ECB to launch €750bn bond-buying programme
The European Central Bank has announced plans to buy an additional €750bn in bonds after holding an emergency call of its rate-setting committee on Wednesday night in response to the worsening economic and financial turmoil caused by the coronavirus pandemic.
The central bank said all the extra asset purchases would be carried out this year and cover both sovereign bonds and corporate debt. Dubbed the Pandemic Emergency Purchase Programme, it would last until the coronavirus crisis is judged to be over.
“Extraordinary times require extraordinary action,” ECB president Christine Lagarde said on Twitter after the measures were announced. “There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.”
The ECB also decided to expand the range of assets eligible for purchase to non-financial commercial paper and to ease its collateral standards to allow banks to raise money against more of their assets, including corporate finance claims.
“The governing council of the ECB is committed to playing its role in supporting all citizens of the euro area through this extremely challenging time,” it said in a statement. “The governing council will do everything necessary within its mandate.”
Investors were encouraged by the move, with S&P 500 and Dow futures both rising more than 2 per cent in early Asian trading. “The euro area has caught up with the US: both legs of economic policy, monetary and fiscal, are now providing massive support,” said Gilles Moec, chief economist at Axa.
Emmanuel Macron, the French president, also expressed his “full support” for the ECB’s “exceptional measures”, writing on Twitter that it was now time for eurozone governments to act more aggressively on the fiscal side. “Our people and our economies need it,” he wrote.
Economists have been calling for the ECB to increase its bond-buying programme, which has already collected €2.6tn of assets, particularly since the borrowing costs of southern eurozone countries, including Italy and Greece, began rising sharply to levels not seen for more than a year.
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The ECB opened the door to buy Greek sovereign bonds for the first time since the country’s sovereign debt crisis by announcing a waiver for its debt under the new asset-purchase programme.
Another option for the ECB to repair market confidence would be to lift its self-imposed limits to not buy more than a third of the eligible sovereign bonds of any single country and to purchase sovereign bonds in proportion to the weight of each country’s investment in its capital.
The ECB signalled this was under consideration, saying: “To the extent that some self-imposed limits might hamper action that the ECB is required to take in order fulfil its mandate, the governing council will consider revising them to the extent necessary to make its action proportionate to the risks that we face.”
Melvyn Krauss, a senior fellow at Stanford University’s Hoover Institution, said: “The only way the ECB can calm European bond markets and be creditable about it is to relax the self-imposed political constraints like issue limits.”
The latest €750bn package comes on top of last week’s €120bn extra purchases and means the ECB will buy more than €1tn of bonds in the next nine months — its highest ever pace of purchases.
Last week, the ECB gave itself more capacity to buy bonds issued by Italy and other eurozone countries by increasing its existing €20bn-per-month programme of asset purchases by the extra €120bn over the course of this year. It also beefed up the cheap loans it offers to banks and granted lenders various forms of capital relief.
However, since then eurozone countries have imposed more severe lockdowns on their residents as the coronavirus continued to spread, forcing a shut down of retailers and other consumer activities. Both the US Federal Reserve and the Bank of England have in recent days announced extra measures to shield their economies from the lockdown and to inject liquidity into financial markets.
Bruno Le Maire, France’s finance minister, added to pressure on the ECB earlier on Wednesday, saying: “All of the instruments available to the European Central Bank should be used quickly and massively.” He added: “I’m watching the interest rates everyday, we want the European Union to show its determination and its solidarity.”
It is rare for the ECB to change monetary policy outside of its scheduled meetings every six weeks, which is something it has only done a few times before, usually in a co-ordinated move with other central banks, such as after the 2008 financial crisis and 2001 terrorist attacks.
Ms Lagarde told EU leaders this week that if the lockdown of many households and businesses continued for as long as a month it would knock 2 percentage points off the central bank’s forecast for eurozone growth of 0.8 per cent this year.
If the freeze on many business and consumer activities lasted three months, the ECB estimates it would knock more than 5 percentage points off growth this year.
This has increased the pressure on the ECB to do more, prompting its governing council members to hold Wednesday evening’s emergency call. Earlier on Wednesday, the ECB took the unusual step of issuing a statement to deny a claim by Robert Holzmann, the outspoken head of Austria’s central bank and a member of the ECB governing council, that its monetary policy had reached its limits.
Ms Lagarde was also forced to beat a hasty retreat and to issue an apology to the rest of the council last week after she said it was not the ECB’s role to “close the spread” in sovereign debt markets — referring to the gap between Italian and German bond yields that is a key risk indicator for Italy.
That triggered a bond market sell-off, pushing Italian government bond yields — and thus Italy’s debt financing costs — up. Yields rise when prices fall.