Welcome to Outlook, the Repubblica newsletter that analyzes the economy, finance and international markets.
What I know about financial markets and the economy I learned by working for one of the main stock exchanges on Piazza Affari, the companies that buy and sell securities on the stock exchange for large investors. I took it with me when I became a journalist for La Repubblica where, among other things, I covered investigations and major scandals such as that of Parmalat, helping to unmask its false financial statements. Every Wednesday we will talk about listed and unlisted companies, personalities, institutions, scandals and investigations linked to this world. If you want to write to me, my email is [email protected]. Enjoy the reading
Walter Galbiati, deputy director of Repubblica
The fear that the end of purchases by the European Central Bank of government bonds in the euro area would trigger a crisis on bond trading, especially for highly indebted countries like Italy, this has not materialized at the moment.
What happened. From mid-2022 to today, the ECB has reduced its balance sheet by 2,000 billion euros especially through a reduction in government bonds in the wallet. 1) Part of these were kept as loan guarantees granted to the banking system 2) another part was instead fruit of ECB purchases carried out to support the emissions of euro area countries during the various crises that occurred from 2015 onwards and culminated with the Covid pandemic.
The rise in rates. Today, with the monetary tightening underway, the loans granted to banks by the ECB have begun to decrease drastically and the collateral securities have returned to the marketmore the purchase of government bonds was eliminatedby no longer reinvesting the ECB in maturing securities as part of its purchase programs, the Public sector purchase programme (PSPP), launched for the public sector from March 2015 until December 2018, and continued with the repurchase of maturing securities until July 2023. And the Pandemic emergency purchase programme (PEPP), activated for the pandemic emergency until the end of 2022, and then switching only to reinvestment in maturing securities until the end of 2024.
How many Italian bonds had the ECB purchased? Through these two programs in 2022 the ECB has almost reached the point of purchasing on the secondary market 77% of Italian government bond issuescame down suddenly to 8.7% in 2023 et al 7.6% for the current year. A significant reduction that was triggered in a scenario of strong emissions by many governments, including the Italian one, struggling with the refinancing of their debt.
Italy and the problem of placing government bonds without the umbrella of the ECB
October 18, 2023
Who bought instead of the ECB? The demand is legitimate because the auctions were far from empty, on the contrary, they were subscribed for much larger quantities than the offer. And two types of buyers have emerged, foreign investors And the families.
Foreign investors. According to data published by the ECB, foreign investors are nothing new, because they have always been among the largest buyers of government bonds in the euro area, with a share that before the start of the ECB’s purchase programs was around 40% of total emissions. Their return was easily predictable, driven above all by the rise in yields.
Yet despite the purchases, they did not return to pre-2015 levels, but after falling to a minimum of around 20% in 2022, they began to rise again to reach a share of just over 25% at the end of 2023. Their preferences went to European bonds from countries with the best ratings, such as Germany and the Franceand to a lesser extent in Italy and Spain.
The families. What amazed the ECB analysts most was the response of small investors whose purchases quickly returned to the level before the launch of the public sector purchasing programmes. It was at 3.5% and has returned to this level.
Two factors drove families’ appetite for bonds: 1) i high yields guaranteed by the rise in rates, to twenty-year highs 2) the emissions designed and built for retail (like the Btp Valore in Italy) at a time when banks have left the returns on the liquidity deposited on zero current accounts. All of this, moreover, at a time when the increase in savings that occurred during the pandemic meant that families had more money available to invest.
The Italian scenario. This trend is confirmed by the data from Bank of Italy relating to the composition of the Italian debt. The most active bond buyers in 2023 were precisely families and non-financial investors who bought some for 121.6 billion more, up 3.9% compared to 2022, and foreign investors for 51.1 billion up by 0.8%, numbers that appear even more significant when compared with the purchases of Bank of Italy and banks (including investment funds) fell by 24 and 39.5 billion respectively.
The tightness of the system. The markets, therefore, continued to function well, maintaining the ability to buy or sell bonds intact, as demonstrated by the Good confirmed relationship between volatility and liquidity: in times of crisis when the former increases, as in cases where interest rates are raised, the latter should worsen. “This – explains a report from ECB – this is what happened in March 2020, at the beginning of the pandemic, when euro area bond markets suffered serious disruptions due to the drastic deterioration of liquidity and the decoupling from volatility”. A situation which, however, did not occur in this period of budget normalisation.
Why did it work? According to ECB experts, there are three reasons.
1) First, timely communication of the reduction of the Eurosystem’s balance sheet has facilitated the planning and adaptation of market operators, such as banks, insurance companies and hedge funds. Reducing the balance sheet in a predictable and gradual manner supported orderly market conditions.
2) Secondly, the bond issuers they strategically changed their behavior: both governments and private companies reacted to the new context initially shortening deadlines of their bonds and some have issued investment products dedicated to retail investors.
3) Finally, the banks who oversaw the emissions they played a fundamental role in ensuring that secondary markets remained liquid and efficient. Since the start of the ECB’s balance sheet reduction, they have mobilized sufficient space on their balance sheet which has facilitated the buying and selling of bonds between investors in the secondary market.
But the question now is: What will happen when interest rates start to fall? Beyond the technical measures, there is no shadow of a doubt that great help in the placement of securities came from yields. The hope of those who sell is that rates do not return to zero because the quantity of securities to be replaced is still enormous. In February 2024, the European Central Bank still had 405 billion in Italian securities in its portfolio, relating to the PSPP programme, and another 285 billion relating to the PEPP, equal to 690 billion, i.e. just over 24% of the Italian public debt.
