Thursday 19th March 2020
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The European Central Bank launched an extra emergency bond-buying program worth 750 billion euros ($820 billion) in the latest attempt to calm markets and protect a euro-area economy struggling to cope with the coronavirus epidemic.
“Extraordinary times require extraordinary action. There are no limits to our commitment to the euro,” President Christine Lagarde said. The euro and U.S. equity futures rose after the stimulus measures.
The decision in an unscheduled meeting on Wednesday night is the latest in an escalating global response to an outbreak widely seen driving the economy into recession this year. In Europe, officials are weighing activating a regional bailout fund to help nations with strained public finances that saw their borrowing costs surge after announcing additional spending measures.
The ECB last week agreed to pump more liquidity into the financial system and joined other central banks in a bid to ease a funding squeeze. The measures on Wednesday include:
A temporary asset purchase program to buy public and private-sector securities, worth 750 billion euros and running until at least the end of 2020
Program will cover all assets eligible under current quantitative-easing program, and will be extended to commercial papers of sufficient credit quality
Greek government debt will be included in the program under a waiver from current rules
Collateral standards will be eased by adjusting some risk parameters
Program will continue until ECB judges the crisis phase of the pandemic to be over, but not before the end of this year
The ECB will consider raising its self-imposed limits on QE holdings, and stands ready to increase the size of its asset purchase programs
S&P 500 futures reversed losses and the single currency edged higher to trade around $1.0950.
Investors are pushing up bond yields as they fret about the cost of the massive fiscal response to the pandemic. Italy, which already has the euro zone’s second-biggest debt burden after Greece and is the worst-affected by the disease, is especially hard hit.
“We think that it is clear that central banks will use all their instruments to support financial markets and their functioning,” Ebrahim Rahbari, Citigroup’s global head of currency analysis, wrote in a note after the ECB decision. “However, we think we still need further fiscal easing and indications of absorbing private credit risk to stabilize financial markets more durably.”
In its statement, the central bank said it “will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.”
Venturing into the commercial-paper market is a novelty for the institution. In doing so, policy makers are taking a page out of the Federal Reserve’s book.
The Fed committed to backstopping the market for top-rated, dollar-denominated, three-month notes to support America’s biggest corporations in meeting short-term cash flow needs and payroll. The Bank of England has announced a similar plan.
The decision to consider raising the limits on QE holdings could be controversial. The caps, set at the start of the program in 2015, are meant to address concerns the central bank would breach European Union law by financing governments.
Lagarde’s predecessor, Mario Draghi, argued last year the Governing Council could loosen standards if economic circumstances warrant it. Taking that step in the immediate future faces one key complication -- a German constitutional court ruling on the legality of QE is just weeks away.
Wednesday’s announcement came hours after French Finance Minister Bruno Le Maire called on the ECB to intervene “quickly and massively” using all its instruments.
With yields spiraling, euro-area officials are looking at activating the region’s bailout fund to help contain the impact of the coronavirus, according to people familiar with the matter.
That would be a crucial step toward triggering the ECB’s most powerful bond-buying power -- Outright Monetary Transactions -- a program designed during the bloc’s debt crisis in 2012 to purchase the debt of specific nations.
That program, which grew out of Draghi’s “whatever it takes” pledge, has never been used.
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