March 19 2020
The European Central Bank is finally on track to deliver much needed stimulus to battered markets in Europe.

What Happened

After an emergency meeting, the European Central Bank (ECB) announced plans to purchase €750b ($820b) in more bonds in response to deteriorating economic and financial market conditions.

The bond-buying program aims to purchase sovereign bonds, which are already covered by the current quantitative easing program. Additionally, the program includes corporate debt in an effort to provide relief to European corporate debt markets. Greek government debt will also be included in the program with a waiver from current rules, indicating strong support for peripheral countries hit hard with higher borrowing costs.

The purchase program will run at least through the end of the year, or even longer if the pandemic crisis continues. The ECB is also reconsidering the self-imposed one-third sovereign issuer limits to allow more room for bond purchases when needed.

Investment Implications

During normal times, a strategic move like this would be a game-changer. However, we are not living in normal times. The size of the program is appropriate and timely, assuming the spread of the virus will be contained in Europe sooner rather than later. Without this backstop from the ECB, European economies were facing a significant struggle ahead; they may still do so if the containment efforts last much longer than expected.

Opening the door for corporate bond purchases by the ECB could guide the Federal Reserve (Fed) to do the same. The Bank of England also introduced similar programs for small businesses called “Funding for Lending Scheme.” Former Fed Chairs, Ben Bernanke and Janet Yellen, recently recommended that the Fed ensure that credit is available for sound borrowers who face temporary losses. Credit markets are the backbone of our modern economies, and authorities guiding overall monetary policies are out in full force to prevent dislocations in credit.

Bottom Line

In many countries, new fiscal stimulus packages are being introduced almost by the hour, and on the monetary side, major central banks are offering cheap funding to significant parts of the economy. These measures are an attempt to support economic growth as Covid-19 spreads across the globe. Many unknowns remain, but the good news is that on March 18th, China added only 13 new confirmed cases and Korea added only 84. After two months of lockdown, the city of Wuhan in China, where it all began, announced no new Covid-19 cases. What we need to see next is more signs that containment efforts underway in other countries, including the US and Italy, are slowing the growth rate of the virus as well. In the meantime, the ECB’s move was timely and necessary given the dire economic environment in Europe.

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CN2020-0670 EXP12-2020