When news broke on Wednesday that the ECB was holding an emergency meeting, the market knew something was coming, it just wasn’t clear what.
French Finance Minister Bruno Le Maire implored the central bank to intervene “quickly and massively” in order to tamp down spreads and said he wanted to see Christine Lagarde marshal all of the instruments at her disposal and “quickly”, at that.
Fast forward a few hours and the ECB did, in fact, act. The Governing Council on Wednesday evening announced a new asset program for both public and private securities. The new facility is dubbed “Pandemic Emergency Purchase Program” or, “PEPP” if you like.
Because everything the ECB does has to be accompanied by an obligatory caveat about decisions being taken solely on the basis of ostensible risks to monetary policy functioning, the PEPP announcement begins with the bank saying that the spread of the virus poses “serious risks to the monetary policy transmission mechanism”.
As if that’s the paramount concern here, right? The ECB’s monetary policy transmission channel has arguably been broken for years, primarily because the bank’s task (coordinating a unitary monetary policy applicable to disparate economies) is inherently impossible.
In any case, the ECB goes on to state the obvious: COVID-19 is poised to weigh heavily on the outlook for the euro area.
Remember, a viral epidemic is just about the last thing Europe needed. Output contracted in Italy and France in Q4 and the bloc’s economy was essentially flatlining even before the outbreak. Germany came into 2020 mired in the deepest industrial slump in recent memory.
Angela Merkel signaled Tuesday that Berlin could be amenable to joint EU debt issuance in order to cushion the blow from the virus. That would represent a rather remarkable change of heart from Germany.
Late last week, the EU Commission said a recession in Europe is now the base case.
“The direct impact through all channels is estimated to reduce real GDP growth in 2020 by 2.5 percentage points compared to a situation where there would be no pandemic”, the EC lamented. “Given that real GDP growth was forecast to be 1.4% for the EU in 2020, this would imply it could fall to just over -1% of GDP in 2020”.
Under PEPP, the ECB will rely on the capital key, but says purchases will be made in a “flexible” manner which “allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions”.
That’s essentially a nod to the necessity of making sure Italy doesn’t implode. Recall that last week, Lagarde’s errant “it’s not our job to close spreads” comment led directly to the worst day for Italian bonds on record.
At the March meeting, the ECB added €120 billion to QE and expanded/enhanced its liquidity provision mechanisms, but left rates unchanged. Generally speaking, the market was disappointed.
The ECB will also grant a waiver to ensure that Greek government securities can be purchased under the new facility.
PEPP will have total firepower of €750 billion, and will run at least through the end of this year, and maybe longer. The ECB says purchases will only cease under the new program “once [the GC] judges that the coronavirus COVID-19 crisis phase is over”.
Further, the ECB has expanded the range of assets that can be purchased under CSPP. Notably, the ECB will now buy non-financial commercial paper “of sufficient credit quality”, a move that follows the Fed’s decision to reinstitute the crisis-era commercial paper funding facility on Tuesday.
The ECB is also relaxing collateral standards.
After reiterating that the central bank “is committed to playing its role in supporting all citizens of the euro area through this extremely challenging time” where that means making sure that “all sectors of the economy can benefit from supportive financing conditions”, the statement says this:
The Governing Council will do everything necessary within its mandate. The Governing Council is fully prepared to increase the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed. It will explore all options and all contingencies to support the economy through this shock.
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 ECB will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.
Got that? The ECB will do “everything necessary”, including and especially recognizing that self-imposed constraints are just that – self-imposed, and therefore subject to being altered or ditched entirely should the circumstances warrant.
And, in case this non-thinking pathogen (which, by virtue of being a virus, cannot possibly possess a sense of purpose let alone read any central bank pronouncements), is listening, the ECB wants COVID-19 to know that the central bank “will not tolerate” the risk posed by this epidemic any longer.
European equities are down some 40% since February 19. That, despite ongoing asset purchases, soothing rhetoric and, of course, negative rates.
The virus is winning. But, central banks do have printing presses. And by god, they’re about to be runnin’ hot.