October 13, 2020
18:45
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One fifth of Belgian government debt is held by the National Bank and the European Central Bank (ECB).
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More than 100 billion euros. This is the amount of Belgian government bonds that the National Bank and the ECB have bought since March 2015 to boost under-growth and inflation.
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Who buys what?
The central banks of the eurozone have injected some 3,400 billion euros into the economy over the past five and a half years by buying massive debt securities. The purchase of government bonds is the most important part of that so-called quantitative easing (QE). Since March 2015, the National Bank and the ECB have bought EUR 101.4 billion in Belgian government bonds, of which EUR 84.1 billion through the PSPP program and EUR 17.3 billion through the new pandemic program (PEPP). This is evident from figures from the ECB.
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The purchase of government bonds of a euro country is 90 percent done by the national central bank of that country and 10 percent by the ECB. That means that the National Bank bought paper for 91.3 billion euros and the ECB for 10.1 billion.
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What part of the debt is held by the central banks?
A government bond portfolio of 101.4 billion euros represents about 20 percent of the Belgian government debt, as it has risen to about 500 billion.
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What is the impact of the bond purchases?
The massive purchases of government bonds have lowered the Belgian long-term interest rate below zero. Ten-year government bond yields fell to -0.34 percent on Tuesday, flirting with the historic low of -0.39 percent, which dates back to August last year. The Belgian state can therefore borrow money at a negative interest rate. That means investors are willing to pay to lend money to our country. The federal government still has old bonds outstanding with coupons of up to 5.5 percent.
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The interest costs on the government debt are historically low.
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However, interest expenses in relation to outstanding debt and gross domestic product have fallen sharply in recent years and are now historically low. The government is therefore a clear winner of the negative interest rate. The losers are savers and investors. They receive much less interest on their bonds, savings bonds and term accounts.
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How much more will the National Bank and ECB buy?
Even for tens of billions. Eurozone central banks have already bought bonds worth EUR 565 billion through the PEPP program. They want to increase purchases to 1.350 billion by June 2021. If the percentage composition of the PEPP portfolio remains the same, the National Bank and the ECB will purchase an additional 24 billion euros in Belgian government bonds. The additional purchases are likely to be greater, as economists expect the ECB to announce additional bond purchases in December.
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The current rules of the ECB stipulate that the central banks can buy up a maximum of one third of the outstanding government debt. That restriction does not apply to bonds purchased under the PEPP program.
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Will those bonds stay on the balance sheet of the central banks forever?
That is not the intention. Eurozone central banks want to phase out their huge government bond portfolios when inflation has risen to the target of “less than but close to 2 percent.” But that is not yet until tomorrow. The ECB says it will continue to reinvest the maturing bonds from its PEPP portfolio in new bonds at least until the end of 2022. It also continues to reinvest the maturing bonds of the PSPP program and will do so well after the first rate hike. Economists expect that first rate hike in 2023 at the earliest.
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