PEPP – Revealing the ECB's Ulterior Motive
With yields spiking, the ECB is buying Italy and selling Germany
Obviously, I'm a big fan of my charts, but now and then, I come across one that deserves credit. And a post! This chart will, once again, underscore the European Central Bank's increasingly explicit target of maintaining debt sustainability.
More equal than others
The chart below, by Robin Brooks, Chief Economist at the Institute of International Finance, shows the net purchases within the ECB's 'pandemic emergency purchase programme' (PEPP), sorted by country.
Since June last year, the ECB has almost exclusively reinvested maturing PEPP bonds in Italian debt. In contrast, the ECB has been a net seller of Dutch and German government bonds. This, of course, is no coincidence.
Capital Keys?
With interest rates rising sharply, it's crucial for the ECB not to let spreads (yield differentials) widen. The 10-year yield on Italian government debt has risen to the highest since 2012, even with relatively benign spread levels. The current Italian yield is higher than in 2010, just before the European debt crisis erupted.
Once upon a time, the ECB bought bonds in line with the capital keys - the share each member state represents in the ECB's capital - which allowed it to disguise that 'debt sustainability' was a (shadow) objective of the central bank. But a lot has changed in recent years, as Brooks' chart shows. And in hindsight, it's fair to say that the ECB embarked on this path of debt sustainability ever since Draghi's famous 'Whatever it takes' speech.
Today, the ECB has left the capital keys far behind.