Exclusive ECB to direct cash from north to south in bid to limit rate differentials – sources

The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlovsky

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  • ECB to reinvest PEPP proceeds as spreads widen
  • Italy, Spain, Portugal and Greece are among the beneficiaries
  • The donors are Germany, France and the Netherlands
  • Lists to be reviewed monthly

CINTRA, Portugal, June 30 (Reuters) – The European Central Bank will buy bonds from Italy, Spain, Portugal and Greece with some of the returns it receives from outstanding German, French and Dutch debt in an effort to reduce spreads between borrowing costs. Sources told Reuters.

The European Central Bank will begin the process of rebalancing on Friday to prevent fiscal fragmentation among eurozone countries from derailing its plan to raise interest rates – with an additional one due to be unveiled next month. Read more

The central bank has divided the euro zone’s 19 countries into three groups – donors, recipients and neutrals – based on the size and speed of rising bond spreads in recent weeks, according to conversations with six people at the European Central Bank’s annual conference. Forum in Sintra, Portugal. The spreads are measured against German bonds, which serve as a de facto benchmark for the single currency area.

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The sources said that the European Central Bank will direct the cash-received portion of the maturing bonds it has purchased from the “donor” countries under the Pandemic Emergency Purchase Program, with the neutrals serving as storage.

The lists, which will be revised monthly, reflect the division between peripheral and core countries that emerged at the time of the eurozone’s first debt crisis a decade ago.

The sources said the beneficiaries include a handful of countries that investors consider riskier due to their high public debt or meager growth, such as Italy, Greece, Spain and Portugal.

Their list was initially longer before the Governing Council narrowed it down.

The donor group consists of about half a dozen core countries considered safer and includes Germany, France and the Netherlands, according to the sources.

An ECB spokesperson declined to comment for this story.

While the recoveries in July and August are significant, the ECB knows that simply reinvesting the proceeds will not be enough to calm investors.

So it has accelerated work on a new instrument that will allow it to make new purchases where they are needed if the state meets certain conditions.

This could be confirmed by the European Commission, based on its fiscal rules or economic recommendations, or by the European Central Bank itself by assessing debt sustainability, as it did with Greece a few years ago, sources told Reuters. Read more

The first option would keep the European Central Bank above the fray but make it dependent on another institution. The latter would give central bankers more say but open them up to accusations of involvement in politics.

The ECB may then drain cash from the banking system to offset its bond purchases, most likely through special auctions in which banks can secure more favorable interest rates if they park the money at the central bank. Read more

Policy makers still have to decide whether to announce the size of the chart, as they hope its mere announcement will stabilize the markets and they may not have to use it. Read more

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Edited by Tomasz Janowski

Our Standards: Thomson Reuters Trust Principles.

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