The ECB’s Quantitative Easing Program Worked Well For The Peripheral Countries

“During the European debt crisis, several countries experienced large increases in government borrowing costs. The yields on government bonds for Ireland, Italy, Portugal, and Spain rose from around 2 percent in 2009 to between 7 and 20 percent in 2011, and Greek two-year bond yields rose to 200 percent in 2012. In response to this situation, the European Central Bank (ECB) enacted policies designed to reduce bond yields, including the Securities Markets Programme (SMP), Outright Monetary Transactions (OMT), and Long-Term Refinancing Operations (LTRO).” (Morgan Foy, Quantifying the Impact of ECB Policies during the Debt Crisis, The NBER Digest, Feb. 2018)

From a European perspective the 2007/2008 financial meltdown had hardly faded away before the European Union faced a serious sovereign debt and banking crisis.

In 2012 the government bond markets of the EU countries were dramatically affected by concerns over the financing of the government debt and the solvency of the banks. The concerns were heavily centered on the southern tier of countries, particularly Portugal, Greece and Spain and somewhat later Italy.

Member states and the ECB then embarked upon a series of aggressive initiatives to improve confidence and liquidity, to reduce borrowing costs and to limit the possibility of countries pulling out of the EU.  

As the following chart indicates, the ECB’s monetary initiatives started with the Securities Market Programme (SMT) -- which allowed the ECB to directly purchase government debt from Greece, Ireland and Portugal (as of May 2010), and then for Italy and Spain in 2011.

In September of 2012 the ECB introduced the OMT which allowed the central bank to expand its government bond purchases, though countries applying for help had to meet certain fiscal conditions.

The third program, the LTRO, was an extension of the previous program that also included loans to banks.

As the following chart illustrates, these aggressive monetary policy moves succeeded. Yields on two-year government bonds fell sharply following the introduction of the SMP and the OMT programs.

The NBER researchers observed that “yields on bonds with two-year maturities declined by 400 basis points for Italy and Spain (around 200 basis points each from the SMP and the OMT), by 500 basis points for Ireland and Portugal, and by 1,000 basis points for Greece. The LTRO policy had more modest impacts. The researchers find that the largest impact was a 50-basis point reduction in borrowing costs for Spain.”

In closing, the NBER report concluded that the ECB’s aggressive program was successful largely because it eliminated the default risk for sovereign bonds.

Moreover, the report also concluded that the ECB initiatives had a substantial and positive impact of the stock markets of the distressed countries.