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HOW THE ECB IS REACTING TO THE PANDEMIC

Federica M. Greco

The outbreak of COVID-19 has led to heavy losses for families, industries and business activities in numerous sectors. It has undermined the stability of the economic system, which is why the European Central Bank, after initial hesitation about how to react, agreed to buy public and private bonds to face the emergency and reassure the markets.

On March 25th, the ECB announced a €750 billion asset-purchase programme - the PEPP - in response to the coronavirus outbreak and declared that they were ready to review the limits on bond purchases. The change of pace in the ECB’s strategy happened after Italy's sovereign Spread reached 300 basis points on March 18th.

Quoting Christine Lagarde, “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate”. That is why, from now, the ECB will purchase without limit, government bonds and bonds issued by international and supranational entities, through the new extraordinary and temporary Pandemic Emergency Purchase Programme (PEPP).

The ECB will therefore not have to respect the 33% limit for government bonds and the 50% limit for the supranational ones; limits that so far had constrained PEPP’s purchases on public assets. The PEPP is intended to last until the end of the year.

This is an unprecedented action that takes into account the exceptional emergency of the pandemic. It fully broadens ECB’s freedom of action in the sphere of government bonds and securities issued by the European Investment Bank and the European Stability Mechanism. In fact, in the hypothetical case of a Eurobond issue, the ECB will be allowed to subscribe the total amount of it.

In Italy, investors and financial players are worried about a recession. In fact, Italy’s GDP decline forecast ranges between -6% and -10% and the Italian debt is going to reach 150%. For that reason, a response from the ECB was necessary. Now, we have just to see if it will work.


Source: IlSole24Ore