This site is for archive purposes. Please visit for latest updates
Go to Top

ECB Sovereign Bond Purchases Remain Unlikely

Kirkegaard, F. J. (2014) “ECB Sovereign Bond Purchases Remain Unlikely“, Peterson Institute for International Economics, 01 October.


The European Central Bank (ECB) is reportedly on the cusp of another round of euro area sovereign bond purchases. Proponents of such a move say it is necessary if the ECB is to grow its balance sheet by the €750 billion to €1 trillion signaled by its president, Mario Draghi, on September 4. Yet it is probably a mistake to expect this action soon.

True, euro area headline inflation has fallen to 0.3 percent [pdf], well below the ECB’s inflation mandate of close to but below 2 percent in the medium term—and possibly only one external shock away from outright deflation. But that does not mean that the ECB governing council majority is feeling any urgency. Draghi has not provided a timetable for the balance sheet expansion, saying that the new targeted longer-term refinancing operations (TLTROs) will unfold over two years. It will take until December to even begin to gauge its impact on the balance sheet.

The total balance sheet expansion will result from three channels—the new 4-year TLTROs, renewed purchases of covered bonds, and the ECB’s new asset-backed securities (ABS) purchase program. With the first TLTRO generating just €82.6 billion in new demand from banks and just over €63 billion in net new demand for long-term ECB loans, the ECB faces nearly €350 billion in maturing LTROs in December 2014 and February 2015. The new TLTROs must exceed this tally before generating a net expansion of the ECB balance sheet in the coming months. Indeed, the total scale of the ECB’s longer-term refinancing operations and the balance sheet as a whole might actually shrink before early 2015.

But additional lending-benchmarked TLTROs are planned for each quarter from March 2015 to June 2016, offering euro area banks additional access to cheap long-term ECB loans to accommodate their rising loan demands. Aggressive new balance sheet expansion from TLTRO-measures is thus not likely until after early 2015. Thus the net ECB balance sheet expansion in the short-run will come from one of two sources. The first would be renewed purchases of covered bonds, where the program size should bigger than the ECB’s two earlier covered bond purchase programs, which were put in place to stabilize specific bond market segments. The total amount of bond purchases amounts to only €45.8 billion.


Relevant posts: