ECB launches “Pandemic Emergency Purchase Programme”

Late
on Wednesday, the European Central Bank announced an emergency €750bn bond-buying
spree in a second attempt to ease the impact of the coronavirus pandemic.

Until
the end of 2020, under this scheme, it will buy not only government and company
debt across the Eurozone, but also non-financial
commercial paper. It has also eased collateral standards in order that banks
can raise money against more of their assets, including corporate finance
claims. The latest purchase intentions
mean that the ECB will buy more than €1tn of bonds in the next nine months
— its highest ever pace of purchases.

However,
to calm the storm in bond markets, some analysts believe that the ECB will have
to relax its capital key requirements which dictate that:

• It cannot buy more
  than one third of the eligible sovereign bonds of any individual country.
• It should purchase
  sovereign bonds in proportion to the weight of each country’s investment in its
  capital.

Recent
comments could suggest that the bank is mulling this over internally. The bank
said: “To the extent that some self-imposed limits might hamper action that the
ECB is required to take in order to fulfil its mandate, the governing council
will consider revising them to the extent necessary to make its action proportionate
to the risks that we face.”

The Chair, Christine
Lagarde, tweeted "there are no limits" to the central bank’s
commitment to the euro. The move comes only six days after the ECB ramped up
its TLTRO programme and set aside an “envelope” of €120bn
for purchasing assets; a play which underwhelmed markets.

Europe’s old world economy, which was just starting to show
signs of recovery, looks particularly vulnerable to the unexpected blow from
the pandemic. Already, Maarten
Vervey, the European Commission’s director-general for economic and financial
affairs, admitted that the growth forecast is “deteriorating very rapidly”.
Taking into account the economic shock from the virus and the containment
measures, Vervey said that “it is very likely indeed that growth for the euro
area, and EU as a whole, will fall below 0% and potentially even considerably
below 0%”.

In such an uncertain
environment, traders have switched to a “cash is king” mentality and this week,
even government bonds and other safe haven assets started to sell off.
The ECB’s move, as with other packages already announced by central banks
around the globe, offered little salve to ailing sentiment. It seems that the
only glint of hope will come from a falling infection rate and/or substantial
fiscal stimulus.

On this front, there was some
encouraging news on Thursday from China, which reported no new local infections for the previous day, a first
in the country’s
costly battle with the outbreak. Meanwhile, across the
Atlantic, real fiscal action is coming to fruition. The White House yesterday spelled
out the first facets of a $1 trillion economic package, requesting that
Congress provides $500 billion for direct payments to taxpayers and $500
billion in loans for businesses. President Trump invoked a wartime law that
allows the government to push domestic industries to ramp up the production of
medical supplies. He is also sending two military hospital ships to New York
and California. Can and will Europe’s governments follow with such measures of
their own, that’s the question…