Countries that have issued without generating more inflation or devaluations

It was in the midst of the turmoil in financial markets at the start of the pandemic, when central banks in Croatia, Hungary, Poland, Romania, Serbia and Turkey implemented asset purchase programs (APPs), buying local currency bonds issued by governments, but also by the private sector (in the Hungarian case).

An IMF investigation (“Asset purchase programs in European Emerging Markets ”by William Lindquist, Nadeem Ilahi and Jaewoo Lee) suggests that asset purchases in emerging Europe have helped alleviate the dysfunction of financial markets, with no signs of destabilizing effect. The limited scale and duration of these PPPs was in line with their objectives, which were to alleviate dysfunctional financial markets, provide liquidity and repair the transmission mechanisms of monetary policy.

This distinguishes these PPPs from quantitative easing used by central banks in advanced economies, which was intended to provide additional stimulus in the context of official interest rates close to the effective lower bound. Indeed, PPPs in emerging European countries have mostly been implemented in parallel or even preceded by conventional easing of monetary policy. For example, Romania’s asset purchase program essentially ended in the summer of 2020, but the key interest rate did not hit its low of 1.25% until January. 2021.

According to IMF experts, no evidence has been found that the PPP announcements have led to easing pressures on bond market liquidity and a reversal of the increase in forward spreads, and it has not been found that these PPPs have caused pressure on exchange rates (This may reflect its mainly limited duration and scope.) “In countries where PPPs were more extensive or protracted, actions by central banks to absorb the additional liquidity created by these purchases may also have played a role in minimizing the impact on exchange rates, ”the study notes.

To worry

While PPPs in emerging Europe were successful during the pandemic and now appear to be part of the toolbox, “the conditions under which to use them in the future are less clear.” In part, its use may depend on global circumstances. For that It is important to recognize that the near universal easing of monetary policies during the pandemic created more favorable conditions for emerging markets to use such tools. “It remains to be seen whether emerging markets could use PPPs in response to idiosyncratic shocks without triggering reactions such as currency depreciation.” “The fundamentals of the country are also important. One of the concerns about PPPs in emerging markets is that they could foster fiscal dominance if they help sustain deficits that cannot be financed by conventional means. A solid record of macroeconomic stability and credible economic institutions is likely to alleviate concerns about fiscal dominance. “To this end, the structure and discipline provided by EU membership make these risks less serious, which could improve the future reach of PPPs in these countries,” the study said.