ECB reinvests bonds bought in pandemic to control South’s risk premium


By reinvesting the ending titles in the purchase of debt from countries on the periphery, it would reduce the yield required for bonds from Italy or Spain.

Christine Lagarde, President of the ECB
Christine Lagarde, President of the ECBSam van der WaalEFE
  • ECB holds urgent meeting today after southern European countries’ risk premiums skyrocket

European Central Bank (ECB) has decided in its emergency meeting held this Wednesday reinvestment of debt securities achieved under its post-pandemic debt purchase program (PEPP) So flexible Able to do Get more loans from Southern European countries and thus put downward pressure on bond yields in countries such as Spain or Italy, thus controlling their risk premium.

“The Governing Council has decided that Implement flexibility in reinvestment of refunds mature in portfolio PEPPTo preserve the functioning of the monetary policy transmission mechanism, a precondition for the ECB to be able to fulfill its price stability mandate”, he announced in a very brief statement published at the end of the meeting, in which he did not Have given more details.

At its monetary policy meeting last week, the ECB had already warned that “in the event of a re-fragmentation of the market related to the pandemic, Reinvestment under PEPP can be adjusted at any time Flexibly over time, across asset classes and jurisdictions.

In particular, take as an example reinvestment in greek bonds: “This may include the purchase of bonds issued by the Hellenic Republic, as well as reinvestment of overdue amounts to avoid interruption of purchases in that jurisdiction, which may hinder the transmission of monetary policy to the Greek economy while Recovery continues from the impact of the pandemic. Net purchases under PrEP may resume, if necessary, to address the negative aftershocks related to the pandemic.”

OK, the risk premium of Greece (the spread between the required yield on a ten-year bond against its German counterpart, the Bund) climbed this week. 261 basis points, The highest in Europe with Italy. Therefore, it is to be expected that despite the paucity of details, this flexibility in the reinvestment of PEPP titles will be used to Greek, Italian and Buy possibly even Spanish, Since our risk premium has also increased significantly in recent times.

Antifragmentation Tools for Defining

In addition to this measure, the ECB has mandated Eurosystem committees and various ECB bodies “to expedite the finalization of the design of a single ECB. new anti-fission device, which will be submitted for the consideration of the Governing Council. This new tool would be one that would serve to avoid a large disparity between the yield required for bonds from different countries and, as expected, not yet designed or agreed upon Given the differences within the council itself.

In the statement, Just . From of paragraphThe ECB has explained that “since the gradual policy normalization process began in December 2021, the Governing Council Committed to work against resurgence of fragmentation risks, The pandemic has left permanent vulnerabilities in the eurozone economy, which are, in fact, contributing to the uneven transmission of our monetary policy that is common across all jurisdictions.”

10 Year Spanish Bond Yield It had fallen below 3% this morning and with confidence in this meeting the risk premium fell from the level of 136 basis points to around 128 points. now, It will be necessary to see whether the agreed measure, of which no details have been given, is sufficient. To keep the markets calm.

“This solution alone may be disappointing for the market, since The size of the assets to be matured is too small Compared to the potential need to stabilize the markets. The same will happen with any other adjustment of existing political instruments”, warned the British adviser this morning Capital Economics.

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