ECB Overbuys Italian Debt to Funnel Virus Aid Where Needed

(Bloomberg) -- The European Central Bank skewed asset purchases under its new emergency program toward Italy, underscoring the institution's crisis-fighting role in the face of the coronavirus outbreak.

The ECB bought 37.4 billion euros ($42 billion) of Italian debt since the plan started in late March, it said on Tuesday when issuing details for the first time. That means it bought a greater share of the country's bonds than the size of Italy's economy and population -- general guidelines for the allocation of purchases -- would have implied.

Purchases of French debt significantly undershot the ECB's so-called capital key.

The numbers shine a light on how much more flexible the ECB's 750 billion-euro crisis program is in comparison to its regular quantitative-easing plan. The latter, which was recently questioned by Germany's constitutional court, is constrained by limits on how much of each nation's debt the central bank can hold, and a rule that requires purchases to be allocated proportionately across the region.

While that rule technically still holds for the pandemic program, policy makers have stressed it won't prevent them in the short run from channeling liquidity to those countries that need it most.

Bank of France Governor Francois Villeroy de Galhau has said the ECB should go even further and remove the capital key from the program -- not just temporarily but altogether -- because it's an “uncalled-for constraint.”

Italian bond yields had risen sharply amid doubts about how the government would pay for battling the recession caused by the virus. They've fallen significantly since the ECB launched its purchases and European Union politicians moved closer to a joint fiscal response that may distribute some of the costs across the 27-nation bloc.

ECB bought 4.7 billion euros of Greek debt so far, after it decided to include the country's sovereign bonds in its emergency-purchase program despite the fact that Greece still carries non-investment grade. The move has eased investors' fears, with yields on 10-year notes dropping from around 4% before the announcement of the scheme to around 1.5% on Tuesday.

The weighted average maturity of the ECB's public-sector pandemic portfolio stood at 6.3 years, compared with 7.2 years for QE holdings.

The ECB spent 35.4 billion euros on commercial paper, and acquired more than 80% of that debt on the primary market. Total purchases under the emergency plan amounted to 234.7 billion at the end of May.

Policy makers have repeatedly said they're ready to increase the size of the pandemic program and extend if it needed. Most economists surveyed by Bloomberg expect the ECB to step up purchases at its meeting on Thursday.