European Central Bank: Securities Markets Programme

The Eurozone struggled during the escalation of the sovereign debt crisis in 2010. In order to aid malfunctioning securities markets, restore liquidity, and enable proper functioning of the monetary policy transmission mechanism, the European Central Bank (ECB) instituted the Securities Markets Programme (SMP) on May 9, 2010. This program enabled Eurosystem central banks to purchase securities from entities in Greece, Ireland, Portugal, Italy, and Spain. The program ended on September 6, 2012, and evaluations of its effectiveness are mixed.

The European Union was adversely impacted by the escalation of the sovereign debt crisis, and the Eurozone struggled with malfunctioning securities markets and a lack of market liquidity.

As part of its suite of responses to the financial crisis, the European Central Bank (ECB) launched the Securities Markets Programme (SMP) on May 10, 2010, to address the lack of demand for sovereign debt issued by certain countries.

SMP purchases were conducted by Eurosystem central banks and proceeded in two main waves. The first dealt with government bonds from the secondary markets of Greece, Ireland, and Portugal, and the second (which began on August 7, 2011, after a period of inactivity) expanded the program’s jurisdiction to deal with government bonds from Italy and Spain. During the second wave, central banks continued to purchase securities from Ireland and Portugal, but Greece was not included in this new wave of transactions.

The program ended on September 6, 2012 and was replaced by the Outright Monetary Transactions (OMT) program. At that time, purchases made under the SMP totaled €218 billion. All bonds purchased under the SMP were to be held until maturity; as of October 26, 2018, the SMP portfolio held nearly €73 billion at amortized cost.

A comprehensive evaluation of the SMP is difficult to conduct because although the program is similar to asset purchase programs, it differs from them in several significant ways, and as such cannot be evaluated fully by existing frameworks. As such, reviews of the SMP’s effectiveness are mixed and dependent upon the model used by the author(s). All evaluations find that the SMP did have some impact on government bond yields, but it is important to note that as the purchases were conducted at the height of the sovereign debt crisis, it is difficult to isolate whether yields rose despite the program or due to other interfering factors. Additionally, the SMP was a politically controversial program.

The SMP was a politically controversial program, and its proposal was met with mixed reviews within the ECB’s Governing Council. Axel Weber, then the president of the Bundesbank, publicly criticized it.^FNWeber’s public criticism of the SMP was surprising as, at the time, he was considered the “default favorite” to succeed Jean-Claude Trichet as president of the ECB. However, he spoke out against the SMP on multiple occasions, including at a speech in New York, where he stated, “As the risks associated with the SMP outweigh its benefits, these securities purchases should now be phased out permanently” (Ewing 2010). When the program was expanded for its second iteration in August 2011, Jürgen Stark (a German member of the ECB’s Executive Board), publicly stated his opposition to the program, and subsequently announced his resignation from the Executive Board in September 2011.^FNStark had opposed the bond-buying program since its inception; while the official ECB statement on his resignation cited “personal reasons,” “those familiar with his thinking cited his wide-ranging worries about steps being taken by the ECB and other central banks globally” (Atkins et al. 2011). Gibson, Hall, and Tavlas (2016) proposed that “such opposition to the program, especially since it came from members of the Governing Council who were from the euro-area’s largest economy, may have affected its effectiveness,” and note the existence of press reports issued at the time that questioned the SMP’s future.

Notably, and unlike other central bank asset purchase programs, SMP purchases were conducted during a sovereign debt crisis—in fact, during the most acute points of the debt crisis and in the markets most impacted by the crisis, which sets the program apart from other asset purchase programs such as the Fed’s large-scale asset purchases and the Bank of England’s quantitative easing (Eser and Schwaab 2016). The fact that the interventions were carried out in periods of such stress must be considered in the program’s evaluation (Manganelli 2012).

Additionally, the SMP program was fully sterilized, as the ECB did not want the program to interfere with its monetary policy goals; at the time, the ECB was focused on controlling inflation. This sets the program apart from the Fed’s and Bank of England’s asset purchase programs, which sought to promote accommodative monetary policies under the guise of quantitative easing.

Eser and Schwaab, two ECB economists, found that “the SMP had a significant average [yield] impact per €1 billion of bond purchases in all the stressed euro area countries.” They used time series panel data regression to examine the yield impact of SMP purchases and dispute the idea that the SMP was ineffective because yields rose as the purchases were being conducted. Rather, they argue, simple and common regression-based techniques that examine yield changes “neglect the presence of common factors, such as the escalating sovereign debt crisis [which] partly explain … the rising yields” (Falagiarda and Reitz 2015).

Their framework examines whether, after controlling for other variables, yields in markets subject to the SMP rose less than yields in markets where purchases were not undertaken. While noting that additional factors need to be taken into account for more specific calculations in the future, they determine that “yield changes and SMP purchase amounts at a daily frequency are positively correlated for most SMP countries when interventions took place,” and that Greece and Portugal particularly benefited from the program (Eser and Schwaab 2016).

Ghysels et al. (2017)^FNThree out of four of this paper’s authors were affiliated with the European Central Bank at the time of publication. found that “SMP interventions succeeded in reducing yields and volatility of government bond segments of the countries under the program” (Falagiarda and Reitz 2015). They used high-frequency data on SMP purchases and sovereign bond quotes and found that the SMP was, in fact, effective at reducing yields on government bonds in the countries under the program. They write that “the mere announcement of the central bank intervening in the secondary market had an immediate and obvious impact on government bond yields and spreads,” noting that spreads on 10-year Greek government bonds fell by more than 400 basis points on May 9, 2010 (the day the program was formally announced), while spreads on Italian and Spanish bonds fell by almost 100 basis points on August 8, 2011, after the ECB released an announcement detailing the second wave of purchases.

Ghysels et al. used a vector autoregression model to calculate their evaluation of the SMP intervention. Their estimates show that the SMP interventions effectively dampened the upward pressure on yields of government bonds for all countries under the program except Greece, and that this dampening impact persisted in a notable way for another day in many countries. They also found that SMP purchases had a statistically significant dampening impact on yield volatility for most of the countries and various maturities under the program (Ghysels et al. 2017).

De Pooter, Martin, and Pruitt found “statistically significant stock and flow effects on sovereign bonds liquidity premia in response to official purchases” (Falagiarda and Reitz 2015).

De Pooter, Martin, and Pruitt (2015) developed an asset-pricing model to examine the SMP’s impact on peripheral European bond yields, particularly on the liquidity premium component of yields. They concluded that “some market commentary claimed that the SMP was a failure because a large number of consecutive purchases were deemed necessary, yet peripheral bond spreads often rose soon after the ECB stepped out of the market.” They further addressed criticisms over the ECB’s repeated entry into sovereign bond markets, noting that official government purchases can crowd out private sector investment, necessitating a brief wait until market participants look to sell more bonds and government reentry is viable. Overall, they concluded that this implies “the ECB’s repeated entry into sovereign bond markets was a necessary feature of their targeting liquidity premia, not an indication of the SMP’s failure” (De Pooter, Martin, and Pruitt 2015).