ECB cut back buying of Italian bonds in May, drawing Rome’s ire

The European Central Bank trimmed purchases of Italian debt in May, when the political turmoil over the formation of a euroskeptic government reached its height.

The European Central Bank said the slowdown in purchases came because it needed to buy more German government paper after a large chunk of debt expired in April, news reports said. But the move drew ire from Italian politicians, who complained the timing amplified the bond selloff that accompanied negotiations by a pair of antiestablishment parties to form a coalition government.

Laura Castelli, a member of parliament from the 5 Star Movement who was involved in drafting the coalition contract with the right-wing League party told the Italian edition of the Huffington Post that the ECB and Italian banks “slowed up if not suspended their buying of [Italian government bonds]…adding to pressure on spreads,” the Financial Times said, noting she also argued that “quantitative easing is being weakened at exactly the moment when we need it strengthened to secure the stability of the EU.”

Frederik Ducrozet, an economist for Pictet Asset Management, tweeted that the sudden drop in Italian bond-buying was merely a “technical effect,” but he added the timing of the fall was unfortunate.

The ECB bought a net 3.6 billion euros ($4.21 billion) of Italian government paper in May, after 15% of the allocation of the 30 billion euros of monthly purchases went toward Italian debt, compared with 28% toward German debt. The Italian share marks the lowest allocation since March 2015.

Though May’s purchases were higher than those in recent months, the fall in the ECB’s Italian bond purchases may draw controversy after several Italian politicians suggested the central bank had trimmed its asset purchases of Italian debt to discourage its newly elected populist government from entertaining euroskeptic policies.

In May, fears over a “Frankenstein agenda” from the far-right League and the antiestablishment Five Star Party sent Italian bondholders fleeing for the exit doors.

See: Here’s why the euro stands to lose as ECB weighs Italy woes, inflation pickup

Read: 4 ways the ECB is helping prevent an Italian rerun of the euro crisis — for now

Even though it remains the largest bond market in the economic bloc, Italy experienced a sudden shortfall of liquidity last week after an intense selloff in Italian government paper put off traders who were wary of being caught out by the relentless climb in Italian yields.

Last Tuesday, the two-year Italian bond yield












TMBMKIT-02Y, -23.26%










soared more than 180 basis points, or 1.83 percentage points, its largest one-day jump in more than 25 years. Bond prices fall when yields rise.

But on Monday, an ECB spokesman countered claims that the choice to cut Italian asset purchases were motivated by politics, reports said. The spokesman said that a large raft of German debt had matured in April, increasing the amount the ECB had to buy over the past two months. In addition, the fall in purchases of Italian debt came alongside similar declines in buying of Spanish, Portuguese and French bonds.

More than 23 billion euros of debt from the central bank’s bond portfolio came due in April, the highest amount on record. The ECB’s data does not break down the redemptions by country.

The central bank has the ability to space out the asset purchases needed to cover the redemptions over different months if they feel its buying will have an outsize influence on the market.

“The ECB has always showed flexibility in applying capital keys on a monthly basis and May was no exception,” said Chiara Cremonesi, fixed income strategist for UniCredit. “The ECB’s QE and its application intend to be as neutral as possible and are not linked to any country-specific issue.”