DUBLIN (Reuters) - A senior official at the Portuguese debt agency said on Saturday he was worried about liquidity in the country’s bond markets and how the European Central Bank will withdraw its asset-purchase stimulus scheme.
José Cardoso Costa, the head of research and reporting unit of the IGCP, added that the central bank’s monthly purchases of government bonds under quantitative easing (QE) are now less than half of what they started at because of the scheme’s self-imposed limits.
The ECB has committed to buying 60 billion euros worth of bonds every month until December, but many analysts expect policymakers to signal a wind down of purchases later this year.
“When will it (QE) end, our worry maybe is how it will end? We certainly don’t want this to end with cliff effects or anything of the sort, we want this to be as smooth as possible,” Costa said at an industry event in Dublin.
“Particularly in Portugal...the market has evidence that it has very low liquidity these days. It is hard to assess whether this comes from the impact of PSPP (Public Sector Purchase Program) itself...we have seen a number of events of excessive volatility that arise from this lack of liquidity so we are worried about that.”
In Portugal as well as other countries such as Ireland, volumes of monthly central bank purchases have recently not met the ECB’s capital key weighting based on the size of each country’s economy. This is because of limits on the amount of each country’s debt and individual bonds it can hold.
“The ECB has reduced purchases on Portuguese debt because of the constraints it has set so they are now buying less than half of what they would be according to the capital key. We have seen that this had an impact on our market last year, but I believe the ECB is being able to do this in a smooth way but it is something that may worry us.”
Costa also raised concern about Portugal potentially dropping out of QE altogether if it is downgraded by rating agency DBRS, the only firm recognized by the ECB to rank Portugal investment grade - a requirement for QE inclusion.
He said there should be a discussion to make this decision less binary.
“I think that this binary decision maybe is worrisome, it would be interesting to discuss whether we could set other arrangements that could make this less binary and have a more gradual effect. That is something that is worrisome for us and a big constraint.”
Reporting by John Geddie and Padraic Halpin; Editing by Ros Russell