Public finances face a notable challenge this year as the European Central Bank (ECB) plans to scale back its loan portfolio through 2024. In Spain, public debt at the central, regional, and local levels is expected to be affected, with estimates suggesting reductions in the tens of billions of euros. The ECB’s gradual unwinding of its holdings is part of inflation-fighting measures and may push Spanish administrations to seek new buyers. In recent years, the public sector managed to attract buyers, but the current environment could differ. A gradual retreat by the ECB from euro-area public debt increases the risk for highly indebted countries, and in times of market stress, the euro area might consider different arrangements, including the possibility of reordering exposures among member states.
Thus, by the end of last year theECB held about 4.23 billion euros of eurozone public debt. Purchases were significantly larger between March 2015 and June 2022 to avoid deflation and support the economy through the pandemic. Inflation eventually dampened the pace of purchases in July 2022, but reinvestment continued for a period as debt matured. In March 2023, the ECB halted reinvesting portions of amortizing debt, allowing the portfolio to weaken gradually. The reinvestment rate was partially reduced in July and is expected to decline further in the second half of 2024 until reinvestments are exhausted in 2025. [Citation: ECB policy communications]
However, the process will be gradual. The average debt maturity in the ECB’s portfolio is just over seven years, meaning a mix of shorter and longer-term securities. For example, Spanish Treasury notes range from three months to five decades. The direction is clear: the ECB aims to tighten financing conditions in the euro area by reducing demand for public and private debt, cooling consumption and investment, and ultimately moderating inflation.
growing challenge
This challenge is not new for Spanish public finances, but its scale is increasing. The ECB reduced the Spanish public debt portfolio by about 14.3 billion euros last year, roughly 2.8% higher than the end of 2022. The 2024 figure is around 38 billion euros, with total Spanish debt around 494 billion euros in finial counts at the end of 2023. About eighty percent of holdings come from the central government, with the remainder from regional and local governments. If plans stay unchanged, the 2025 figure could be heavier as reinvestments come to an end. [Citation: ECB market analysis]
The drop in ECB holdings last year was offset by increased purchases from private investors. For government debt, the central bank reduced Treasury holdings by about 11.558 billion euros through October. Private investors bought securities at higher prices, totaling around 89 billion euros in the period. In aggregate, the decline in the central bank’s stock and the rise in private sector holdings contributed to a broader shift in the debt landscape. Figures show foreign buyers and households purchasing government securities, reflecting a positive sentiment toward the eurozone’s debt prospects.
Security concern
Private investors appear to benefit from higher yields as official rates rise under ECB policy. The average rate on government debt last year stood at 3.44%, up from 1.35% in 2022 and -0.04% in 2021. Importantly, higher rates did not coincide with a fiscal crisis for the state, unlike during the 2012 debt crisis. The increase in interest costs affected issuances but remained manageable relative to the overall debt profile, with some securities carrying roughly 4.5 percentage points above baseline levels since mid-2021. [Citation: Market data]
The debt market continued to show strong demand for long-term paper. Spain’s 10-year bonds drew robust interest, with nine times more demand than the amount issued. The risk premium, defined as the gap between Spanish and German benchmark yields, remained around 100 basis points on average. This spread is often interpreted as a signal of investor confidence in Spain’s economy and prospects, according to statements from the national authorities.
On the other side, authorities warn about structural deficits and high financing costs. The Bank of Spain and other institutions have highlighted how a rising burden could pressure public finances if the ECB slows its purchases or if market conditions deteriorate. The ECB previously indicated it would adjust its holdings in response to shifts in risk premiums, a move that could reopen questions about euro-area debt dynamics.
Estimates suggest the ECB will reduce its portfolio of Spanish public debt through 2024, driven by two long-standing programs: APP, designed to prevent deflation and expanded during the pandemic, and the PEPP program initiated during the pandemic. By year-end, the APP held a portion of Spanish debt representing a meaningful share of total program activity. The ECB stopped reinvesting in certain securities as they mature, projecting a substantial reduction in 2024. Some projections place a portion of the remaining exposure around 33 billion euros within the APP framework. In the PEPP, ongoing reinvestment continues until mid-year conclusions, with a gradual roll-off expected in the second half of the year. Excluding supranational debt in the euro area, amortization estimates for public debt hover in the tens of billions. If the Bank of Spain’s share is applied to these estimates, a notable portion would still come into play within the overall euro-system framework.