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. However, there was one topic where Mario Draghi was a bit unclear. The 33% holding cap (including SMP holdings) and the 25% ISIN cap.

• 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.

• 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.

Details

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).

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).

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.