Blog Post

Chart of the week: the ECB’s power on Spanish and Italian bond yields

By how much can the ECB influence government bonds yields of Spain and Italy? The answer is ‘very significantly’, as the chart below shows. But the chart also shows that the impacts do not last for too long, as (at least up to July 2012) yields started to increase a few months after the various […]

By: and Date: October 29, 2012 Topic: European Macroeconomics & Governance

By how much can the ECB influence government bonds yields of Spain and Italy? The answer is ‘very significantly’, as the chart below shows. But the chart also shows that the impacts do not last for too long, as (at least up to July 2012) yields started to increase a few months after the various measures.

2-year and 10-year maturity government bond yields of Spain, Italy, and Germany, 2 January 2010 – 8 October 2012

Source: Datastream (yields) and ECB (dates); see the links to various announcements in the main text.

While it is impossible to isolate the direct impact of ECB measures, because various other decisions and events also shape market reactions, the chart does indicate that several major ECB announcements were followed by strong market reactions. An earlier post by Chiara Angeloni looked at the yield developments after four major events in 2012. Here we take a longer perspective by looking at various ECB announcements since 2010. The vertical lines (with capital letters on top) indicate the following dates:

A. 7 May 2010: The Heads of State of the euro area countries grant a support package for Greece. This Summit was followed by the extraordinary Economic and Financial Affairs (ECOFIN) Council meeting on 9 May 2010, endorsing “measures to preserve financial stability in Europe”, including financial assistance facilities, with a total volume of up to € 500 billion. The ECB announcement of the Securities Markets Programme (SMP), which aimed to normalise government bond yields in the name of monetary transmission, came a day later on 10 May 2010.

·         There was a spike in yields the days before, but the Euro Summit, ECOFIN and ECB announcements tempered the markets. In another Bruegel post, Guntram Wolff and Chiara Angeloni found that among the five major Euro Summits, the May 2010 had the largest impact on Spanish and Italian yields – which was possibly reinforced by the SMP announcement of the ECB. But they found that at the other major Euro Summits there was no systematic improvement in the bond yields, so we see no need to indicate their dates in our chart.

B. 29 November 2010: The Eurogroup and ECOFIN announce a financial assistance programme to Ireland.

·         This was not an ECB announcement, but we included it in our chart because after the announcement of the Irish programme, Spanish and Italian bond markets seem to have calmed for some time.

C. 7 August 2011: The ECB “welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms” and declares that “the ECB will actively implement its Securities Markets Programme

·         Market yields fell significantly, both at the 2-year and 10-year maturities.

D. 19 September 2011: The ECB reduces weekly purchases through the SMP

·         There was no particular announcement of ECB intentions, but weekly purchases slowed down after 19 September 2011. In the six weeks up to 19 September 2011, the stock of SMP holdings increased by (in € bn) 22, 14.5, 5, 13.5, 14, and 9.5, respectively. But after 19 September 2011, the weekly changes in SMP holdings were (in € bn) 4, 4, 2.5, 2, 4.5, and 4, respectively. After that, when yields increased significantly (see the chart), the weekly change in SMP holdings increased to € 9.5 bn during the week 7 November 2011. Yet it could not calm the markets.

E. 6 October 2011: The ECB announces the 2nd Covered Bond Purchasing Programme (CBBP), amounting to €40 billion.

·         This was the second ‘quantitative easing programme’ of the ECB, whereby the ECB started to purchase private sector securities (the first CBBP, amounting to €60 billion, run from September 2009 to June 2010). The CBBP did not trigger a positive reaction in government bond yields.

F. 8 December 2011: The ECB announces measures to support bank lending and money market activity, including two longer-term refinancing operations (LTROs) with a maturity of 36 months (the first operation is to be allotted on 21 December 2011, the second on 29 February 2012). Around this date, the ECB reduced again weekly purchases through the SMP.

·         This announcement contributed to a sharp fall in bond yields, despite the reduction in SMP purchases. Some commentators speculated that banks entered a carry trade, whereby they borrowed from the ECB at 1% interest rate and purchased higher yielding Spanish and Italian bonds.

G. 29 February 2012: The second 3-year LTRO

·         The second 3-year LTRO further pushed down the borrowing costs of Spain and Italy.

H. 22 March 2012: ECB’s President Draghi says the “worst of euro zone crisis over”.

·         Well, looking at what happened some weeks later, the worst of the euro zone crisis was clearly not over. Yet President Draghi also said that “but there are still risks”, and called governments to act, which proved to be insufficient: “Investor confidence is returning and the ECB hasn’t had to buy government bonds as a support for weeks. The ball is in the governments’ court. They must make the euro zone crisis-proof for the long-term.

I. 26 Jul 2012: ECB’s President Draghi’s speech on a new bond purchasing programme.

·         This speech acted like a magic wand: bond yields fell sharply without any actual intervention. The widely quoted sentences had an impact: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.  …   To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate.

J. 6 Sep 2012: The ECB’s announces the new bond purchasing programme, called Outright Monetary Transactions (OMTs), which will be unlimited in principle, will treat the ECB pari passu with other creditors, and will be based on clear conditionality (see our earlier post for a comparison of SMP and OMT and an assessment of the criticisms of the OMT here).

·         The actual announcement helped further.

Therefore, some ECB announcements had strong impacts on the government bond markets, but for not too long. Only time will tell the medium term impact of the most recent announcement of the OMT, which will primarily depend on the progress with other aspects of the euro-crisis. Since 6 September 2012, Spanish and Italian yields have increased somewhat, but they remained broadly at their level of early 2011. The current 2-year yields of about 2.4% for Italy and 3.2% for Spain look reasonable, but there would be scope for reduction in the 10-year yields, which currently are about 6% for Spain. How could this be done? For Spain, the application for a full macroeconomic adjustment programme would bring clarity and allow the ECB to prove that the OMT is real. Thereby, the application would help to lower longer maturity rates as well and therefore Spain may not need to draw much from the borrowing facility, but could continue to borrow from the market. The Spanish application would likely have a positive impact on Italy, yet domestic developments, such as progress with the reforms, the economic performance and the political outlook for the next election, will be crucial.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More by this author

Blog Post

Bank regulation in the European Union neighbourhood: limits of the ‘Brussels effect’

The EU model of financial market regulation is increasingly copied by third countries. In this context, the EU’s efforts to promote its model beyond its borders should take into account the underdevelopment of financial markets in many partner countries, and the often insufficient capacity of regulators and supervisors.

By: Alexander Lehmann Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: November 20, 2019
Read article Download PDF More by this author

Policy Contribution

Crisis management for euro-area banks in central Europe

Euro-area bank integration has decreased as post-financial crisis national rules require banks to hold more capital at home. It might be undermined further by bank resolution planning. Either a Single Resolution Board takes the lead for the entire banking group or independent local intervention schemes need to be developed for crisis resolution.

By: Alexander Lehmann Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: November 19, 2019
Read about event More on this topic

Past Event

Past Event

Better governance, better economies

This event will feature the presentation of the 2019 EBRD Transition report, which focuses on governance in the EBRD regions.

Speakers: Daniel Daianu, Beata Javorcik, Zsuzsanna Lonti and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Press Club Brussels Europe, Rue Froissart 95, 1000 Brussels Date: November 19, 2019
Read about event More on this topic

Past Event

Past Event

Improving regulatory policy formulation and institutional resilience in Europe

Are large differences in the resilience of individual economies related to differences in the quality of country-level institutions that shape the absorption and response to these shocks? At this event we'll discuss the evolution of labour markets, and the role of institutional design and good process.

Speakers: Arup Banerji, Maria Demertzis, J. Scott Marcus, Céline Kauffmann and Rogier van den Brink Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 13, 2019
Read article More on this topic More by this author

Opinion

Scholz's improved plan to complete the banking union

The head of German Finance has written in the Financial Times defending the need to deepen the banking union, now London is about to leave

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: November 8, 2019
Read article Download PDF More on this topic

External Publication

A Primer on Developing European Public Goods: A report to Ministers Bruno Le Maire and Olaf Scholz

This report was prepared for the French and German Ministers of Finance.

By: Jean Pisani-Ferry and Clemens Fuest Topic: European Macroeconomics & Governance Date: November 8, 2019
Read article Download PDF

Policy Contribution

How to make the European Green Deal work

Ursula von der Leyen has proposed a European Green Deal that would make Europe climate neutral by 2050. With this Policy Contribution, the authors provide a first analysis on how to make this initiative work.

By: Grégory Claeys, Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance Date: November 5, 2019
Read article More on this topic

Opinion

Politics, not policy will help Lagarde save the eurozone

Her success at helm of Europe’s central bank will depend on her ability to mend fences with hawkish policymakers.

By: Guntram B. Wolff and Rebecca Christie Topic: European Macroeconomics & Governance Date: November 4, 2019
Read about event

Past Event

Past Event

What industrial policy for the European Green Deal?

This event will be a workshop, aiming to look into the design and implementation process of the European Green Deal. Each session will be introduced by three short presentations aimed at launching the discussion among all workshop participants.

Speakers: Jos Delbeke, Bertrand Déprez, Markus Hess, Laura Piovesan, Megan Richards, Simone Tagliapietra, Mary Veronica Tovšak Pleterski, Kurt Vandenberghe and Reinhilde Veugelers Topic: Energy & Climate, European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 4, 2019
Read article More by this author

Podcast

Podcast

How to Spend it

Can governments make their fiscal policy go further? And are they trusted enough to try? This week The Sound of Economics asks if the quality of public spending is as important as the quantity.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: October 23, 2019
Read article More on this topic

Blog Post

Talking about Europe: La Stampa 1940s-2010s

An on-going research project at Bruegel seeks to quantify and analyse printed media discourses about Europe over the decades since the end of the Second World War. In this third blogpost, we carry out the exercise on 9.9 million articles from an Italian daily newspaper, La Stampa. The trend increase in the frequency of European related articles, previously found looking at the French and German press, is confirmed in the case of Italy.

By: Enrico Bergamini, Emmanuel Mourlon-Druol, Francesco Papadia and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: October 22, 2019
Read article More on this topic More by this author

Podcast

Podcast

The Art of the Brexit Deal

An emergency Brexit podcast to dissect today's tentative deal between the EU27 and the British Government, featuring Maria Demertzis, Guntram Wolff and Nicholas Barrett

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 17, 2019
Load more posts