How the ‘fire’ in the government bond market was contained

By Tasos Dasopoulos

The “super ship”, which will contain the rise of the government bonds of the countries of the European South, such as Greece, should be ready by the ECB after the second interest rate increase, since together with the limitation of liquidity the Eurozone will have the risk to slip into recession, due to the European North.

So far, since the announcement of the tool, the situation is progressing smoothly for Greek titles. The Greek 10-year returned to a yield close to 3%-3.1% from the 4.7% it had reached in mid-June, a few days after the announcement of the new “tool” by the Central Bank of the euro. In fact, the deliberate vagueness about the parameters of the intervention discouraged some “adventurers” from trying it, for fear of being trapped themselves in securities that would suddenly lose their value.

The second and most substantial help for Greek securities is a preliminary application of the measure, through the reinvestment that the ECB makes in the bonds that were purchased in the two years 2020-2021, through the PEPP. As can be seen from the variation of the bonds it bought from each country, through the emergency program of the pandemic, since June the ECB has been letting the bonds of the European North, such as those of Germany and the Netherlands and – to a lesser extent – France, expire without renewing them .

Then, with the money it collects, it supports the bonds of Greece and Italy. In particular, at the end of July, the ECB held Greek bonds amounting to 39.7 billion euros, of which 1.1 billion euros were purchased in the months of June and July. Correspondingly, the ECB now holds 289 billion euros in Italian bonds, of which 9.76 billion euros were also bought in the June-July period.

On the contrary, the German bonds held by the ECB decreased by 14.3 billion euros in the two months of June-July and now there are 398.4 billion euros in the portfolio of the ECB. French bonds for the same period decreased by 1.2 billion euros and Dutch bonds by 3.38 billion euros.

The next phase

So far, the plan has been a success. Although Greece did not proceed with any “normal” bond issuance during this period, Greek bond yields were held and Greek bond investors should feel satisfied. However, in the next phase, which will start next month with the second increase in euro interest rates and the peak of the energy crisis, the ECB’s new tool will be tested in tougher conditions.

As things stand so far, Germany, France and Italy will face shortages in the energy resources necessary to keep their economies running smoothly. There are not a few investment houses and independent think tanks which estimate that at the end of the year the Eurozone will enter a recessionary environment, which will be caused by the large and not the small economies of the Union. In such an environment, it is a given that European bonds will come under new pressures. These pressures will be greater in countries such as Greece, which does not yet have an investment grade, and more so Italy, which is much more exposed to borrowing from the markets.