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ECB to Launch New Bond-Buying Program to Combat Coronavirus Slowdown

The European Central Bank unveiled a new EUR750 billion bond-buying program aimed at shielding the eurozone economy from the spreading coronavirus, casting aside longstanding taboos to send a determined signal to investors that the bank will stand behind the region’s embattled governments.

The unexpected move, following days of delay and mixed messages from the ECB, underscores the high level of urgency among policy makers in Europe, which has emerged as the new center of the fast-moving global crisis.

Borrowing costs for Southern European countries have jumped in recent days, reflecting concerns that the region’s governments might struggle to meet their obligations as spending demands increase. That has revived memories of the eurozone debt crisis nearly a decade ago.

While analysts cheered the ECB’s move, it could raise fresh concerns in the region’s largest economy, Germany, where officials have long worried about overreach by the ECB.

In a statement, the bank said it would buy EUR750 billion of public- and private-sector assets at least through the end of the year, and possibly beyond. The purchases — dubbed the Pandemic Emergency Purchase Program — will include Greek government debt, which was excluded under earlier ECB bond-buying programs.

The decision came during an unscheduled late-night conference call among top ECB officials, on a day when borrowing costs for governments like Italy and Spain jumped as the virus roiled and shuttered the region.

“This looks like a game-changer for the euro area economy and markets,” said Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.

It means the ECB will be able to buy almost EUR120 billion a month of eurozone debt for the rest of the year — the largest amount ever. Under the rules of the program, the ECB could focus its purchases in the short-term on Italy and other struggling governments.

“It sends a very, very strong signal to markets,” said Torsten Slok, chief economist at Deutsche Bank Securities in New York. “This is the bazooka.”

The decision marks an about-turn for the ECB, which had dragged its feet for weeks about the need for aggressive monetary stimulus, even as major central banks like the Federal Reserve announced deep interest-rate cuts and other actions to help combat the virus.

Last Thursday, ECB President Christine Lagarde stressed at a news conference that the bank was “not here to close spreads,” suggesting it wouldn’t intervene to narrow the difference in borrowing costs between Germany and Italy.

That comment stunned investors, and the ECB quickly sought to walk it back. The incident called into question the ECB’s carefully crafted role as an effective lender of last resort to eurozone governments. The ECB is prohibited under European treaties from financing governments, but European courts have supported its right to use bond purchases to calm markets.

As Italy’s sovereign debt came under pressure this week, however, the ECB intervened in the market via the nation’s central bank, according to a person familiar with the matter. It also sought to redirect remarks by senior officials suggesting that the bank would take no further action.

“It has intervened in a flexible but intense way due to the volatility of markets,” the person said.

The ECB declined to comment.

In a confusing twist Wednesday, Austrian central-bank Gov. Robert Holzmann suggested in an interview that investors were right in assuming that the ECB would do little more to support the economy.

He even suggested that a downturn in Europe might have a positive, cleansing effect on the economy by eliminating businesses that aren’t viable. “One should be careful that only the firms capable of surviving do survive, and that others that would have failed even without a crisis don’t survive,” Mr. Holzmann said.

A spokesman for Mr. Holzmann declined to comment further on his remarks, which prompted a swift response from the ECB. The bank said its top officials were united in their desire to use all their tools to support the region’s economy.

Still, Italy’s 10-year government bond yield rose above 3% on Wednesday for the first time in more than a year, as investors worried that the ECB wouldn’t step in to support Rome. The Greek equivalent traded above 4.1%, compared with less than 1% several weeks ago.

“This is the perfect storm,” said James Athey, an investment manager at Aberdeen Standard Investments. “Liquidity has essentially evaporated, the BTP [Italian government bond] market has essentially broken today. There are basically no bids and a lot of sellers.”

The ECB’s actions later Wednesday signal a new level of urgency.

On a conference call with European Union leaders on Tuesday, Ms. Lagarde said the eurozone economy would likely contract by 1.3% this year if business shutdowns lasted for one month and shrink by around 5% if the shutdowns lasted three months, according to a person familiar with the matter. The latter would represent a fiercer downturn than the financial crisis.

In its statement late Wednesday, the ECB suggested it might alter self-imposed limits on its bond-buying program, breaking a longstanding taboo. That would potentially give the bank room to buy more than a third of the outstanding debt of governments like Italy. It could also raise legal concerns in Germany, where the ECB has faced multiple lawsuits over its bond purchases.

The move underscores the urgency among ECB officials, said Mr. Slok. “It’s an attempt to try to calm markets down and stabilize them while they wait for the shock to subside.”
Source: Dow Jones

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