by Francesco Canepa and Balazs Koranyi
SINTRA, Portugal, June 30 (Reuters) – The European Central Bank (ECB) will buy bonds issued by Italy, Spain, Portugal and Greece using proceeds from the maturities of German, French and Dutch debt that it holds in the portfolio, to limit the widening of yield differentials between States, we learned from several sources.
The ECB must engage from Friday in this exercise of rebalancing the “spreads” in order to prevent a financial fragmentation of the euro zone at a time when it is preparing to raise its key interest rates. And it plans to present on July 21 the terms of a new system developed for this purpose.
The central bank has therefore divided the 19 countries of the euro zone into three groups, the “donors”, the “recipients” and the “neutrals”, according to their size and the speed of the increase in their spread in recent years. weeks, said several people Reuters spoke to at the ECB’s Annual Forum in Sintra, Portugal in recent days.
Spreads were measured against German yields, which serve as a de facto benchmark for the entire currency bloc.
“Recipient” countries are set to benefit from the reinvestment of principal from “donor” country bonds purchased in recent years under the Pandemic Emergency Purchase Program (PEPP), launched in March 2020; titles from “neutral” countries will act as a cushion, the sources said.
The composition of the three groups of countries, which will be reviewed each month, reflects the division between the “core” countries of the euro zone and the so-called “peripheral” countries which appeared in the early 2010s, during the debt crisis in the eurozone.
CONDITIONS STILL TO BE SET FOR THE NEW INSTRUMENT
The recipients thus include countries considered by investors to be more risky due to the weight of their public debt or the weakness of their economy, namely Italy, Greece, Spain and Portugal, the sources said. Initially longer, the list was shortened by the Board of Governors, they added.
The group of donors includes half a dozen countries from the “heart” of the euro zone, including Germany, France and the Netherlands, according to these sources.
An ECB spokesman declined to comment on the matter.
If the amounts of the maturities of July and August are important, the ECB knows in advance that the only reinvestment of these liquidities will not be sufficient to calm the tensions on the markets. This is why it has accelerated the work in progress on the development of a new instrument which should allow it to make new purchases if necessary to support a given country, under certain conditions.
These conditions could be set by the European Commission based on its own budgetary rules or economic recommendations, or by the ECB itself via an assessment of the country’s capacity to assume its debt, as was the case for Greece. a few years ago, sources told Reuters.
The first option would shield the ECB from blame but make it dependent on a more political institution; the second, on the contrary, would consolidate the power of the central bankers but would expose them to accusations of interference in the economic and budgetary policy of the Member States.
At the same time, the central bank could withdraw liquidity from the euro area banking system to compensate for the effect of its bond purchases on the markets, probably by resorting to reverse repurchase transactions, during which banks can benefit from subsidized interest rates when they deposit cash with the central bank.
(Report by Francesco Canepa and Balazs Koranyi, French version by Marc Angrand, edited by Kate Entringer)