BarcelonaSpain was the second country most favored by the European Central Bank’s stimulus during the pandemic, only surpassed by Italy. The institution chaired by Christine Lagarde massively bought debt from eurozone states through two programs, which represented additional financial support for European governments and also had a stabilizing effect on bond markets .
More specifically, between March 2020 and July this year, the acquisition of public debt represented an injection of 2.18 trillion euros into the credit markets by the ECB. Of this amount, 1.98 trillion was allocated to buy debt securities issued by states, while the rest was allocated to supranational debt, for example issued by the European Commission.
With the pandemic, the ECB introduced the Pandemic Emergency Purchase Program (PEPP), in addition to the Public Sector Purchase Program (PSPP), which had been active between 2015 and in 2018 and that the institution had resumed in November 2019, a few months before the arrival of covid.
2,18 B€
It is the figure allocated by the ECB to its two public debt purchase programs between March 2019, when the pandemic broke out, and July this year.
In principle, PSPP purchases must be made in proportion to each country’s weight in the ECB’s capital. In other words, the bank must buy more bonds from large countries than from small ones. This rule, however, was suspended in the case of the PEPP, which had no restrictions and which also included Greece, a country banned until last month from the PSPP because it still had its economy under surveillance due to the various bailouts received during the crisis.
Italy and Spain win, but also Germany
This means that, if the purchases of the two programs are combined, it is clearly seen that the government most favored by the massive acquisitions of debt during the pandemic has been that of Italy, with that of Spain in second place. As can be seen in the attached graph, the ECB bought, between March two years ago and July this year, Italian bonds worth more than 339 billion euros, 29.5 billion more than it would be entitled to according its weight within the institution.
Likewise, Spain also comes out very favoured. The purchases of Spanish titles exceed 238,000 million euros, almost 14,000 million more than those that would touch him. If you take into account that the debt of all Spanish administrations went from 1.19 trillion euros in February 2019 to 1.48 trillion in June 2022, this represents that the ECB financed approximately 83% of new debt issued by Spain.
251.961 M€
It is the total amount of Spanish public debt bought by the ECB during the pandemic.
On the other side, the Netherlands is the country most affected, with purchases more than 15.6 billion euros below the level that would affect them due to the weight of the organization’s capital. Similarly, France, with purchase levels 14.2 billion below their theoretical level, also suffered, as did Slovakia and the three Baltic states.
Interestingly, between the PEPP and the PSPP, Germany has ended up receiving 3.7 billion more than it would have according to its share in the capital of the central bank, even though it has traditionally been the country most opposed to the acquisition of bonds, which they consider which favors the governments of the south, more in debt, at the expense of states like Germany, which have healthier public finances.
In fact, several German politicians and businessmen have taken the various programs approved by the ECB to the country’s Constitutional Court, since they consider that they violate the German Constitution, which limits the financing of administrations with money issues and debt purchases by part of the central bank.
Usual policies between central banks
Debt buying is a common policy of all central banks and serves to stimulate the economy in times of crisis, as it injects large amounts of money into the economy. In addition, the fact that the ECB creates money and spends it on buying government bonds discourages hedge fund attacks on debt markets and sends a signal of support and stability to public finances, so governments end up paying interest lower to get into debt. A role that economists call lender of last resort.
In the European case, these purchases are particularly important, since the states borrow with a currency that is not 100% their own, but is shared by 19 countries. During the crisis of the years 2008-2014, the states of the periphery of the continent paid much higher costs than those of the center to get into debt and ended up being bailed out, including Spain. It wasn’t until the previous president of the ECB, Mario Draghi, started the first sovereign debt acquisition programs that the crisis ended.
With the outbreak of the pandemic, Lagarde assured a press conference that the job of the ECB was not to ease the cost of the states’ debt. “We are not here to reduce the risk premiums“, the president said in March 2020, words that caused a momentary upheaval in the markets and which he had to rectify minutes later and after a few days presented the PEPP. The risk premium it is the difference between the interest paid by a bond of a country (for example, Spain) and the interest of German bonds, considered the reference to Europe.
Negative impact on finishing the programs
In total, the ECB set a PEPP purchase limit of €1.85 trillion, of which it has ultimately spent €1.66 trillion since its inception in March 2020 until last March, when extinguished it. As for the PSPP, which ended in July, since March the monetary body had dedicated another 518 billion euros, which add up to the total of 2.18 trillion intended for the acquisition of public debt.
The end of debt purchases has had an immediate impact on debt markets, with the ECB also raising key interest rates to curb inflation. All Eurozone countries have gone from paying very low or even negative interest rates to borrowing at higher rates, although they are still far from the levels of a decade ago. To slow the hikes, the ECB announced a new program (the Transmission Protection Instrument, or TPI) that will be activated in the event that a country suffers a too strong escalation in the interest rates on its bonds.