ECB holds back on Irish, Portuguese bond purchases

The ECB limited its sovereign debt buys of Irish and Portuguese bonds last month due to concerns about hitting its purchase caps, in a move that could mean those countries stand to benefit less from the scheme, according to Central bank sources.

With almost a year left of its quantitative easing programme, the ECB is already nearing a self-imposed limit of holding a third of the countries’ debt due to the large amounts of bonds it bought under previous crisis-fighting measures.

This became an issue when the ECB increased its monthly asset buys to €80 billion in April from €60 billion. Data shows that so far purchases have increased by more than 50 percent in most euro zone countries but only by 16 percent in Portugal and 33 percent in Ireland.

Two sources familiar with the situation said the ECB and national central banks that conduct the buying had supplemented Portuguese and Irish bonds with the debt of supranationals to avoid having to curtail buying of their debt more radically or even having to cut them off completely once it hits its limits.

The curtailed buying means that the ECB’s sovereign debt purchases will deviate slightly from the countries’ shareholding in the central bank, called the capital key, possibly muting the positive market impact of the scheme in Portugal and Ireland.

The ECB declined to comment, while the Central Bank of Ireland said it is “purchasing a limited amount of supranational bonds on behalf of the Eurosystem, along with a number of other national central banks”. The Bank of Portugal was not immediately available to comment.

Euro zone central banks can top up their QE purchases of sovereign bonds with the debt of development banks or the bloc’s bailout fund to maintain asset purchases in proportion to their ECB shareholding. These so-called ‘supranational’ bonds can be from institutions without any ties to the particular country.

While QE has pushed borrowing costs in the euro zone to record lows in many countries, some investors say that uneven purchases of sovereign debt could mean vulnerable countries like Portugal do not benefit as much as the bloc’s largest economy, Germany, thereby escalating political tension in the region.

The sources said the ECB was keen to keep both countries in the programme until the projected end of the scheme in March 2017, but said that the buying could still fluctuate over time and that the ECB also reviews its issuer limit every six months.

Left over from its Securities Markets Programme, a scheme launched in 2010 to tackle an escalating debt crisis, the ECB held €9.7 billion of Irish debt at the start of 2016 while its Portuguese holdings stood at €12.4 billion. Since the start of QE, the ECB has bought €11 billion of Irish debt and €16.2 billion in Portugal.

– Reuters