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Thursday 10 December 2020
To update
Bonds for 1.85 billion euros
The ECB supports companies and states with new billions
In the fight against the crown crisis, the ECB is pumping more billions into the market. This is the second time the aid program has been expanded this year. The second wave is affecting the economies of Europe. However, the ZEW warns of the negative consequences of the new measures.
The European Central Bank is flooding the financial markets with billions more. This is intended to ease the economic upheavals of the Corona crisis. The program for the purchase of government bonds and corporate securities will be expanded by € 500 billion to € 1.58 trillion. This is what the central bankers decide at their council meeting in Frankfurt.
The duration of the program will also run for nine months to at least the end of March 2022. At the same time, the ECB is providing more particularly cheap long-term loans (PELTRO) to commercial banks and easing the conditions for long-term loans. that are already running.
However, in terms of interest rates, everything remains the same: the key interest rate in the euro area has been at a record low of zero percent for almost five years. Commercial banks still have to pay 0.5 percent interest when they deposit money with the central bank. The exemptions for certain amounts are intended to relieve the institutes of costs.
“The ECB will also be there in the second wave”
Just in June, the central bank had almost doubled the volume of the particularly flexible PEPP (Pandemic Emergency Purchase Program) launched in March to 1.35 trillion euros. Securities purchases help both states and companies: they don’t have to offer such high interest rates on their securities if a central bank is a big buyer in the market.
After the council meeting in October, the monetary authorities left no doubt that they wanted to step up again. “Even if the second wave of the virus turns out to be less violent than the first, it poses no less of a threat to the economy,” ECB President Christine Lagarde said recently. “The ECB was there in the first wave and it will also be there in the second wave.”
Recently, the corona virus had spread massively again. In many euro area countries, public life was once again restricted. After the recovery in the summer months, concerns about the economy mount. The other central bank bond purchase programs, which have been running on a hiatus since March 2015, had already reached a whopping volume of just over three trillion euros by the end of November.
ZEW sees measures exceeded
LBBW Chief Economist Uwe Burkert believes the decision is justified and not surprising. However, one or the other could have expected more. The ECB may recheck the key interest rate.
According to Alexander Krüger of Bankhaus Lampe, the company is seizing the moment mainly to “continue its covert monetary state funding and secure favorable financing rates in the medium term.” However, it is questionable whether this will be successful. “Because the increase should only last until March 2022 if the buying speed is moderate.” In view of the increase in public debt in the next year, “it seems a lot that today’s search is not the last.”
Thomas Gitzel of VP Bank notes that the start of 2021 will be extremely bumpy for the entire euro zone. That is why the ECB had to act. He also doesn’t see the end of the flagpole yet. The ECB will also provide “monetary policy assistance”.
Meanwhile, ZEW offers clear caveats. The ECB is now increasingly in danger of “losing all measure with its massive purchases of government bonds and the extension of the term that has taken place.” The almost complete “equalization of government debt yields in the euro zone is now beyond comprehension”. To make matters worse, “the purchases of government bonds by the central banks of the euro are now totally unilaterally oriented towards a few countries with higher education.” The ZB must “finally make preparations to reduce the de facto total dependence of southern Europe on central bank money.” The big task for 2021 is now to “communicate the exit from bond purchases cautiously and still credibly.” Otherwise, the claim of monetary state funding is increasingly difficult to disprove.
