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The European Central Bank has slowed down its buying of Portuguese bonds to its lowest ever level under its stimulus measures, highlighting the squeeze in assets facing policymakers and raising fears about a reduction in support for the bloc’s most vulnerable economies.
In the latest set of data from its QE holdings, the ECB revealed it snapped up just €656m of Portuguese government debt at the end of February from €688m – the lowest monthly amount since it began its stimulus measures two years ago this month.
The ECB buys up government debt in proportion to the size of each member state economy in the eurozone (with the exception of Greece and Cyprus). But the central bank has been hitting constraints in its measures as it is not allowed to hold more than a third of any government’s outstanding debt.
When it first began the programme in March 2015, the ECB was buying up Portuguese debt at around €1bn a month to hit its QE targets but has been deviating from its “capital key” rules for nearly a year.
Portugal is particularly vulnerable to a scale-back in central bank buying as the ECB already holds Portuguese debt on its balance sheet from an earlier purchase programme launched in 2011. The economy, which underwent a bailout in 2010, has a debt to GDP pile above 130 per cent – the joint highest in the eurozone after Greece.
The ECB’s over-sized presence in Europe’s bond market has helped keep a lid on government borrowing costs across the continent – pushing up bond prices. But the current slow down has helped push Portugal’s 10-year yield to a 12-month high of 4.2 per cent in February.
A tapering in ECB support for the likes of Portugal, Ireland and Slovenia “has already resulted in political questions about why their respective countries no longer can count on equal ECB QE support, especially as some of these countries may need the stimulus the most” said Anatoli Annenkov at Societe Generale.
Greece, the most troubled economy in the 19-member bloc is not part of the stimulus measures. Figures out today revealed the country’s suffered a sharp economic contraction at the end of 2016, with the economy shrinking 1.2 per cent.
In the face of an asset shortage, the ECB has given itself more wiggle room to hits its €80bn a month QE target by dropping a yield floor of -0.4 per cent on its sovereign debt purchases. Germany has proven the biggest beneficiary of the tweak from the start of this year, with the country’s two-year “Schatz” debt yielding around -0.9 per cent becoming eligible for QE.
Short-term bond purchases have led to a sharp reduction in the average maturity of German debt held by the ECB this month. The figure has fallen sharply from 7.8 years to 4.3 years.
As of next month, the ECB will begin scaling back its measures from €80bn to €60bn a month until at least December as growth and inflation has been on the rise.
But senior policymakers, including president Mario Draghi, have been under pressure from hawks within the governing council who are urging for a faster “tapering” given recent good news on growth and inflation in the bloc.
Mr Draghi will be forced to defend his insistence that the ECB will remain accommodative despite inflation hitting 2.1 per cent last month at the central bank’s latest meeting on Thursday.