Investors will not have to contribute a single euro to finance the vast budget deficits of eurozone governments next year, according to analysts who forecast that the European Central Bank will buy a greater quantity of debt than all the new bonds hitting the market.
Draft budget plans published by EU member states earlier this month showed that deficits are expected to remain sky high even as economies rebound from the effects of the Covid-19 pandemic.
But, according to calculations by Citigroup, ECB purchases will more than cover the extra cash that governments need in 2021 — even if the central bank does not scale up its €1.35tn emergency bond-buying programme by another €500bn in December as is widely expected. Christine Lagarde, the ECB’s president, hinted at a policy-setting meeting on Thursday that further stimulus is on the way.
The projections underscore how the ECB is propping up demand for bonds across the currency bloc, despite a flood of new issuance, pushing borrowing costs for member states close to all-time lows.
Erik Nielsen, chief economist at UniCredit, said the ECB had made it “very clear” that it intends to buy as many bonds as needed to prevent monetary conditions from tightening for all eurozone governments. “The thing with the debt is that as long as it sits on the central bank’s balance sheet, it doesn’t cost anything,” he said, referring to the way that much of the interest paid to the ECB by governments is returned to national treasuries via dividends from their own central banks.
Citi is expecting bond sales of €1.2tn next year, down just slightly from the record total pencilled in for 2020.
Maturing bonds and interest payments will then reduce the net new issuance to €405bn. The ECB is expected under its current plan to buy €460bn on the secondary market where the bonds trade, which means investors are actually getting back a total of €55bn. That figure rises to €343bn if the bond-buying programme is expanded.
How investors will end up getting back €55bn next year
Expected eurozone government bond sales in 2021
Issuance next year after accounting for maturing bonds and interest payments
Amount the ECB is expected to buy on the secondary market under its current plans
“The ECB is swallowing up all the supply,” said Iain Stealey, international chief investment officer for fixed income at JPMorgan Asset Management. “The size of their programmes outweighs anything to do with fundamentals. It’s a completely technically-driven market now.”
ECB buying will be most supportive for Italian bonds next year, outstripping the net supply of debt by €38bn, according to Citi strategist Puja Sawant.
Eurozone members will collectively run a deficit of just under €700bn, or 6 per cent of GDP, in 2021, down from 8.9 per cent this year, according to a Financial Times analysis of the draft budgets.
But governments will not need to raise that full figure from bond markets, because they will receive some funding from the EU itself.
Brussels plans to massively scale up its own borrowing efforts to help fund member states’ response to the crisis, and started the process this month with a heavily-oversubscribed bond sale.