PEPP talk

Clearer picture emerges on how many more Greek bonds the ECB is willing to purchase

News this week shines light on how much scope there is for the European Central Bank to continue increasing its Greek government bond holdings.

The central bank is operating using an informal ceiling of just under 50 percent of each country’s bonds, according to a report by Bloomberg. This limit applies to the consolidated holding of securities under both the Pandemic Emergency Purchase Programme and the Asset Purchase Programme.

This is significant information, because under APP — the “regular” quantitative easing that came before PEPP — the issuer limit was formally set at 33 percent. Such limits were explicitly left out of PEPP, but we first noted in April that holdings of Greek government bonds were reaching that symbolic 33 percent level.

The central bank’s PEPP purchases of Greek bonds have continued at a fairly steady pace since then, with holdings having increased to around 40 percent of eligible securities by the end of September.

The stock of Greek government bonds at the end of September stood at 81.8 billion euros, so without further issuance there’s headroom for around about 8.5 billion euros more of Greek bond purchases. The ECB bought 2.8 billion euros of the bonds in August and September; maintaining that rate would mean running out of bonds to buy some time around April.

Of course, there almost certainly will be further issuance next year (it would take some implausibly extreme developments for Greece to lose market access). Specifically, some analysts expect the Public Debt Management Agency to issue between 10 and 12 billion euros of new bonds next year. However, those issues will be spread throughout the year, and in any case would only add few a more months worth of purchases at the current rate.


So, now we know that there’s a theoretical limit in place to how many Greek bonds the ECB is prepared to buy — even if that limit is an informal one that doesn’t bind the central bank.

In a research note last month, Frederik Ducrozet and Nadia Gharbi of Pictet Wealth Management noted that Greece was “underpurchased” in the APP — where capital keys have been used as guidelines for the size of bond purchases — by 58 billion euros. That held out the prospect of substantial scope for future purchases, given that PEPP holdings don’t count towards the 33 percent APP ceiling.

This is nicely illustrated in their chart, below, where only the red bar needs to be below the dotted line.

However, the 50 percent ceiling in Bloomberg’s report shows that the room for further buying isn’t so substantial after all. One implication is that we’re likely to now see a substantial slowdown in the monthly rate of Greek purchases.

Of course, the 33 percent limit on APP purchases is still just a theoretical one for Greece, since the country’s bonds aren’t actually eligible for inclusion at all under the programme right now, being below investment grade.

All eyes are on next month’s critical ECB meeting, when they will plot a course for what happens after PEPP ends in March. Bank of Greece governor Yannis Stournaras sounds confident that a solution will be found to maintain Greece’s QE access.

There’s good reason to be confident. Greece’s original exclusion from QE had more to do with the politics of the eurozone crisis at the time — and the practicalities of Mario Draghi’s fight to get it added to the central bank’s toolkit — than it did with monetary policy. That’s now a closed chapter, and all parties have come too long a way since then to risk another self-inflicted Greek crisis.

I’d love to get your thoughts and feedback, either in the comments, on Twitter or by reply if you received the newsletter by email. If you’re not subscribed yet, consider doing so now.