ECB steps up ‘whatever it takes’ fight to save euro area

Bloomberg

The European Central Bank (ECB) will scrap limits on bond purchases for its 750 billion-euro ($819 billion) emergency program in a landmark decision that gives it almost unlimited firepower to fight the economic fallout from the coronavirus (Covid-19).
Government bonds rallied across the euro area after the ECB released a legal document that said the so-called issue limits, which constrained sovereign bond-buying to a third of each of its member state’s debt, “should not apply” to its new emergency program.
“The Eurosystem will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area,” according to the document.
The emergency program, scheduled to continue until at least the end of 2020, will also include bonds with shorter maturities than under its ongoing quantitative-easing operations.
The dramatic move tallies with President Christine Lagarde’s comment that there are “no limits” to the ECB’s commitment to the euro as the economy faces a deep recession due to severe restrictions imposed to check the spread of coronavirus.
The Governing Council agreed the Pandemic Emergency Purchase Program in an emergency late-night conference call a week ago. The legal details had to be finalized before it could be launched.
Frederik Ducrozet, global strategist at Bank Pictet & Cie. in Geneva, said the details are a game-changer for the ECB.
“In a nutshell, the decision removes virtually all constraints on asset purchases, in a further boost to the credibility of the ECB’s commitment,” he said in a note. “Asset purchases can now continue well into 2021, if needed.”
Short-dated Italian debt saw the biggest gains, with two year yields dropping as much as 13 basis points to 0.32%, the lowest level in a week. German 10-year yields fell six basis points to -0.32%. Greek bonds also surged.
While the ECB is set to buy more than 1.1 trillion euros of bonds this year, questions were raised about whether the scope of its purchases could run into self-imposed limits that would stop the buying in its tracks. Some Governing Council members have also opposed easing of the constraints, arguing it would amount to the ECB bankrolling governments.
By scrapping restrictions, the ECB has effectively reduced the need for potentially powerful instruments such as the outright monetary transactions program designed under then-President Mario Draghi in 2012. The emergency program is “better suited to cope with the current shock,” according to Berenberg economist Florian Hense.
“The ECB can now lend even more support to hard-hit countries such as Italy without the stigma that an early use of the OMT tool may have implied,” he said. “Of course, activating the OMT program once a country has asked for and been granted support from the European Stability Mechanism remains a powerful additional option.”
OMT would allow the ECB to buy nearly unlimited quantities of a nation’s sovereign debt, but is contingent on countries securing access to Europe’s bailout fund and is typically tied to conditions.
Both programs allow the ECB to push down bond yields that risk making much-needed fiscal stimulus unaffordable.