As widely speculated — the European Central Bank did indeed ramp up its bond purchases in the week ending December 9, with the Securities Markets Programme buying a further €2.7bn of peripheral eurozone government paper.
From Reuters:
RTRS-ECB SAYS COMPLETED 2.667 BLN EUROS OF BOND PURCHASES UNDER SECURITIES MARKETS PROGRAMME IN WEEK TO DEC 10, VS 1.965 BLN PURCHASES PREVIOUS WEEK
RTRS-ECB SAYS TOTAL 72 BLN EUROS PURCHASES SETTLED UNDER BOND BUY PROGRAMME TO DEC 10, FROM 69 BLN PREVIOUS WEEK
And in slightly more technical terms from the ECB:
As announced by the Governing Council on 10 May 2010, the ECB will conduct specific operations in order to re-absorb the liquidity injected through the Securities Markets Programme. In this regard, the ECB will carry out a quick tender on 14 December at 11.30 in order to collect one-week fixed-term deposits with settlement day on 15 December. A variable rate tender with a maximum bid rate of 1.00% will be applied and the ECB intends to absorb an amount of EUR 72 billion.
The latter corresponds to the size of the Securities Markets Programme, taking into account transactions with settlement on or before Friday 10 December, rounded to the nearest half billion. As the SMP transactions which settled last week were of a volume of EUR 2,667 million, the rounded settled amount – and the intended amount for absorption accordingly – increased to EUR 72 billion.
The benchmark allotment amount in MROs takes into account the liquidity effect of non standard measures, assuming an unchanged size of the Securities Markets Programme and full sterilisation of this amount via the above mentioned liquidity-absorbing operation. Fixed term deposits held with the Eurosystem are eligible as collateral for the Eurosystem’s credit operations. The ECB intends to carry out another liquidity-absorbing operation next week.
That’s around €700m than in the previous week and takes purchases since the SMP was launched at the height of the Greek crisis in May to a total of €72bn.
In spite of the relatively modest increase in purchases, the ECB certainly got plenty of bang for its buck euro with Irish and (especially) Portuguese spreads and yields — where most of the buying was said to be concentrated — falling sharply:
And to put the week’s purchases into context, here’s Martin van Vliet of ING:
… the intervention is still relatively modest compared to May/June, when the ECB bought bonds worth more than €7 billion per week on average. This highlights the ECB’s underlying discomfort with the bond-purchasing programme.
Please note that today’s figures incorporate most – if not all – of the large scale purchases of Portuguese and Irish bonds made on Thursday 2 December. These transactions had not yet been settled. Last week’s transactions bring the total amount of bond buying since the ECB launched its intervention at around €72 billion – equivalent to 15.5% of the outstanding bonds of Greece, Ireland and Portugal.
A point that’s also captured in this chart from RBC Capital’s Norbert Aul:
The question now, of course, is whether the ECB maintains purchases at this level or allows them to tail off. Given trading volumes are thinning ahead of the year end, it can probably get away with scaling-back. (In fact trading volumes have very light in recent weeks).
But as the charts show, yields Irish and Portuguese debt remain elevated and it wouldn’t take much to trigger another sharp sell-off.
With that in mind all eyes now turn to the European leaders gathering in Brussels on Thursday in Friday. In theory, they should agree on the formalisation of the European Stabilization Mechanism (ESM) via a modification of the EU Treaty, according to European Rates Strategy team at RBS:
Press reports over the weekend suggest that a modification would consist of a new sentence to Article 136 of the EU Treaty, which currently allows the European Council to adopt specific measures for the euro area member states in orders to “(a) to strengthen the coordination and surveillance of their budgetary discipline and (b) to set out economic policy guidelines for them, while ensuring that they are compatible with those adopted for the whole of the Union and are kept under surveillance”.
Again according to the press, a new sentence would be added to the article, stating that “The Member States whose currency is the euro may establish a stability mechanism to safeguard the stability of the euro area as a whole. The granting of financial assistance under the mechanism will be made subject to strict conditionality.” In terms of the timing of the treaty change implementation, once agreed upon, the EU leaders will run consultations with the European Parliament, the European Commission and the ECB with the aim of getting the legislation in place by 2013, which is when the ESM will enter in force.
But in practice things could play out rather differently.
And as Aul notes, eurozone governments really needed to take the lead against and specify further potential support for the periphery. Otherwise…
In the absence of further supportive measures, ECB purchases on their own might not be enough to support peripherals. This will be tested when large EGB gross supply will be coming to the primary market in early 2011.
Quite.
Related links:
What fresh basis the ECB hath wrought – FT Alphaville
The SMP to the rescue? – FT Alphaville
Look into my eyes… I am Jean-Claude Trichet – FT Alphaville
Paper Tiger, Hidden Trichet – FT Alphaville