As a result of an unwinding of the European Central Bank’s (ECB) bond-buying programme, fiscal pressure has become particularly acute in France, Spain, and Italy.
The ECB has accumulated €2.6 trillion in government and corporate bonds and is committed to reinvesting interest payments in sovereign bonds for an extended period of time and will actually invest €190 billion into bonds in the first 11 months of 2019, which will act as a much-needed cushion once the withdrawal of €20 billion a month in cheap liquidity sets in.
However, the distribution of this reinvestment will add pressure on France, Italy, and Spain, all of which will need to seek new buyers for €64 billion – equal to the amount the ECB overbought in sovereign debt from the trio to help keep yields down.
Greece and Portugal, whose bonds were not part of the stimulus scheme due to their low credit rating, were “underbought” by the ECB.
Additional pressure for all the southern periphery stems from regulators insisting that systemic EU banks in EU buy the sovereign bonds of their host country.
The Eurozone’s chief banking regulator, Danièle Nouy, and the European Commission official responsible for financial services, Olivier Guersent, said in December that lenders must be freed from their implicit obligation to hold a limitless amount of EU government bonds on their balance sheet.
The politically-induced obligation of buying government bonds has been the standard international practice since the interwar period of the 1920s-1930s, which was partly induced by national currencies. Eurozone lenders, however, could theoretically decouple their credibility from that of their host state. If such proposals came to fruition, certain Eurozone members could find much weaker demand for their sovereign bonds.
The ECB’s interest rates are expected to remain down through the summer as economic growth continues to decelerate. At present, the Bank’s main refinancing rate benchmarks stand at zero, while the deposit rate stands at -0.4%.