European Central Bank announces $820bn emergency bond purchases

The European Central Bank (ECB) launched new bond purchases worth 750 billion euros ($820bn) at an emergency meeting late on Wednesday in a bid to stop a pandemic-induced financial rout shredding the eurozone’s economy and renew concerns about the bloc’s viability.

With much of Europe in lockdown amid the coronavirus outbreak, economic activity has come to a near standstill and markets have been in a tailspin, foreshadowing a deep recession on par with the 2008 global financial crisis and raising questions about the eurozone‘s cohesion at times of stress.

Under pressure to act to bring down borrowing costs for indebted, virus-stricken countries such as Italy, the ECB launched a new, dedicated bond-purchase scheme, bringing its planned purchases for this year to 1.1 trillion euro ($1.2 trillion) with the newly agreed buys alone worth 6 percent of the euro area’s gross domestic product (GDP).

“Extraordinary times require extraordinary action,” ECB President Christine Lagarde said. “There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.”

The bond purchases will continue until the “crisis phase” of the epidemic is over and non-financial commercial paper – bonds issued by companies but not banks – will also be included for the first time among eligible assets, the ECB said.

The euro rebounded after the announcement and was last up 0.16 percent at $1.0929 but Asian stock markets quickly turned volatile as the measures provided only brief solace to panicky investors.

Although the ECB said it would still buy government bonds according to each country’s shareholding in the bank, the so-called capital key, it would also be flexible and may deviate from this rule.

This was seen as a hint that it will not tolerate the surge in yield spreads between eurozone members seen in Italy and Greece in recent days.

The purchases will also include for the first-time debt from Greece, which has been shut out of ECB buys because of its low credit rating.

Crucially, the ECB said it was prepared to increase the size and duration of its purchases if necessary and review any constraints that stand in its way – a likely reference to a cap on owning more than a third of any country’s debt.

“Provided the fiscal response continues to build up, this looks like a game-changer for the euro area economy and markets,” Frederik Ducrozet, a strategist at Pictet Wealth Management, said.

However, the ECB left its minus 0.5 percent deposit rate unchanged just as it did last Thursday, another sign that policymakers may now see a further cut doing more harm than good.

Meeting in a regular session last Thursday, the ECB approved a large stimulus package but the measures disappointed investors, prompting some to question the bank’s commitment to former ECB boss Mario Draghi’s pledge to do “whatever it takes” to save the euro.

With bond yields on the bloc’s periphery soaring and the spread between Italian and German ten-year debt doubling in just a few days, pressure has been mounting on the ECB to do more.

Panic-selling pushed 10-year Italian yields above 3 percent briefly on Wednesday, raising concerns about the sustainability of its debt, before ECB purchases and verbal intervention pushed it back to about 2.3 percent.

Additional measures from Frankfurt may not, of course, fix the issue just like aggressive rate cuts and far greater bond-buying by the United States Federal Reserve have not calmed sentiment.

US stocks deepened their selloff on Wednesday and the Dow erased virtually the last of its gains since President Donald Trump’s 2017 inauguration, as the widening repercussions of the coronavirus pandemic threatened to cripple economic activity.