The European Central Bank (ECB) pulled out the heavy artillery late Wednesday evening (18 March) by announcing a new massive repurchase operation of private and public securities on an unprecedented scale of €750 billion, greater than the effort made in 2012 during the sovereign debt crisis in the euro area.
Objective: to convince the financial markets that the monetary institute will do 'whatever it takes' to prevent the fragmentation of the market for sovereign securities of euro-area countries and to erase the recent ambiguous statements of its president, Christine Lagarde (see EUROPE 12449/8).
Hailed on Thursday by the main European leaders, this new massive injection of liquidity, combined with new measures announced by other central banks, such as the U.S. FED, seems to have interrupted at this stage the negative spiral observed in recent days on the sovereign debt markets.
Dubbed the Pandemic Emergency Purchase Program (PEPP), the new temporary operation will have a strike force of 750 billion euros to use until the end of the economic crisis caused by the coronavirus pandemic, but "in any case not before the end of 2020", to acquire all of the securities already eligible for the existing ‘asset purchase program’ (APP) operation which had been relaunched last September at a rate of 20 billion euros per month (see EUROPE 12326/1).
With regard to the acquisition of sovereign securities, the general rule will be to acquire volumes corresponding to the ECB's capital key. Nevertheless, this rule will be applied flexibly depending on the nature of the securities and the countries of issue. For the first time, Greece is included in an operation of this nature, since it is no longer on a financial drip from the euro area. Finally, the ECB says it is ready, if necessary, to go beyond the self-imposed threshold of 33% ownership of a single country's debt.
"The ECB will ensure that all sectors of the economy can benefit from supportive financing conditions that enable them to absorb this shock. This applies equally to families, firms, banks and governments", said the Governing Council, saying that it was ready to further adjust the scale, composition and duration of its intervention in line with developments, while remaining within the scope of its mandate.
"There are no limits to our commitment to the euro", Lagarde said via Twitter.
The new PEPP operation, combined with the measures announced last week (see EUROPE 12445/1) and the relaunch of the APP operation, brings the ECB's ongoing liquidity injections to more than €1 trillion.
In response to the economic paralysis caused by Covid-19, many euro-area governments announced emergency measures (government guarantees, tax deferrals) that were greater than those taken during the 2008 financial crisis. They will therefore be obliged to borrow substantially on the markets. The French Finance Minister, Bruno Le Maire, has already warned that France's debt will exceed 100% of national GDP.
Already heavily indebted and facing sluggish growth in normal times, Italy was already the subject of debt speculation as the interest rate on 10-year Italian securities climbed to 2.5% on Wednesday, up from less than 1% at the end of February.
Many EU leaders have welcomed this novel initiative which, like other ECB sovereign debt buyback programmes (see EUROPE 11336/18), could ultimately be challenged in court for indirect financing of Member States.
"Europe did it!", Italian Prime Minister Giuseppe Conte welcomed the ECB's decision, saying it was "commensurate to the severity of the health crisis we are facing and the economic shock it is causing". The French President, Emmanuel Macron, gave his "total support for the exceptional measures" taken by the ECB. "It is up to our European States to do their bit, through our fiscal measures and greater financial solidarity within the eurozone", he said.
The reaction in the European Parliament is also very positive. According to its President, David Sassoli, the ECB acts to protect "families, workers, businesses".
More information on the PEPP operation: http://bit.ly/3dh3d9s (Original version in French by Mathieu Bion)