ECB Begins New Bond Purchases, Throwing Weight Behind Virus-Hit Nations
March 26 2020 - 8:32AM
Dow Jones News
By Tom Fairless
The European Central Bank sent a powerful signal to investors
that it will aggressively support Italy and other indebted eurozone
countries that are battling the coronavirus, starting purchases
under a new EUR750 billion ($812 billion) bond-buying program and
stating that it won't be bound by earlier limits on its bond
buys.
The ECB's actions ricocheted through financial markets on
Thursday, pinioning down the yields on Southern European government
debt.
That eases pressure on European Union leaders, who are preparing
to discuss new measures Thursday to support the region's
financially weaker governments through the crisis, including
controversial common debt instruments.
But the bank's move, which took investors by surprise, could
also raise legal and political concerns in Northern European
countries like Germany, where the ECB's bond purchases have faced a
series of legal challenges. Germany's top court is expected to give
its verdict on an earlier ECB bond-buying program on May 5.
Under a legal act adopted overnight Thursday, the ECB said it
would have broad flexibility to focus its new EUR750 billion
bond-buying program, announced last week, to force down the
borrowing costs of any eurozone country it chooses. That represents
a major shift from the bank's earlier bond-buying program, under
which the ECB restricted itself to buying no more than a third of
the debt of any individual government.
ECB officials had signaled last week that they would consider
easing the limits on their bond purchases, but a decision didn't
appear to have been made.
The change should help to ease concerns that the pandemic will
unleash a new debt crisis in the currency union, as vulnerable
governments step up borrowing to pay for health care and measures
to support closed businesses and the unemployed.
"This decision strengthens the ECB's quasi fiscal support to the
most vulnerable sovereign states," said Frederik Ducrozet, an
economist with Pictet Wealth Management in Geneva.
Some observers suggested the ECB's move might be a symbolic
gesture to investors, and that the bank would in fact take care to
abide by limits that have been sanctioned by European courts.
"It is important for the ECB to remain within these limits,"
given that Germany's top court was already quite critical of the
ECB's bond purchases, said Lars Feld, chairman of the Council of
Economic Experts, which advises the German government.
Still, Mr. Feld said that an expected increase in government
bond issuance across the region this year, including in Germany,
could allow the ECB to remain within the 33% limit even as it
aggressively supports Italy.
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
March 26, 2020 08:17 ET (12:17 GMT)
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