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ECB Interventions in Distressed Sovereign Debt Markets: The Case of Greek Bonds

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Abstract

We study central bank interventions in times of severe distress (mid-2010), using a unique bond-level dataset of ECB purchases of Greek sovereign debt. ECB bond buying had a large impact on the price of short and medium maturity bonds, resulting in a remarkable “twist” of the Greek yield curve. However, the effects were limited to those sovereign bonds actually bought. We find little evidence for positive effects on market quality, or spill-overs to close substitute bonds, CDS markets, or corporate bonds. Hence, our findings attest to the power of central bank intervention in times of crisis, but also suggest that in highly distressed situations, this power may not extend beyond those assets actually purchased.

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Fig. 1

Sources: Greek Official Government Gazette Issues 413 V/2012, 574 V/2012, and 705 V/2012, Bloomberg, authors’ calculations

Fig. 2

Sources: Greek Official Government Gazette Issues 413 V/2012, 574 V/2012, and 705 V/2012, Bloomberg, authors’ calculations

Fig. 3

Sources: Greek Official Government Gazette Issues 413 V/2012, 574 V/2012, and 705 V/2012, Bloomberg, authors’ calculations

Fig. 4

Sources: Greek Official Government Gazette Issues 413 V/2012, 574 V/2012, and 705 V/2012, Bloomberg, authors’ calculations

Fig. 5

Sources: Greek Official Government Gazette Issues 413 V/2012, 574 V/2012, and 705 V/2012, Bloomberg, authors’ calculations

Fig. 6

Sources: Thomson Reuters, authors’ calculations

Fig. 7

Sources: (panel a) Bloomberg, authors’ calculations; (panel c) Thomson Reuters, authors’ calculations

Fig. 8

Sources: Greek Official Government Gazette 413 V/2012, 574 V/2012, and 705 V/2012; Markit; authors’ calculations

Fig. 9

Sources: Greek Official Government Gazette 413 V/2012, 574 V/2012, and 705 V/2012; Markit; authors’ calculations

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Notes

  1. The ECB only published weekly aggregate purchase amounts as well as a one-time snapshot of the country composition of the bond portfolio acquired through the SMP. See http://www.ecb.int/press/pr/date/2013/html/pr130221_1.en.html.

  2. The ECB purchases were large and very concentrated and they took place at a time of high uncertainty and risk aversion. In such an environment limits to arbitrage should matter most (Vayanos and Vila 2009).

  3. We are grateful to Sergi Lanau for pointing us to this source. Technically, the gazette shows the results of the “silent” ECB debt swap. On February 17, 2012, all bonds held by the ECB and other central banks were exchanged into new bonds which were exactly the same as the old ones (same nominal amount, coupon payments, and repayment dates) but which were given a new set of serial numbers (ISINs).

  4. In this period, the amount of outstanding debt was essentially fixed since the Greek government was excluded from capital markets from April 2010 onwards, making the bond supply shocks caused by the ECB even more pronounced. See Sect. 2 and Appendix A for a discussion on the timing of purchases.

  5. The OMT program would focus, in particular, “on sovereign bonds with a maturity of between 1 and 3 years.” http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html.

  6. See also Gürkaynak and Wright (2012), for a survey.

  7. Acharya et al. (2014) show how a sovereign-bank doom loop can limit the trading and investment abilities of domestic banks.

  8. The impact of the Federal Reserve’s LSAP is analysed in Gagnon et al. (2011), Krishnamurthy and Vissing-Jorgensen (2011), Bauer and Rudebusch (2013), D’Amico et al. (2012), Hamilton and Wu (2012), Cahill et al. (2013) and D'Amico and King (2013). For evidence on the UK’s QE, see Joyce et al. (2011) and Joyce and Tong (2012). More general papers on the relation of bond prices and bond supply include Bernanke et al. (2004), Greenwood and Vayanos (2010, 2014), and Krishnamurthy and Vissing-Jorgensen (2012).

  9. Our estimated total program effect in mid-2010 (− 185 to − 75 basis points) compares to a total impact of about − 30 to − 50 basis points for the first LSAP program of the Federal Reserve, according to D’Amico and King (2013), and approximately matches the announcement effect of QE in the UK, according to Joyce and Tong (2012). Interestingly, the latter find no bond-specific effects of purchases on yields (no “own purchase” effect like us). See the survey by the IMF (2013) for a comparison of the impact of bond purchase programs.

  10. In addition, Beetsma et al. (2014) examine the effect of aggregate weekly SMP purchases in a study of the effect of news on the intraday volatility and covariance of Euro area bond yields and find a mitigating effect.

  11. Our intraday results for May 10, 2010, are consistent with Doran et al. (2014), since we also find purchases to have halted price declines over the trading day, but only for targeted bonds.

  12. Conversely, it may also help explain why we do not find a liquidity impact of ECB purchases although—consistent with the findings of De Pooter et al. (2015) and Eser and Schwab—bid-ask spreads declined on average during the intervention period. This decline appears to have reflected SMP and EFSF announcements, which lowered perceived default risk, rather than bond-level intervention.

  13. For a contemporaneous account see, Nelson et al. (2010).

  14. See http://www.ecb.int/ecb/legal/pdf/l_12420100520en00080009.pdf.

  15. See Doran et al. (2014), Eser and Schwaab (2016) and for a contemporary view, Hume (2010).

  16. See “Statement by the President of the ECB” from 7 August 2011: http://www.ecb.europa.eu/press/pr/date/2011/html/pr110807.en.html. Ghysels et al. (2017), Wall Street Journal, 8/8/2011 “ECB Buys Italian, Spanish Bonds”, and Zerohedge, http://www.zerohedge.com/news/ecb-purchases-%E2%82%AC22-billion-italian-spanish-bonds-past-week-highest-weekly-amount-ever.

  17. See IMF (2013) for an overview.

  18. See http://www.ecb.int/press/pr/date/2010/html/pr100510.en.html.

  19. In a related Q&A in February 2012, ECB president Draghi reconfirmed this as follows: “Question: Will you hold the bonds in your SMP program until maturity? Draghi: We have no reason to change this commitment. If we do, we will tell you.” http://www.ecb.int/press/pressconf/2012/html/is120209.en.html.

  20. In addition, the exchange involved 36 instruments issued by three public entities: Hellenic Railways, Hellenic Defence Systems, and Athens Urban Transport Organisation (“guaranteed titles”), with a volume of €9.8bn. In this paper, we ignore these quasi-sovereign bonds because none appears to have ever been purchased under the SMP, presumably because they were far less liquid, and perhaps also because their legal properties would have complicated pricing comparisons with sovereign bonds (Buchheit and Gulati, 2013). Although eligible under the SMP policy, they may not have been considered for intervention in practice and are hence suspect as controls. In any case, with few exceptions, no yield information is available for these bonds during our sample period.

  21. In addition, five foreign-law bonds (including four bonds of which the ECB had bought small amounts) were swapped into Greek law bonds. In one case, held by one of the other Eurosystem central banks, the currency of denomination was swapped from US dollars to Euros.

  22. Specifically, we draw on the government gazette issues “413 V/2012”, “574 V/2012”, and “705 V/2012”, published in February 2012 (in print only). We are grateful to Sergi Lanau for pointing us to this source.

  23. 30 of these 31 bonds were among the 81 bonds that were subsequently restructured. The remaining bond was a floating rate note that was swapped by the ECB but escaped the debt restructuring.

  24. Specifically, we lack information on bonds maturing between May 2010 and February 2012 (less than 10% of total Greek bonds outstanding). Bonds at the very short-end of the yield curve are therefore excluded from our analysis, including four bonds that were trading on secondary markets in 2010 (see Appendix A).

  25. Specifically, we use Bloomberg’s CBBT pricing source whenever available and the BGN source otherwise.

  26. Alternative data sources that we accessed and compared include J.P. Morgan and data from the trading platform MTS. Both sources had only very restricted coverage of Greek sovereign bond prices in 2010.

  27. Similar to Calice et al. (2013) we compute mid-yields and mid-prices as an average of bid and ask quotes from generic identifiers (TICs) on each bond since these are the most liquid source and combines information from multiple dealers. The alternative would be to use dealer-specific quotes, but that would imply an arbitrary choice on which dealer data to use.

  28. Thomson Reuters only provides data on “quote depth” (amounts offered/traded) for very few bonds.

  29. The exception was one English law bond maturing in 2014, of which the ECB held a small amount.

  30. This may be more appropriate than OLS because the dependent variable is a fraction bounded between 0 and 1. See Papke and Wooldridge (2008) and Ramalho et al. (2011).

  31. The results are similar when using a Svensson-type yield curve.

  32. As mentioned above, the ECB’s collateral policy might have influenced which bonds were targeted, but the policy itself is very unlikely to bias the estimated SMP purchase effects in May and June 2010. Although collateral use of Greek sovereign bonds at the ECB sharply rose in the run-up to the IMF/EU/ECB rescue in May 2010, it fell during the SMP intervention period (see Drechsler et al. 2016). Moreover, adding a dummy variable for bonds that were eligible as ECB collateral as of 2010 to the regressions did not affect our results.

  33. After concluding our analysis, we learned of four Greek sovereign bonds that were neither among the 31 bonds purchased by the ECB nor among the 81 bonds included in the Greek debt exchange of 2012 (which is why we originally missed them). The ISINs of these bonds are GR0514017145, GR0326040236, GR0514018150 and GR0514019166. For three of these bonds, yield data is available. We have verified that adding these bonds to our sample does not appreciably change the regression results reported below.

  34. To avoid bias, we treat a bond of which the ECB bought only 0.2% as non-targeted (ISIN: GR0138001673).

  35. See Doran et al. (2014). Bond prices at 9:00 a.m. on May 10 can therefore be interpreted as pre-purchase but post-announcement prices.

  36. This equation ignores the effect of purchases of “close substitute” bonds (meaning bonds of similar maturities) on (see D’Amico and King 2013). This is not essential for the discussion that follows, and also turns out to be less empirically relevant in the context of the SMP than in the context of quantitative easing. We consider the effects of close substitutes in Sect. 5 below.

  37. If investors believed, at the time, that Greece had a deep solvency problem that would not necessarily be resolved by the SMP and the EU-IMF program, the SMP might have been viewed as “kicking the can down the road”. This would have implied a smaller drop in yields of long bonds compared to short bonds.

  38. For example, assume that we are in the LSAP case in which actual interventions are fully observed and no purchases are expected beyond the intervention period. In this case, we are back to Eq. (2) which, after decomposing E0(q i ) into its mean, \(\tilde{E}_{0}\), and deviation from the mean, \(\tilde{E}_{0,i}\), can be rewritten as:

    $$\Delta y_{i} = - \beta \bar{E}_{0} + (\beta + \theta )q_{i} - \varPhi \left( {\tau_{i} } \right) - \beta \tilde{E}_{0,i} + \varepsilon_{i}$$
    (3′)

    If there are no other sources of misspecification—in particular, if \(\tilde{E}_{0,i} = 0\) or uncorrelated with q i , and ɛ i is i.i.d—then an OLS estimate of (3′) of the coefficient on bond purchases will identify the total effect of intervention (β + θ), rather than just the direct purchase effect θ.

  39. In the daily panel, we cannot rule out that serial correlation may result in downward-biased standard errors, even though we already cluster standard errors on the bond level in all specifications.

  40. Three bonds in our sample stop trading in late May and June 2010, after the first weeks of ECB intervention. The sample therefore drops from 40 to 37 bonds in regressions with longer time spans.

  41. We also included maturity squared, in line with model (3), but this variable never turned out as significant.

  42. In our context, the yield curve fitting error is likely to be mismeasured, given that the Nelson-Siegel and Svensson methods perform relatively poorly during times of distress, as shown by Härdle and Majer (2012) and Mesters et al. (2014) in the Eurozone context. This is likely to be especially true for Greece in 2010, with its inverted yield curve and the existence of two distinct curves: one for foreign-law and one for domestic-law bonds (see Fig. 4). Against this backdrop, we prefer using a simpler measure of pre-SMP yields.

  43. In this sample of 37 bonds, the purchase amount of €1 bn corresponds to a holding share of 16.6%. The quantitative impact of €1 bn purchases can therefore be computed by multiplying the average holding share with our estimated coefficient (16.6 * − 0.10) = − 1.66 percentage points).

  44. There is no yield data for 3 bonds in late June and early July of 2010. The panel is therefore unbalanced.

  45. Total return indices are not available off-the-shelf for Greek bonds, so that we compute them manually for each bond using Bloomberg bond price data as well as information on coupon and interest rate characteristics. The methodology is the same as in Andritzky et al. (2014) and the approach used for JP Morgan’s Emerging Market Bond Index (EMBI), of which Greece is a part since its 2012 restructuring.

  46. This includes the regression with Greek-law bond only and regressions based on Thomson-Reuters data for just 25 “highly liquid” bonds to allow the yield changes to be measured beginning 9:00 a.m. on May 10th (not shown). However, if one runs these regressions using a thinner set of controls or with two-stage least squares without controls, the ECB purchase variable again shows significance at the 1 or 5% level.

  47. Using a dummy variable for targeted bonds to construct the diff-in-diff treatment variable rather than ECB purchases (in %) leads to a coefficient of − 2.14, suggesting that, on average, yields of purchased bonds dropped by 214 basis points compared to the counterfactual (no purchases). This is just a bit higher than the implied total mean purchase effect when the continuous treatment variable (per cent purchased) is used.

  48. Note that this is very different from saying that the SMP was perceived to lower the probability of a Greek default, as it initially may well have. In Tables 3 and 4, the latter would be reflected in the regression constant and the maturity measure (in case of maturity-specific default risk) rather than in the coefficient measuring the impact of intervention. Note also that the expectation that ECB purchases of a specific bond might lower the loss-given-default of that bond relative to bonds not bought by the ECB would imply that the expected average loss-given-default might have increased as a result of ECB intervention, as any preferential treatment of the ECB (or the bonds owned by the ECB) would require a worse treatment of the remaining investors/bonds in order to reach a given debt relief objective. Again, this effect would be absorbed by the regression constant.

  49. This is clear both from statements by ECB officials (e.g. speech by José González-Páramo: http://www.ecb.int/press/key/date/2011/html/sp111125.en.html, emphasising that the SMP did not constitute quantitative easing) and from the fact that the ECB purchases were sterilised.

  50. According to the duration channel, central bank purchases may reduce the average duration of bonds held by private investors and, hence, lower the risk premiums required to hold long maturities. See Cahill et al. (2013) or Joyce and Tong (2012) for details.

  51. As explained in Appendix A we lack data on purchase amounts at the very short end of the yield curve. However, this is unlikely to drive our result. Indeed, we do not find the result on close substitute bonds to change when altering the maturity range included, i.e. when dropping short-end bonds with a maturity of less than 2, 3 or 5 years. The variable on close substitutes remains insignificant throughout.

  52. As of July 2014, the index consisted of 14 Greek corporate bonds. Only 3 of these were outstanding in 2010.

  53. Markit rates CDS quotes from a minimum of CCC to a maximum of AAA based on quantitative criteria, such as the number of distinct dealer quotes, as well as qualitative criteria on market liquidity and transparency (see Markit User Guide, June 2012).

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Acknowledgements

We are grateful to Bennet Berger, Alvaro Leandro, Adrian Rott and Maximilian Rupps for excellent research assistance, Christine Sheeka for helpful information on the MTS high-frequency data, Jonathan Lehne, Olga Ponomarenko, and Kristjan Piilmann for assisting us with the collection of Bloomberg data and Egor Gornostay for his careful fact-checking. We also thank the Editor, several anonymous referees, Henrique Basso, Benjamin Böninghausen, Giovanni Dell’Ariccia, Marcel Fratzscher, Thomas King, Sergi Lanau, Athanasios Orphanides, Seth Pruitt, Julian Schumacher, Bernd Schwaab, Andrei Shleifer, Linda Tesar, Julian Williams, and seminar participants at the ECB, the Federal Reserve Bank of Chicago, the Federal Reserve Bank of San Francisco, the Bank of Spain, the LSE Financial Markets Group, ZEW Mannheim, and the Universities of Frankfurt (Goethe), Mainz, Munich, and Santa Clara for helpful comments and suggestions.

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Authors and Affiliations

  1. Department of Economics, Kiel University, Kiel, Germany

    Christoph Trebesch

  2. Kiel Institute for the World Economy, Kiel, Germany

    Christoph Trebesch

  3. CEPR and CESIfo, Munich, Germany

    Christoph Trebesch & Jeromin Zettelmeyer

  4. Peterson Institute for International Economics, 1750 Massachusetts Avenue, NW, Washington, DC, 20036-1903, USA

    Jeromin Zettelmeyer

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Correspondence to Jeromin Zettelmeyer.

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This paper is forthcoming in the IMF Economic Review. Part of this paper was written while Trebesch was visiting the IMF. An early version of this paper was circulated under the title: “Deciphering the ECB Securities Market program: The Case of Greek Bonds”. The views expressed in this paper are those of the authors and not those of the institutions they are affiliated with.

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Trebesch, C., Zettelmeyer, J. ECB Interventions in Distressed Sovereign Debt Markets: The Case of Greek Bonds. IMF Econ Rev 66, 287–332 (2018). https://doi.org/10.1057/s41308-018-0051-y

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