amounts of bonds issued by the above-mentioned countries long before the coronavirus crisis. Whereas in 2015 the ECB and the national central banks still managed to allocate the bond purchases largely in proportion to the ECB capital key, the excess deviations in the PSPP have since increased for some countries. “The large deviations in favour of Italy, Spain and France in the crisis year 2020 are ultimately only the continuation of a trend that has already been very pronounced since 2018,” says Heinemann.

The ZEW study also puts this year’s bond purchases in relation to the predicted very high government deficits of the euro countries in the recession year 2020. The analysis shows that for Italy, Greece, Portugal and Germany, net purchases are of a similar magnitude as or even higher than the countries’ respective government deficits. “Our estimates reveal the substantial indirect involvement of the national central banks in the financing of euro countries,” explains Annika Havlik, co-author of the study and researcher in ZEW’s “Corporate Taxation and Public Finance” Department.

The study concludes that bond purchase programmes on this scale should be brought to an end after the COVID-19 crisis. “Government bond purchases by euro central banks with such deviations are only covered by EU law in an acute emergency such as the coronavirus-related recession. Under normal economic conditions, such a programme would be a clear case of monetary public financing. For Europe’s bond markets, the question remains uncertain as to how highly indebted euro countries will be able to finance themselves again after the crisis without receiving massive indirect financing aids from central banks,” concludes Friedrich Heinemann.