The European Central Bank has started buying Cypriot bonds once again, it said on Thursday, including the country in its stimulus programme for the first time since its exit from a painful bailout programme in 2016.
The ECB said it would try to slowly make up for its missed purchases in the coming months, meaning it could potentially snap up some 4 billion euros (3.57 billion pounds) worth of Cypriot paper. But it added it would also take liquidity conditions into account, suggesting that actual purchases may still be limited.
Having continued its reforms, it finally obtained the coveted rating this month and got back into the ECB programme just months before its scheduled end in December.
The ECB holds just 214 million euros worth of Cypriot debt while the country’s shareholding would have dictated purchases of about 4.2 billion euros, suggesting the ECB could still buy 4 billion euros worth of bonds.
But making up for these buys could prove difficult as the market for Cypriot bonds is relatively illiquid, with big investors holding large chunks.
“I think the (credit rating) upgrade was a reason to buy Cypriot government debt in its own right, and possibly there was some anticipation of ECB eligibility as well, so maybe that’s why they haven’t reacted so strongly this morning,” said Mizuho strategist Antoine Bouvet.
Buying 2.6 trillion euros worth of bonds, the ECB is supposed to divide its purchases according to each country’s shareholding, and while it buys fluctuates from month to month, they are supposed to match this ‘capital key’ by the end of the purchases.
“Until the end of net asset purchases, the Eurosystem’s pace of purchase in Cypriot government bonds will take the specific market liquidity situation of the Cypriot government bond market into account in calibrating a gradual and measured increase in Eurosystem holdings towards Cyprus’s share in the ECB capital key,” an ECB spokesman said.
While the ECB could also try to raise its Cypriot shareholding during the years that it reinvests cash from maturing debt, the ECB said that decisions on reinvestment policy will be taken later.