The significant boost provided by the European Central Bank’s emergency bond-buying program (PEPP) to Greek state bonds is set to come to an end, a development that may be painful for some eurozone economies.
The Greek bond market’s reaction will be interesting, though as is the case with any QE program, the biggest challenge will be which exit strategy the ECB will choose.
Ioannis Sokos, fixed income research director at Deutsche Bank, says that there are two distinct steps to the exit. “The first is the end of net asset purchases that we witnessed briefly in the first 10 months of 2019, and the second and even more challenging is the end of reinvestments, or in other words the unwinding of the ECB portfolio,” he says.
“At the moment, based on the ECB’s forward guidance, that is several years down the line. The ECB just announced that it will keep reinvesting its PEPP holdings at least until the end of 2023, while asset purchase program (APP) reinvestments are part of ECB’s forward guidance, ie. depend on when the ECB will start hiking rates,” he tells Kathimerini.
An asset manager at a big French bank also takes the long view: “We are a long way from removal of the program and yields are reflecting that with net supply due to be negative for some time. What will happen when it is tapered? Clearly it will need to be done in an orderly way to avoid any sudden correction but undoubtedly this will have an impact on rates. This seems so remote though that no one will worry about it for some time Then we will look again probably debt/GDP ratios which will raise new questions. But this is a long way from today,” he tells Kathimerini.
When the program ends, problems might be significantly bigger for Greek government bonds (GGBs), though experts appear optimistic.
Antoine Bouvet, a senior rates strategist at ING, argues that “as a smaller bond market, GGB liquidity could suffer more than others from the ECB dominance but this does not necessarily mean they will underperform.
“On the contrary, I suspect this means more spread tightening in the coming months. Note also that low rates and low volatility produces incentives for investors to buy into higher-yielding markets, such as GGBs. The end of the QE programs will be tricky to navigate, no doubt. The hope will be that the PDMA will use the coming year to lock in low interest rates, and lengthen debt maturity as much as possible,” Bouvet tells Kathimerini.
Nicola Mai, portfolio manager and sovereign credit analyst at Pimco, is not worried either. “Greece is a big beneficiary of European policy support measures: the ECB PEPP program includes GGBs in its purchase umbrella, and the Greek sovereign will benefit from significant disbursements from the EU Recovery Fund. This should provide stability to the GGB market,” he notes.