Cypriot bonds in Eurosystem drop to €6.38 billion

The value of Cypriot bonds held by the Eurosystem has decreased to €6.38 billion as the European Central Bank (ECB) continues its balance sheet reduction under its tightening monetary policy.

These bonds, held through the Public Sector Purchase Programme (PSPP) and the Pandemic Emergency Purchase Programme (PEPP), represent 28 per cent of the Republic of Cyprus’ issued debt.

As of mid-August, the balance of Cypriot bonds in the PSPP portfolio stood at €3.99 billion, marking a €304 million decrease due to the maturity of Cypriot bonds in June.

In addition, the weighted average maturity of these bonds on the Eurosystem’s balance sheet was 8.02 years.

The ECB originally announced in August 2023 that it would cease reinvesting amounts from maturing bonds as part of its balance sheet reduction strategy, thereby reducing market liquidity to support broader efforts to curb inflation.

The broader Asset Purchase Programme (APP), of which the PSPP is a part, stood at €2.8 trillion at the end of July, reflecting a €33 billion reduction.

The largest decrease was recorded in the PSPP, which saw a €26.7 billion drop, bringing its total to €2.22 trillion, the highest among the programmes.

Similarly, the value of Cypriot bonds held under the PEPP fell to €2.39 billion at the end of July, with net purchases decreasing by €76 million during June and July.

What is more, the weighted average maturity of Cypriot bonds under PEPP stood at 8.04 years.

Meanwhile, the total balance of the PEPP programme at the end of July was reduced to €1.65 trillion, with €1.6 trillion of this amount being in government bonds.

Furthermore, It should be noted that on December 14, 2023, the ECB’s governing council announced that it would continue full reinvestments of maturing amounts until the first half of 2024.

Thereafter, it plans to reduce the PEPP portfolio by an average of €7.5 billion per month, with a complete cessation of reinvestments by the end of 2024.

Cyprus banks slash Eurosystem borrowing

In related news, it was reported last week that Cypriot banks have almost entirely repaid their borrowing from the Eurosystem’s Targeted Longer-Term Refinancing Operations (TLTROs), with repayments totalling €2.6 billion, according to the Central Bank of Cyprus.

The CBC reported that by the end of June 2024, TLTRO borrowing had reduced to just €100 million, down from €2.7 billion in May.

In June, Hellenic Bank and Bank of Cyprus repaid €2.3 billion and €0.3 billion, respectively, effectively clearing their central bank debts.

TLTROs, launched in 2014, were designed to provide long-term liquidity under favourable conditions to encourage lending.

Next ECB rate cut

Finally, Reuters reported on August 23 that a growing number of European Central Bank (ECB) policymakers are supporting another interest rate cut in September, with only significant data surprises potentially delaying the decision, according to sources.

Financial markets widely expect the cut, but ECB officials have been cautious after criticism for their June rate cut commitment.

Recent data on growth, wages, and prices have increasingly convinced policymakers that conditions for another cut are being met.

In addition, Reuters wrote that sources suggested that easing price pressures, slower-than-expected economic growth, softening wage increases, and signals from the US Federal Reserve have bolstered the case for a rate cut on September 12.