Implementation of the PEPP
On 18 March 2020 the Governing Council of the ECB instituted the Pandemic Emergency Purchase Programme (PEPP), a new, temporary programme with an overall envelope of EUR 750 billion, equivalent to 6% of euro area GDP. Purchases under the new programme began on 26 March 2020, and will be conducted until the end of this year.
Purchases under the PEPP include all the asset categories eligible under the existing APP:
- public-sector bonds; treasury bills with a maturity of more than 70 days have now been added,
- corporate bonds; commercial paper with a maturity of more than 28 days has been added,
- covered bonds,
- asset-backed securities.
Public sector securities of euro area countries whose residual maturity at purchase is between 70 days and 30 years and 364 days are eligible for purchase under the PEPP. For corporate securities, the eligible range for residual maturity at purchase is from 28 days to 30 years and 364 days. Commercial paper of the requisite credit quality is also eligible. The requisite credit quality is a rating of at least credit quality step 3 in the Eurosystem’s harmonised rating scale (i.e. comparable to a rating of BBB-). All debt securities must also be marketable assets eligible as collateral for Eurosystem credit operations (in accordance with Part Four of Guideline ECB/2014/60 with amendments).
Public sector securities are purchased by the ECB and the national central banks of the Eurosystem exclusively in the secondary market, as this ensures compliance with the ban on monetary financing (Article 123 of the Treaty on the Functioning of the European Union). Central banks of the ESCB may not purchase public sector securities in the primary market, i.e. immediately at issuance. Certain restrictions on the purchase of securities during new or additional issuance must also be observed, to allow for the free formation of market price at issuance, which means that similar securities may not be purchased in a specific period.
The allocation of the stock of overall net purchases of public sector securities across Eurosystem jurisdictions takes account of the subscribed capital that the individual national central banks hold in the capital of the ECB as stated in Article 29 of the Statute of the ESCB (allocation of purchases according to ECB capital key). The capital key for Slovenia amounted to 0.4815% as at 1 February 2020. Here it should be reiterated that the quota of EUR 750 billion applies to all purchases under the PEPP, and not just to public sector purchases; some of the purchases under the quota are being made in private sector securities. The distribution of purchases across investment categories is not made public, and is decided on flexibly within the Eurosystem. It is possible to modify the distribution of purchase flows over time, between asset classes, and between countries. The pace and composition of the monthly purchases is decided on by the Executive Board of the ECB.
Within the framework of the Eurosystem, purchases under the PEPP are made on a decentralised basis, and according to the principle of specialisation. Purchases of public sector securities are made by each national central bank for its own jurisdiction, while a small proportion (10%) is purchased for all jurisdictions by the ECB. Accordingly the Bank of Slovenia is making purchases of public sector securities, which encompass bonds issued by the Slovenian government and by recognised agencies. The list of eligible agencies is public, and can be viewed here. The recognised agencies in Slovenia are SID banka, DARS and SDH. Irrespective of the eligibility of these institutions, issued debt securities must also meet the eligibility criteria for purchases under the PEPP.
Purchases of Slovenian government securities on the secondary market under the PEPP are therefore made primarily by the Bank of Slovenia, and to a lesser extent by the ECB. As is evident from the above description, in so doing the Bank of Slovenia is required to take account of the allocation of Slovenia’s quota, and also the limits on individual issues and issuers that apply to a particular programme. The limits are set by the Governing Council of the ECB under its powers to fulfil its mandate, and must be taken into account by all members of the Eurosystem in their purchases.
Securities are purchased from institutions meeting the eligibility criteria for participating in monetary policy operations, and from other counterparties used by the Bank of Slovenia in its asset management.
The Bank of Slovenia does not conduct purchases of securities issued by the private sector. Purchases of eligible debt securities of the Slovenian corporate sector are being made on behalf of the Eurosystem by the Belgian central bank. No eligible covered bonds or asset-backed bonds have been issued in Slovenia at present.