On Thursday 30 April, the European Central Bank (ECB) did not change the terms of its PEPP operation for the massive repurchase of private and public securities intended to help economic entities in the euro area face the unprecedented socio-economic crisis caused by the Covid-19 pandemic.
However, “we are fully prepared to increase the size of the PEPP and to adjust its composition, by as much as necessary and for as long as necessary”, said the President of the European institution, Christine Lagarde, at the end of the Governing Council meeting.
The ECB repurchased €96.7 billion worth of securities between the beginning of this €750 billion operation on 18 March, which runs until the end of 2020 (see EUROPE 12450/6), and 24 April, according to its website.
Mrs Lagarde said that the PEPP operation was specifically designed to counter the impact of the external and symmetric shock represented by Covid-19 on the euro area economy. She recalled that the limits that the ECB imposed on itself in terms of repurchase operations - for example, not exceeding a maximum threshold for holding certain public debts of the same country - could be revised, if necessary. And it has not ruled out an extension of the PEPP operation after 2020, if the situation so requires.
According to Lagarde, the Governing Council has not discussed the possibility of buying back risky sovereign bonds (‘junk bonds’), even though the Fitch rating agency recently downgraded Italian long-term securities.
The ECB is repurchasing Greek securities as part of the PEPP operation. It is also accepting securities whose financial rating has been downgraded significantly since the outbreak of the pandemic as collateral from banks acquiring liquidity from it.
The only news announced on Thursday was the creation of the new PELTRO refinancing instrument for the banking sector and the granting of even more advantageous financing conditions for the TLTRO III operation.
In total, “we have more than €1 trillion that we can deploy until the end of the year to purchase assets”, as well as “€3 trillion of liquidity to be provided to banks at a negative rate”, and “we have relaxed collateral rules” so that lending will continue “in times of market stress and looming financial ratings downgrades”, Lagarde said.
While the IMF is forecasting a 7.5% GDP recession for the euro area this year, the ECB has put forward a very wide range, between 5% and 12% of GDP, due to uncertainty about the duration of the lockdown that is crippling the economy and the impact of monetary and fiscal measures taken to avoid an economic collapse.
On Thursday, the EU’s statistical office (Eurostat) reported a drop in GDP of 3.8% and 3.5% respectively in the euro area and the EU27 in the first quarter of 2020 compared to the previous quarter, even though these figures only take into account two weeks of the lockdown.
After falling from 1.2% to 0.7% between February and March, inflation is expected to ease to 0.4% in April, again according to Eurostat. The ECB believes that lower energy prices and economic paralysis are weighing negatively on inflation in the short term. Uncertainty remains in the medium term due to the depth of the recession, as well as to a potential increase in prices linked to shortages.
It should be noted that the ECB welcomed the adoption of European safety nets for States, persons affected by short-time working, and enterprises (see EUROPE 12465/2), and calls for the creation of a European Recovery Fund to kick-start the European economy.
Asked about the possible activation of the LMO sovereign bond buyback operation, which would allow euro area countries to activate credit lines from the European Stability Mechanism (ESM), Mrs Lagarde recalled that such activation was “not automatic”.
Finally, on Thursday, the ECB decided to keep its main key rates unchanged. (Original version in French by Mathieu Bion)