ECB Halts Bond Buys for First Time Since August

The European Central Bank bought no government bonds at all last week, halting its controversial purchase program for the first time since it restarted it in early August.

Photo: Bloomberg | Getty Imgaes

The shut-down comes as policymakers gather in Brussels to finalize the second Greek bailout package.

The ECB has all but frozen it purchases of troubled euro zone debt over the last month and a half following a substantial improvement in key euro zone bond markets, but last week was the first one of complete dormancy since August when it ended a four month break in the program.

Last week's absence from the markets comes after a mere 59 million euros in purchases a week earlier. The total amount the ECB has spent since starting the program back in May 2010, remained at 219.5 billion euros.

The purchases have returned to the spotlight in recent weeks as the bank has come under pressure to help cut Greece's debt burden.

It has ruled out taking outright losses on the purchase program's Greek bond holdings, although it has said it is willing to forgo profits on the bonds and is mulling the option of haircuts on Greek debt held by central banks outside the program.

Critics of the 'Securities Markets program', as it is known, including Juergen Stark who recently quit the ECB over the purchases, argue they tread dangerously close to the ultimate ECB taboo of financing euro zone governments.

The ECB does not disclose details of what bonds it buys.

A major factor for the recent improvement in bond markets has been the ECB's injection of almost half trillion euros into the banking system back at the end of December. The cash has eased worries about banks' health

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[.SX7P  Loading...      ()   ] and fed hopes that some may be used to buy the bonds of under pressure governments. Banks have another opportunity to tap the facility next week.

Italian, French, Belgian and Irish borrowing costs have all fallen since the start of the year and those of Portugal have dropped sharply since the end of January. Spain had also enjoyed a blast of positive sentiment, but over the last two weeks the premium investors demand to buy Spanish debt has rising again.

The ECB remains at the center of a political tug-of-war as it — backed by Germany — continues to resist the earlier calls by France and Italy as well as the United States, Britain and Russia to be more aggressive in its buying.

Many economists see the ECB as the only institution with firepower to calm bond markets if the debt crisis worsens, but ECB President Mario Draghi and other top policymakers have continued to reject calls for the bank to ramp up its purchases.

Controversy surrounding the bond buys has intensified further over recent weeks with pressure rising on it to forgo profits as part of a deal to stabilize Greece's finances. The ECB has spent around 40 billion euros buying Greek debt.

The talks are still ongoing and are unlikely to yield a result until tonight's meeting of euro zone ministers at the earliest.

The ECB and the 17 euro zone national central banks buy the bonds under what the ECB calls its Securities Markets program (SMP). European laws forbid it buying the bonds direct from governments, but it gets round the restriction by buying them from banks and other investors on the open market.

It reactivated the program last August after a four-month break when Italy and Spain, two of the euro zone's biggest economies, began to get dragged into the eye of the debt crisis.

Since then it has spent around 140 billion euros, concentrating on those two countries' paper.

The amounts bought are reported by the bank every week but take two to three days to settle, meaning that when it is buying, the figures do not necessarily give a full picture.

As usual, the ECB will hold a 'sterilization' operation on Tuesday to neutralize the the bond buys create, a move it does by getting banks to put down 7-day deposits equaling what it has spent in total on bonds.