Timeline of the ECB’s response to the crisis:
March 12: The ECB decides to expand its QE programme by €120bn until the end of 2020, with a special focus on private sector bonds, such as corporate bonds, and to offer more favorable terms for the already planned TLTRO III with a rate up to -0.75%.
March 18: “Whatever it takes” moment. The ECB unveils its Pandemic Emergency Purchase Programme (PEPP) of €750bn until the end of 2020 with a high degree of flexibility: the 33% limit DOES NOT apply and the ECB can purchase debt across all the yield curve, including Greek debt under waiver. The QE program reach a total of €1050bn until the end of the year (including previous measures and the relaunch of QE by Draghi in 2019).
April 7: The ECB decides a very significant easing of its collateral requirements, including an expansion of eligible credit claims (ACCs) to SME loans, Greek debt (waiver) and a 20% reduction in haircuts.
April 22: The ECB accepts some junk-rated debt as collateral for loans to banks (Important caveats: the bonds must be rated as investment grade on April 7).
June 4: The ECB increases the €750bn envelope for the PEPP by €600bn to a total of €1350bn. All asset categories eligible under the existing asset purchase programme (APP) are also eligible under the new programme.
June 25: The ECB creates a Eurosystem repo facility to provide liquidity in EUR to central banks outside the euro area. This is a precautionary measure to alleviate potential euro funding difficulties due to the pandemic.
The timely response to the pandemic by the ECB successfully managed to close governments financing gap in the Eurozone. Despite the depth of the recession and the large negative shock to the level of public debt, Italy is able to finance COVID-19 expenses at very low cost, without requesting financial help from the ESM. The 10-year Italy-Germany government bond spread is basically back to pre-COVID levels, at 1.66% versus a crisis peak at 2.77% in mid-March. The ECB’s greatest success is that it has avoided a remake of the 2012 debt crisis, by absorbing almost all new public debt related to the pandemic, and by providing as much liquidity as necessary to the market, thus preventing the emergence of a liquidity crisis. Much bas been said about Christine Lagarde’s appointment as president of the ECB, but we need to recognize, myself included, that we were probably too critical and that she has brilliantly managed the crisis, almost making us forget about Draghi.
The ECB has managed to “fill the gap” in the Eurozone