ECB Begins New Bond Purchases, Throwing Weight Behind Virus-Hit Nations -- Update

Date : 26/03/2020 @ 23:48
Source : Dow Jones News

ECB Begins New Bond Purchases, Throwing Weight Behind Virus-Hit Nations -- Update

By Tom Fairless 

The European Central Bank sent a powerful signal to investors that it will aggressively support Italy and other indebted eurozone countries that are battling the coronavirus, starting purchases under a new EUR750 billion ($812 billion) bond-buying program and stating that it won't be bound by earlier limits on its bond buys.

The ECB's actions ricocheted through financial markets on Thursday, pinioning down the yields on Southern European government debt.

That eases pressure on European Union leaders, who discussed new measures Thursday to support the region's financially weaker governments through the crisis, including controversial common debt instruments.

Those discussions ended without any agreement on new specific steps. However, leaders agreed to task finance ministers with presenting new options within two weeks for economic measures the eurozone could take if the situation merited it.

But the bank's move, which took investors by surprise, could also raise legal and political concerns in Northern European countries like Germany, where the ECB's bond purchases have faced a series of legal challenges. Germany's top court is expected to give its verdict on an earlier ECB bond-buying program on May 5.

Under a legal act adopted overnight Thursday, the ECB said it would have broad flexibility to focus its new EUR750 billion bond-buying program, announced last week, to force down the borrowing costs of any eurozone country it chooses. That represents a major shift from the bank's earlier bond-buying program, under which the ECB restricted itself to buying no more than a third of the debt of any individual government.

ECB officials had signaled last week that they would consider easing the limits on their bond purchases, but a decision didn't appear to have been made.

The change should help to ease concerns that the pandemic will unleash a new debt crisis in the currency union, as vulnerable governments step up borrowing to pay for health care and measures to support closed businesses and the unemployed.

"This decision strengthens the ECB's quasi fiscal support to the most vulnerable sovereign states," said Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.

Some observers suggested the ECB's move might be a symbolic gesture to investors, and that the bank would in fact take care to abide by limits that have been sanctioned by European courts.

"It is important for the ECB to remain within these limits," given that Germany's top court was already quite critical of the ECB's bond purchases, said Lars Feld, chairman of the Council of Economic Experts, which advises the German government.

Still, Mr. Feld said that an expected increase in government bond issuance across the region this year, including in Germany, could allow the ECB to remain within the 33% limit even as it aggressively supports Italy.

While the ECB forged ahead with its response to the crisis, EU leaders remained deeply divided over what further fiscal steps to take to boost the economy. After a fractious teleconference that ran hours over schedule, leaders said in a statement they would step up their response "as necessary, with further action...in order to deliver a comprehensive response."

However, the statement made no reference to specific steps like offering precautionary credit lines from the eurozone bailout fund or the possibility of common debt issuance, which is being pressed by Italy, Spain and France, among others.

After the meeting, the office of Spanish Prime Minister Pedro Sanchez said his government now expects the euro group to present "concrete medium and long-term funding proposals." Spain and Italy blocked several draft statements during Thursday evening's talks, and at one stage, Italian officials suggested the discussions would end without any agreement.

However, Dutch Prime Minister Mark Rutte said he couldn't "foresee any circumstances in which" the Netherlands would support the option of common debt issuance.

German Chancellor Angela Merkel made clear that providing countries access to the ESM is Germany's preferred position but said leaders didn't go into details on this.

"In the ESM, we have a crisis tool that opens many possibilities that does not question the basic principles of our common action and individual responsibility," she said.

--Laurence Norman contributed to this article.

Write to Tom Fairless at tom.fairless@wsj.com

 

(END) Dow Jones Newswires

March 26, 2020 19:33 ET (23:33 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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