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ECB cuts southern Europe bond holdings, raises Germany exposure

FILE PHOTO: European Union flags flutter outside the European Central Bank (ECB) headquarters in Frankfurt

FRANKFURT (Reuters) - The European Central Bank cut holdings under its Pandemic Emergency Purchase Programme (PEPP) of southern European nations' bonds over the last two months, picking up German and Dutch debt instead, a bimonthly disclosure showed on Tuesday.

The ECB stopped buying new bonds under the PEPP earlier this year and said it would exercise "flexibility" when reinvesting cash from maturing debt, allowing it to help out individual euro zone members should their borrowing costs rise too much.

It used this flexibility over the summer to prop up the Italian debt market as yields soared, but has since appeared to take a step back as Italy's borrowing costs stabilised.

The ECB cut its PEPP holdings of Spanish debt by 1.4 billion euros in October and November combined and reduced its Italian bond holdings by 794 million euros and those of Portugal by 1.1 billion euros, it said in the disclosure.

The spread between 10-year German and Italian bond yields, watched by policymakers, has shrunk to 187 basis points from levels above 260 bps following Italy's election in September, suggesting growing confidence in the new government.

The ECB increased its holdings of German debt the most in October and November, by 2.6 billion euros, and added 1.7 billion euros of bonds issued by the Netherlands.

All maturing debt held under the 1.7 trillion euro PEPP will be reinvested at least through 2024, the ECB has said.

The ECB is expected to start reducing its older and larger Asset Purchase Programme next year by letting some but not all bonds bought under the 3.3 trillion euro scheme mature without the proceeds being reinvested.

(Reporting by Balazs Koranyi; Editing by Catherine Evans)