1. Art and Diseño

Investment Research — General Market Conditions
28 January 2015
QE Details 1
SMP holdings and cap effects on Portugal, Ireland and Greece



The details of the announced QE programme were much clearer than we are used to
when the ECB launches new measures (see Draghi Delivers: ECB's bazooka in detail
and market implications, 23 January. However, there was one topic where Mario
Draghi was a bit unclear. The 33% holding cap (including SMP holdings) and the
25% ISIN cap.
ECB QE research
The caps are likely to have implications only for Greece, before September 2016.
GGB purchases will be limited by the caps and not start before the July 2015
redemption.
 Impact of broad-based QE
Portugal is set to be the biggest beneficiary of ECB QE. ECB holdings of PGBs
could potentially even exceed the 25% issue cap (including SMP holdings).
Portugal is likely to reach the 25% issue limit during Q4 16 but the cap could also be
a limitation in core countries such as Germany and Finland if the programme is
extended beyond September 2016. Purchases in Ireland, Spain and Italy should not be
affected by the ECB caps.
 Draghi delivers: ECB's bazooka in
detail and market implications
23 January
16 January
 ECB will buy government bonds
15 January
 Deflation but the good kind
14 January
 Short-term weakness fades
13 January
 Recovery despite deflation
Details
12 January
Our interpretation is that the ECB will buy EUR60bn according to the capital key (around
EUR45bn in govies) as long as (1) the ECB holding including SMP purchases does
not exceed 33% of outstanding debt (issuer cap) and (2) that purchases in the QE
programme will not exceed 25% of outstanding in each ISIN (issue).
ECB buying of GGBs to be constrained by 33% issuer cap
ECB QE
40%
SMP holding
ISIN (issue) limit
ECB holdings of GGBs
35%
30%
ECB QE
33%
15%
10%
10%
5%
5%
0%
0%
ECB holdings of PGBs
33%
25%
Source: Danske Bank Markets
We read Draghi as indicating that SMP purchases will not be included in the 25% issue
cap (Draghi was not very clear on this). Our interpretation is also supported by the ECB
bothering to announce different cap levels.
Above are depicted different ECB holding scenarios (we disregard Italy and Spain) (see
detailed assumptions at the end of this document). The ECB could embark on purchases
following redemptions and GGB issuance could open the door for ECB purchases (see chart).
Important disclosures and certifications are contained from page 4 of this report.
ISIN limit (worst case)
20%
15%
Source: Danske Bank Markets
ISIN (issue) limit
30%
25%
25%
SMP holding
40%
35%
25%
20%
Holdings of PGB to be below 25% issue cap until Q4 16
Senior Analyst
Anders Møller Lumholtz
+45 45 12 84 98
[email protected]
Analyst
Anders Vestergård Fischer
+45 45 13 66 41
[email protected]
www.danskeresearch.com
QE Details 1
Greece cannot be included prior to the July redemption, as the current SMP holdings
imply that they will breach the 33% cap. On the other hand, the SMP holdings should
not limit purchases in Portugal. In Portugal, ECB holdings (including SMP) could go as
high as 29% of gross issuance by September 2016 (10% in SMP holdings and 19% in the
QE programme). If the ECB’s programme is extended beyond September 2016, Portugal
is likely to breach the 25% issuer limit. Note though that Portuguese switch auctions and
higher issuance due to, for instance, IMF repayment could imply that the 25% issue limit
would be reached later.
Ireland will not breach any of the caps and remain below the 25% limit including the
SMP programme. This is also the case for both Italy and Spain.
We agree that Draghi’s wording is up for discussion. If the SMP holdings are included in
the 25% ISIN cap, the purchases in Portugal could theoretically be affected in mid-2016,
depending on upcoming issuance and the composition of the PGB in the SMP holdings.
We do not think that the SMP holdings will be included. The limits are at least in part a
result of CAC concerns, hence, the ECB’s concerns regarding ISIN should not apply to
bonds included in the SMP programme. The SMP programme effectively ended in 2011
(officially with OMT Sept-12), while CAC was implemented in 2013 following the Greek
PSI in 2012.
Holdings of IRISH set to remain below caps
ECB QE
SMP holding
ISIN (issue) limit
35%
30%
25%
33%
SMP holdings ultimo 2013 (see adjustment below)
ISIN limit (worst case)
EUR bn
Issuer
country
ECB holdings of IRISH
25%
December 2012
Nominal
Average
amount
remaining
maturity
(years)
Nominal
amount
December 2013
Average
Dec 2013
remaining
holding
maturity
relative to
(years)
current
outstanding
Ireland
14
5
10
5.3
8%
Greece
34
4
28
3.4
44%
Spain
44
4
39
3.6
6%
Italy
103
5
90
4.1
5%
Portugal
Total
23
218
4
4.3
20
186
3.4
3.9
20%
7%
20%
15%
10%
5%
0%
Source: Danske Bank Markets
Source: European Central Bank
Our interpretation of the ECB cap limits is based on the following statements from
Draghi on caps and SMP during the Q&A (there was no information on this in the
technical annex).
‘Question: Two questions. You said that you’ll keep buying bonds until inflation is back on
track. So, basically, you have an open-ended programme. Do you see anything in terms of the
percentage of outstanding debt that you can buy before you start overly influencing price
formation on the secondary market, as the European Court of Justice suggested that you
should avoid?
Draghi: The answer to the first question, yes we will buy government debt up to the percentage
that will allow a proper market price formation. Therefore, we have two limits. The first one is
an issuer limit, which is 33%, and another one is an issue limit, which is 25%. In other
words, we won’t buy more than 25% of each issue and not more than 33% of each issuer’s
debt. The 25% limit, by the way, is the one foreseen in order not to be a blocking minority in
the collective action clause assemblies, basically bondholders’ assemblies, and it’s the basis
for us to be able to say, there is going to be pari passu.’
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28 January 2015
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QE Details 1
‘Question: My first question would be, it's not actually very explicit here in the press release
whether that means that you're not going to buy into Greece's debt right now?
Draghi: And to the first question, let me say one thing here. We don't have any special rule for
Greece. We basically have rules that apply to everybody. There are obviously some conditions
before we can buy Greek bonds. As you know, there is a waiver that has to remain in place,
has to be a programme. And then there is this 33% issuer limit, which means that if all the
other conditions are in place, we could buy bonds in, I believe, July, because by then there
will be some large redemptions of SMP bonds and therefore we would be within the limit.’
Projection assumptions and clarifications
The 33% issuer limit: The vertical bars are SMP holdings and ECB QE holdings
relative to the gross outstanding debt. If this figure exceeds the 33% cap, the ECB will
breach the issuer limit. The monthly figure is adjusted for issuance and redemptions.
The 25% issue limit: The solid line is the QE purchases relative to the gross debt in
maturities from two to 32 years. The dotted line is our ‘worst case’, as it illustrates the
effect if SMP purchases are included in the issue limit. Here we assume the SMP holding
in maturities +2Y is distributed, so that ECB holding in all ISINs plus 2Ys are below
25%. As stated above, we do not think that SMP holdings will be included in the issue
limit.
Projection assumptions Greece
Projection assumptions Portugal
Greece, EUR bn
Portugal, EUR bn
Remaining gross issuance 2015
9.0
Remaining gross issuance 2015
8.0
Gross issuance 2016
15.0
Gross issuance 2016
16.0
ECB fraction of SMP bonds maturing before 2016, %
100.0
ECB fraction of SMP bonds maturing before 2016, %
0.35
Gross redemptions March 2015 - 2016
8.8
Gross redemptions March 2015 - 2016
14.3
Source: Danske Bank Markets
Source: Danske Bank Markets
Projection assumptions Ireland
SMP holding assumptions at QE start March 2015
Ireland, EUR bn
Remaining gross 2015
9.0
Gross issuance 2016
14.0
ECB fraction of SMP bonds maturing before 2016, %
0.15
Gross redemptions March 2015 - 2016
8.1
EUR bn
Issuer
country
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28 January 2015
March 2015E
Nominal
Holding
amount
relative to
current
outstanding
Ireland
10
8%
10
8%
Greece
28
44%
22
35%
Spain
39
6%
Italy
90
5%
20
186
20%
7%
15
15%
Portugal
Total
Source: Danske Bank Markets
December 2013
Nominal
Dec 2013
amount
holding
relative to
current
outstanding
Source: Danske Bank Markets
www.danskeresearch.com
QE Details 1
Disclosures
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske
Bank’). The authors of this research report Anders Møller Lumholtz, Senior Analyst, and Anders Vestergård
Fischer, Analyst.
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QE Details 1
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