- Relative to its actions to date, the European Central Bank (ECB) is demonstrating much more flexibility when it comes to distribution of its purchases across asset classes and in regards to the capital key.1
- It is notable that the ECB’s final sentence in the PEPP statement was, “The ECB will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.”
- The ECB is in “do whatever it takes mode.” We believe it will eventually succeed.
Like everywhere else, Europe needs liquidity. And the ECB is delivering that in abundance. It appears to stand ready to do more without delay when markets become dysfunctional.
The ECB is effectively monetizing the debt that will be necessary to help bridge the cash-flow gap resulting from governments "freezing" their economies. Fiscal policy is also stepping in with liquidity buffers to help individuals and businesses to bridge this gap. We acknowledge that there could be missteps with some individuals and businesses falling through the safety net. But the “lender of last resort” restores order by promising sufficient liquidity. That is the goal of the ECB and it is delivering.
Big spender: a breakdown of ECB buying programs
We estimate ECB asset purchases through 2020 will be approximately €1.06 trillion, with reinvestments around another €220 billion. We don’t know which program the ECB is using for its purchases—but it is buying. Here is the breakdown:
ECB Asset Purchase Programs (APP):
- ECB Quantitative Easing (QE) Version 2: €20B/month. The program started November 2019 and will continue “for as long as necessary.”
- QE “Envelope”: €120B. This facility was announced March 12, 2020, and could last at least until December 2020. It could be deployed flexibly in terms of time and assets to address market dysfunctions. It will have a strong focus on buying private assets in the short term.
- PEPP (Pandemic Emergency Purchase Programme): €750B. It will run from March 26, 2020, until at least December 2020 or until COVID-19 ends. It can be deployed flexibly, and will terminate once the ECB judges that the COVID-19 crisis is over. It will not be subject to the 33% issuer limit; Greek government bonds are eligible securities under this scheme.
The ECB also has Optional Rescue Plans that it has not enacted. But given its recent actions and tone, we would not be surprised to see these facilities put into effect at some point.
Tom Fahey, Senior Global Strategist, Co-Director of Macro Strategies
Marianne Winkelman, Director of Global Bond, EM & FX Trading
Robyn Wilkin, Fixed Income Trader
Valerie Miles, CFA, Fixed Income Trader
1Capital Key: The capital of the ECB comes from the national central banks (NCBs) of all EU Member States. The NCBs’ shares in this capital are calculated using a key which reflects the respective country’s share in the total population and gross domestic product of the EU.
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