Public Sector Purchase Programme

Public Sector Purchase Programme
Name	Public Sector Purchase Programme
Type	Quantitative easing
Issuer	European Central Bank
Country	Eurozone
Established	9 March 2015
Ended	31 December 2018

Public Sector Purchase Programme. It was a large-scale quantitative easing initiative launched by the European Central Bank in response to persistently low inflation and the risk of deflation within the Eurozone. The program involved monthly purchases of sovereign and agency debt securities on the secondary market, aiming to lower interest rates, stimulate economic growth, and return inflation towards the ECB's target. It formed a core component of the ECB's expanded asset purchase programme, which also included the Corporate Sector Purchase Programme and the Asset-Backed Securities Purchase Programme.

Background and objectives

The announcement of the program by Mario Draghi in January 2015 came after a prolonged period of economic weakness following the European debt crisis and the Great Recession. Key objectives were to counter the threat of a deflationary spiral, similar to the experience of Japan in the 1990s, and to support the transmission of monetary policy across all Eurozone member states. The ECB had already employed other unconventional measures, such as negative interest rates and targeted longer-term refinancing operations, but deemed further action necessary. The program was designed to work alongside the existing Outright Monetary Transactions framework, which had calmed sovereign debt markets but was not actively used for purchases.

Implementation and mechanics

The Governing Council of the European Central Bank formally initiated purchases on 9 March 2015, with an initial intended duration until September 2016. The Eurosystem, comprising the ECB and national central banks like the Bundesbank and the Banca d'Italia, executed the monthly purchases. A critical feature was the principle of risk-sharing, where only 20% of the potential losses from purchases were shared across the Eurosystem, with the remaining 80% borne by the respective national central bank. Purchases were conducted in the secondary market to comply with the prohibition on monetary financing under Article 123 of the Treaty on the Functioning of the European Union. The program's implementation was guided by the Capital Key, which allocated purchase volumes based on each country's share in the ECB's capital.

Asset purchases and scope

The primary assets purchased were sovereign bonds issued by central governments of Eurozone members, including those of Germany, France, and Italy. The program also included securities from recognized agencies and international institutions located in the Eurozone, such as the European Financial Stability Facility and the European Stability Mechanism. Key technical limits were imposed: the ECB could not purchase more than 33% of any single issue or more than 33% of a member state's total outstanding debt. This was to avoid becoming a dominant creditor and to preserve market functioning. Purchases excluded securities with a yield below the deposit facility rate, a rule known as the "deposit rate floor."

Impact and effectiveness

The program is widely credited with significantly reducing sovereign bond yields across the Eurozone, particularly in peripheral countries like Spain and Portugal. This contributed to a broad easing of financial conditions, supported a recovery in bank lending, and helped lift inflation expectations away from deflationary levels. Studies by institutions like the International Monetary Fund and the Bank for International Settlements noted its positive effect on GDP growth and employment. The announcement effect, following Mario Draghi's 2012 "whatever it takes" speech, was itself a powerful tool in stabilizing financial markets.

Criticisms and legal challenges

The program faced significant opposition, notably from officials within the Bundesbank and politicians in Germany, who argued it blurred the line between monetary policy and fiscal policy and transferred excessive risk. A major legal challenge was brought before the Federal Constitutional Court of Germany, which in 2020 issued a controversial ruling criticizing the ECB for insufficiently assessing the program's proportionality. However, the Court of Justice of the European Union had previously affirmed the program's legality under EU law. Other criticisms included the potential to create asset price bubbles, penalize savers, and reduce incentives for structural reforms in countries like Italy and Greece.

Tapering and conclusion

In December 2016, the Governing Council of the European Central Bank announced a reduction in monthly purchase volumes from €80 billion to €60 billion, a phase known as "tapering." Under the presidency of Mario Draghi, the program was extended multiple times, with a final net purchase end date set for December 2018. Reinvestments of principal payments from maturing securities continued thereafter to maintain the size of the ECB's balance sheet. The conclusion of net purchases marked a pivotal moment in the normalization of ECB monetary policy, though the overall expanded asset purchase programme remained a key part of its toolkit, especially during the subsequent crisis caused by the COVID-19 pandemic.

Category:European Central Bank Category:Monetary policy of the European Union Category:Quantitative easing