Coronavirus: European Central Bank launches 750 billion euro emergency program

It was necessary to react, while the whole euro zone had its eyes riveted on Frankfurt. This Wednesday evening, a little before midnight, the European Central Bank announced the launch of a new device that will allow it to buy 750 billion assets called Pandemic Emergency Purchase Program (or PEPP), it aims to counter the crisis which is shaking the European economy and markets in the face of the effects of the coronavirus epidemic.

In addition to its very large amount, and even slightly higher than that announced by the Fed, this device will be more flexible than the asset purchase program (QE) launched in 2015 and still in progress. The ECB will, for example, be able to buy bonds from Greece, which is not a small revolution for the central bank. It can be used without a monthly spending limit. And the ECB will be able, if necessary, to temporarily deviate from the capital key which determines the share of purchases devoted to each country in the euro zone.

Another peculiarity is that the PEPP will allow the ECB to buy “commercial papers”, short-term debt securities (less than six months), issued by companies. A market whose closure, in recent days, concerned the central bank.

Debt crisis spectrum

These announcements were particularly awaited. After these announcements, the futures contracts on the indices on Wall Street went green, a sign of the relief of the financial markets faced with this shock response from the ECB. For the past two weeks, the stock markets have been falling apart. The cost of borrowing by governments is increasing, as they reveal their plan for massive support for the economy. The spreads between the German debt, considered to be the safest, and that of other European states has widened sharply in recent days, especially against Italy.

A situation that raises the specter of a fragmentation of the euro zone, as during the European debt crisis between 2010 and 2012. And the situation could become even more tense as States will borrow more on the markets to finance their efforts towards businesses. This is particularly the case for France, which unveiled its new figures on Wednesday and will raise its debt on Thursday morning. In the evening, Bruno Le Maire, the French Minister for the Economy, had called on the ECB “to intervene quickly and massively using all the instruments at its disposal”.

If the ECB was particularly expected, it is because the measures presented last Thursday were not really convincing. While the US Federal Reserve and the Bank of England cut their key rates massively, the Frankfurt institution opted for targeted measures, notably aimed at flooding banks with liquidity so that they lend to businesses. Especially his message was scrambled by communication errors.

By declaring that the role of the central bank was not to tighten the spreads (the rate spreads between the States), Christine Lagarde suggested, against her will, that the Central Bank abandoned the commitment to do “everything which is necessary “to save the euro area. An assumption that jumped the Italian debt rate The President of the European Central Bank immediately corrected the situation, and several eminent members of the Governing Council reaffirmed that the fight against fragmentation was a priority.

The ECB had to intervene again on Wednesday morning, via a “clarification” after the publication of an interview with the governor of the Austrian national bank, Robert Holzmann. In the daily Der Standard, he said in particular that monetary policy had reached its limits. It has since backtracked, but this new incident did not help calm the markets. The Wednesday evening meeting should therefore lead to a clearer and stronger message.

More info to follow …

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