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The European Central Bank believes that the crown pandemic plunges the eurozone into the worst recession since World War II. Gross domestic product could collapse by as much as 12 percent. Therefore, the ECB is launching another aid program for banks, businesses and households and plans to buy bonds worth € 1.1 trillion in 2020.
ECB Director Christine Lagarde wants to examine all options to support the economy.
The European Central Bank (ECB) remains on high alert and in crisis mode. What else? In many eurozone countries, the biggest recession since World War II is unfolding due to the coronavirus pandemic. Central bank experts anticipate gross domestic product (GDP) in the euro zone could collapse by 5-12% this year, as ECB President Christine Lagarde said Thursday at the post-press conference. Regular meeting of the Governing Council said In the first quarter, GDP had already decreased by 3.8% compared to the previous quarter, although the pandemic mainly affected March.
Lagarde hopes the economy recovers later, but its speed and scale are highly uncertain. The same applies to the forecast of further development of inflation, which fell from 0.7% in March to 0.4% in April. The main reason for the low values in both months was the sharp drop in oil prices since the beginning of March. The ECB generally looks for inflation below but close to 2%. In the current environment, the central bank is now trying to support the economy in general, as well as member countries and companies in the euro area in particular, whenever possible. In doing so, it pursues three goals: ensuring abundant liquidity, protecting the smooth flow of credit from banks to businesses and households, and maintaining highly flexible financing terms.
The European Monetary Authority is not too big to achieve these goals. In 2020 alone, the ECB will make € 1.11 billion available for the purchase of government and corporate bonds and other securities for various securities purchase programs. In addition, commercial banks in the euro area can also access subsidized loans of more than € 3 billion through various programs, with less and less valuable loan guarantees. In some cases, banks can now borrow –1% from the ECB if they lend the money to businesses and households.
Starting in March, the central bank reacted in several steps to the spread of the coronavirus in Europe and its economic consequences due to the prescribed shutdown in many countries. At the last regular meeting on March 12, it announced the additional purchase of more than 120 billion euros in securities at the end of the year. The central bank has also been buying government bonds above 20 billion euros per month under existing general purchase programs (APPs) since the fall of last year.
Purchases likely to expand by 2021
A package of measures was also adopted to support banks in the euro area. The central bank temporarily introduced additional subsidized loans for commercial banks, the so-called long-term refinancing operations (LTRO). These should serve to save the financing of credit institutions until the summer. In June, previously announced and also subsidized long-term loans for banks (TLTRO III) will start for a year, the terms of which have also been further improved. As part of the LTRO, commercial banks had accessed central bank liquidity at a volume of € 275 billion in six tender operations at the end of last week.
On March 18, just before midnight, the ECB finally launched a massive new € 750 billion bond purchase program, the Pandemic Emergency Purchase Program (PEPP), shortly before midnight. However, if the ECB continues to buy at the current rate, the € 750 billion already sold out in October, which is why market participants are already speculating on a rise and extension of the program until 2021. Given experience with the central bank’s action would be a surprise if this did not happen.
Zero and negative interest rates in the coming years
Under the PEPP, the ECB is buying back Greek bonds and commercial papers from companies outside the financial sector for the first time. With PEPP, the ECB was also empowered to prefer government bonds from individual member countries, such as Italy, when making purchases, and restrictions in other purchase programs regarding issuance and issuance limits no longer apply. Central bankers had recently relaxed the requirements for tradable banks. The ECB now accepts securities with a rating lower than the “BBB–” asset class as collateral, referred to in the industry as junk papers.
This Thursday Lagarde also announced plans to launch a new series of long-term emergency refinancing operations (PELTRO) starting in May in euro area banks, which will expire in stages between July and September 2021. In addition, the ECB announced that it would once again significantly improve the terms of the TLTRO III loans that were announced in early June. The ECB has left key interest rates unchanged, with the key interest rate remaining at 0% and the deposit rate for banks, which is often also referred to as the penalty rate, at –0.5%. The zero and negative interest rates that have been in place for years are unlikely to change in the coming years.
You can go to business editor Michael Rasch Twitter, Linkedin and Xing, as well as NZZ Frankfurt on Facebook.
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