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Analysis

ECB under-purchasing German bonds

by Ben Robinson in London

Fri 11 Aug 2017

ECB under-purchasing German bonds Enlarge Chart loading Image

Latest figures for July show that, for the fourth month in a row, German bonds bought under the European Central Bank's public sector purchase programme fell short of the amount allowed by the 'capital key' allocation. Other countries have also seen significant deviations from the capital key, under which bonds are bought in proportion to the share of the ECB capital provided by each country. This figure is determined by the size of GDP and population, and is adjusted slightly to reflect the ineligibility of Greek bonds given their low credit rating.

Since April, the ECB has bought an additional €4.2bn of Italian bonds and €809m of Spanish bonds, against an under-purchase of €1.09bn for Germany and (since May) €172m for the Netherlands. The divergence suggests growing difficulties with the ECB's quantitative easing programme and has reignited speculation about a tapering of bond purchases.

Mario Draghi, president of the ECB, reiterated in late June that the bank remains committed to QE through bond purchases. But the longer QE goes on the greater the demand will be for bonds in core countries. In coming months the amount of eligible bonds could begin to face significant strains.

To avoid a sudden fall in the amount of German bonds available, or a politically toxic redistribution of the capital key to allow higher allocations to bonds from southern countries, Germany is scaling back the rate at which its own bonds are purchased.

Berlin has long argued for a general scaling back of QE with a view to winding it down together, citing moral hazard, the distorting effects on countries' risk premia and other factors.

Ben Robinson is Economist at OMFIF.