Business & Economy

ECB expands Covid-19 recovery debt purchasing by 600 billion euros

Frankfurt, Germany, Jun 4 (efe-epa).- The European Central Bank on Thursday extended its coronavirus recovery package by 600 billion euros ($675bn).

The decision boosts the envelope for the pandemic emergency purchase programme (PEPP) to a total of 1.35 trillion euros.

The ECB said it would expand the period of net purchases until at least the end of June, or when the central bank’s governing council agrees the coronavirus crisis to be over.

The period of reinvesting principal payments from securities purchased under the PEPP scheme will continue until at least 2022, the bank said.

It added that interest rates on the refinancing program will remain steady at zero percent until inflation bounces back towards two percent.

The euro reacted positively to the announcement, rising against the US dollar.

As of 29 May, the ECB has bought 234.6 billion euros worth of debt, including 186.6 billion of public debt, 38.38 billion in bank promissory notes and 10.57 billion in corporate bonds.

Christine Lagarde, head of the ECB, said the governing council had not made a decision on the purchase of junk bonds.

As part of its extraordinary debt purchasing scheme, the bank has said it will accept bonds that had been downgraded as long as they met minimum investment requirements with a credit rating of BBB as of 7 April 2020 and were currently no lower than BB, which is non-investment grade, or more simply known as a junk bond.

The peculiarity of the new debt purchase program is that it is flexible and the ECB can buy more debt from a country at any given time if its risk premium shoots up in the market.

“The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. This allows the Governing Council to effectively stave off risks to the smooth transmission of monetary policy,” the ECB said.

In a press briefing, Lagarde said the eurozone economy was forecast to contract 8.7 percent this year as a result of various emergency restrictions enforced in most European Union countries to contain Covid-19.

“Incoming information confirms that the euro area economy is experiencing an unprecedented contraction,” she added.

“There has been an abrupt drop in economic activity as a result of the coronavirus pandemic and the measures to contain it.”

“The latest economic indicators and survey results confirm a sharp contraction of the euro area economy and rapidly deteriorating labour market conditions,” she continued.

“Information from surveys, high-frequency indicators and incoming hard data all point to a further significant contraction of real GDP in the second quarter.”

Lagarde said euro activity was not expected to rebound until the third quarter when confinement measures have been eased across the board.

“The extent of the contraction and the recovery will depend crucially on the duration and the effectiveness of the containment measures, the success of policies to mitigate the adverse impact on incomes and employment, and the extent to which supply capacity and domestic demand are permanently affected,” she added. EFE-EPA


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