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Greece, other ‘peripherals,’ to pick some European PEPP with major bond

Greek economy faces a long winter.

Greece plans to issue a 10-year bond (with maturity in June 2030) at a value of $2.5 billion to help finance all of the aid measures supporting the economy.

Eurozone periphery sovereigns are lining up to get into the primary market this week after the ECB increased its Pandemic Emergency Purchase Programme (PEPP) last Thursday. The PEPP programme sharply increases the funds available to the European Central Bank to buy Member State bond issuance with its €750 billion budget.

Some economists insist that this is just asking governments in Italy and Greece – and all the peripherals – to overspend. “There is some moral hazard involved in all this, and I don’t blame the frugal nations for wanting to be vigilant,” Rosamaria Bitetti, an economist and lecturer at Luiss University in Rome. “There is a feeling that a kind of ‘Romanisation’ of EU fiscal policy is taking place.”

But investors have shrugged all that off and are eager to buy in.

Greece is following right behind Italy, which on May 20 raised €14 billion with retail investors. The bond has a maturity of five years and pays a premium of at least 1.40 per cent over the domestic inflation rate. Greek Finance Minister Christos Staikouras announced that this was the first of two more bond issues for this year – both of them intended to finance support for the Greek economy after the health crisis. Greece raised a total of €4.5 billion from 15- and seven-year bond issues earlier this year.

Both the Italian and the Greek bonds are being issued with the European Central Bank’s ‘quantitative easing’ in mind – that is, the central bank’s programme to purchase national bond issuance.

This provides investors with a kind of backstop; they can invest in these financial instruments with confidence. By the end of May, the ECB had acquired €4.69 billion using the PEPP resources for its balance sheet.

Investors also appear to shrug off the dangers posed by the German Constitutional Court decision on May 5 which stated that the ECB must prove within three months that its purchases of government bonds are justified by emergency conditions, or the Bundesbank, which funds a large part of the purchasing, will have to leave the stimulus scheme.

“The new program, which has just received an additional injection of funds, has succeeded in capping interest-rate spreads between core and peripheral Eurozone member states. But spreads remain elevated and investors are jittery, especially given the likelihood that the Covid-19 crisis will increase Italy’s public debt to 150 to 160 per cent of GDP for the foreseeable future,” writes Eza Moghadam, Chief Economic Adviser at Morgan Stanley.

Will all this liquidity injected into the European economy lead to rising inflation? “This concern seems overdone at a time when deflation is the greater risk,” Moghadam continues.

Nor should we be concerned about moral hazard, which issue is inevitably raised by opponents in this context. Says Moghadam: “There is the perennial fear of moral hazard – that bailouts encourage fiscal irresponsibility. This is surely misplaced: Italy’s current problems reflect its higher starting level of debt, which its eurozone partners have long accepted, and its larger fiscal response to the current crisis, which all agree is appropriate.”

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