DZ Bank buys Greek bonds and sees ECB support after the end of the PEPP

Her Eleftherias Kourtali

“Taurus” appears DZ Bank for Greek bonds and especially against Italian bonds, seeing a significant contraction of the spread and inclusion of Greece in any quantitative easing program in force after PEPP.

As he notes, the spread of Greek 10-year bonds against Italian bonds is at 23 basis points and at a new eight-month high. The reason for the sharp widening of the spread, which began in late October, is the uncertainty about what the ECB will decide on Greek bond markets after the end of the PEPP. At present, the ECB buys Greek bonds only through PEPP and not the “normal” QE and without changing the current rules, this support of the ECB will stop.

However, DZ Bank considers it unlikely that the ECB will completely exclude Greece from QE programs in the future. Rather, the rules of QE are likely to be adapted or, at least legally, to create a new program as the successor to all current programs, which will not exclude Greece. The decision could be taken at the ECB meeting in December and trigger a significant reduction in Greek spreads against Italy.

From the market point of view, Greece has so far benefited more than Italy from the PEPP markets, as noted by DZ Bank. If we compare the positions of the ECB in bonds in relation to the size of the respective bond market, this index is higher for Greece than for Italy. In addition, it should be borne in mind that the ECB started building positions in Greek bonds only when PEPP started in March 2020, while it has been buying Italian bonds since the spring of 2015 when QE started.

Compared to the rest of the eurozone, Greece has the peculiarity that bonds in the market represent only a small part (19.5%) of government debt. In the case of Greece, support programs (EFSF, ESM, GLF) therefore have a much greater impact. Therefore, the country should benefit more than average from joining the ECB’s future QE programs, as DZ Bank points out.

In addition, he notes, despite the economic recovery that has begun, Italy plans to maintain its expansionary fiscal policy in the coming years. The debt-to-GDP ratio will stabilize at best at a high level and Italy’s refinancing needs will remain high with a budget deficit of 5.6% of GDP expected for 2022.

As the ECB is expected to gradually reduce bond purchases towards the PEPP scheduled end of March next year, it will also absorb less of the new Italian bond issues from early 2022. Falling demand is likely to lead to overcrowding for private investors. . However, they are also likely to require a higher risk premium due to higher opportunity cost and risk aversion, compared to the ECB. In the part of the region, especially against Greece, this advocates the underperformance of Italian bonds according to DZ Bank.

Apart from the above, Italy may also face a rather turbulent political scenario. The term of office of the President expires at the end of February of the following year. Sergio Matarella has already ruled out running for another term, with Prime Minister Mario Draghi being discussed as his successor. If Draghi really becomes the new Italian President, the future of the current multi-party coalition would also be open. New elections, from which Eurosceptic parties could emerge victorious, would be very likely. But even if Draghi remains in government, it is uncertain that the coalition will last until the 2023 elections.

Therefore, DZ Bank concludes, it is proposed to buy Greek bonds compared to Italian ones as a significant reduction of the spread between them to the 10 basis points is expected.