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Securities Markets Programme
The Securities Markets Programme (SMP) was a sovereign bond-buying program established by the European Central Bank (ECB) officially on May 10, 2010. The implementation was in response to the escalation of the Eurozone debt crisis. The programme ran between May 2010 and September 2012. The stated purpose of the program was to “address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism.” It aimed to keep an adequate supply of liquidity in the banks in the euro zone and to enable medium-term price stability. The SMP was discontinued in September 2012 with the ECB’s decision of implementing the OMT program (Outright Monetary Transactions).

History and Background
The SMP was first announced on 9 May 2010 by the ECB, and officially activated on 10 May 2010. The SMP has been consistently maintained since its implementation till September 2012. However, two periods of strong bond purchases can be identified (see chart): (1) Mid-May to early July 2010. Bond purchases in this period focused on Greek, Irish and Portugese debt. (2) Beginning of August 2011 to mid-January 2012. Bond purchases in this period focused on Spanish and Italian bonds.

Government bond purchased by the European Central Bank under the SMP
As of 18 June 2012, ECB had spent €212.1bn in total (equal to 2.2% of the Eurozone GDP) for bond purchases covering outright debt, as part of its SMP running since May 2010.

The transactions were sterilized, that is, the ECB offset their asset purchases by offering banks interest-bearing deposits, hence keeping the supply of money stable. The aim was to control inflation and ensure price stability.

The composition of bond purchases was not announced. This was communicated selectively only after completion of the program. The following table shows the breakdown of the Eurosystem’s SMP holdings as at 31 December 2012, per country of issuer, indicated at nominal value, book value and average remaining maturity. Italian papers made up just under half of the total, followed by Spanish (20%) and Greece (16%).

Differences to other bond purchasing programs
It is important to understand that the ECB’s securities markets program (SMP) is different to other western central banks’ bond purchasing programs in some major points – despite all the programs’ scopes being similar.

Targets and objective
The SMP’s target was not the entire eurozone but only particularly hard hit individual eurozone countries. Official communication names an appropriate transmission of monetary policy and „depth and liquidity in those market segments which are dysfunctional“ as the SMP’s major goals. This stands in contrast with the quantitative easing (QE) programs of the Federal Reserve and the Bank of England which aimed at lowering long-term interest rates for all their area of influence.

Time horizon
The period over which bond purchases took place was much more concentrated and focussed on times with severe distress, as opposed to the longer-term oriented QE programs of the Fed and the BoE.

Transparency
Official announcements on the scope of the program were limited to the definition of an „open-ended operation without clear targets“. Thus, it remained unclear which sovereign bonds were purchased, at what time and in what amounts – not even at the country level. Fed and BoE programs on the other hand held scheduled auctions. The consequence of this lack of guidance was that the market could only observe the process of the program via actual transactions, i.e. word-of-mouth between participating dealers.

Buy and hold vs. „active trading“
Unlike the Fed and the BoE, which were ready to sell their stock of bonds at any given (opportunistic) time, the ECB committed to holding the bonds it bought until maturity.

Historical Event: The Greek sovereign debt restructuring in 2012
The Greek sovereign debt restructuring between February and April of 2012 was the largest sovereign bond exchange in history. The exemption took the form of a ‘silent’ debt swap between February 17 and February 21, 2012, where all bonds held by the ECB and other Eurosystem central banks were exchanged into new bonds in term of serial numbers (ISINs) with the exact same other features as the old ones. With this simple operation the ECB, National Central Banks (NCBs), and the European Investment Bank (EIB) avoided taking a haircut and made their bonds disappear from the stock of tradable Greek debt. In total, the ECB holdings sum up to €42.7 bn, which was 17% of the total stock of Greek sovereign bonds in February 2012. Because the ECB had a buy-and-hold portfolio, this stock of holdings reflects the cumulative amount purchased via the SMP between May 2010 and February 2012, minus purchases of bonds that matured between May 2010 and February 2012. NCBs held another €13.5 bn (7% of total), while the EIB held €315 m.

The data used for this was only published in a little-known Greek language government gazette issues, which are available in printed form only. Typically, the researchers drew on issues ‘413 V/2012’, ‘574 V/2012’ and ‘705 V/2012’ and translated them into English. )

Determinants of ECB purchases
It was not made public what determined which bonds where bought. Nonetheless specualtion and studies arisen out of this question are able to give a compelling insight into the matter. Trebesch et alli are able to compute the percentage of each bond series held by the ECB by cross-sectioning all outstanding Greek government bonds prior to the debt exchange as a percentage of the total amount (in February 2012). This method yields compelling results which show a significant amount of variation over all the 81 different outstanding Greek bonds. There are, for example, some bond series of which the ECB bought up to 38% of the total outstandning ones while it bought none of other series. The authors find five main criteria the bonds bought by the ECB fullfill: 1. The bonds had to be issued uner Greek law (99,9% of the bonds bought fell into this criteria). Bonds issued under English, Italian or Japanese law were not bought (28 of the outstanding 81 series were foreign law bonds) 2. The bonds had to be traded on secondary markets, such as the Bloomberg platform. This criteria is fulfilled by 40 out of 81 bond series. These 40 bonds however account, as the authors manage to show, for 99.8% of the Greek bonds held by the ECB. 3. The Bonds had to be relatively liquid and large benchmark bonds, i.e. the had to be used at least once for computing the Greek yield curve on platforms such as Blloomberg. This criteria means that the bonds are considered important to the construction of Greek yields by investors. Buying them shoud therefore, in theory, have a bigger impact on Greek yields than other series. This is true for 75% of the Greek bonds. The 20 largest bond series account for over 80% of the ECB holdings. 4. The focus of the ECB was on short and medium maturity bonds. It is found that the average maturity of Greek bonds in the ECB portfolio is just 5.4 years, compared to the average >9 years in the full sample.The data furthermore shows that the ECB had a strong preference for short-maturity bonds and stayed away from long-maturity ones (bonds with more than 20 years maturity 5. Bonds with higher yiedls were preferred. Via a construction of the yield spreads above German Bunds or above the full sample of bonds, the author manage to show that bonds with high yield spreads or yields (pre-SMP) were preferred for the SMP. The authors conclude that, in the case of Greece, the buying patterns of the ECB were predictable.

Effect on yields
Estimates of the ECB bond purchases show that during the first wave of the program (between May, 10th and July, 5th of 2010) nearly 70%-80% of all the bonds which are found in the portfolio of the central bank were bought during that period. By employing a difference in difference analysis shws a significance impact of the purchase on the yields of those bonds which have been bought. A drop of roughly 230 basis points of the yields of bonds which fall into that category could be observed. Furthermore the authors find that the higher the amount purchased of a bond series the higher the decrease in yields. As can be seen in Panel A, the yield curve of Greek was inverted prior to the SMP. After the first week of th SMP, however, the yield curve resumed its normal curvature again. Though 8 weeks after the start of SMP the yield curve begins to invert again, implying that the effects of the SMP were short lived. (Panel C)