COVID-19: EU’s plan to save the economy
Italy’s borrowing costs plummet as investors reacted to ECB’s new bond buying program.
The day before, the regulator announced a € 750bn asset purchase program in an attempt to mitigate the impact of the coronavirus outbreak as the death toll in Europe continues to rise.
The central bank has said it will buy government and private securities to counter «serious risks» COVID-19. The so-called Pandemic Emergency Procurement Program (PEPP) will last until the end of the year.
The ECB has been criticized since Lagarde said in a press conference last week that the bank’s role is not to close the spread in sovereign debt markets.. As a result, her remarks led to an increase in the cost of borrowing in Italy. Her predecessor, Mario Draghi, assured financial markets in 2012 (at the height of the sovereign debt crisis) that the ECB would do everything it could to save the euro.
However, investors reacted positively to the ECB’s latest coronavirus response package. Italian 10-year bond yield plunges to 1.542% this morning. Yields move inversely with bond prices. Declining yields mean investors are buying Italian bonds, indicating confidence in the country’s ability to repay them..
«Difficult times require decisive action. We are committed to harnessing the full potential of our tools within our existing mandate», – stated Christine Lagarde.
The epidemic that began in China at the end of 2019 has led to a halt in the main economies of the eurozone. The data also showed that the virus infected and killed more people in Europe than in China, according to The New York Times..
The new asset purchase program will also include Greek securities. Previously they were not featured in the regulator’s previous asset purchase programs because they did not have sufficient investment confidence.
«We didn’t expect more. The inclusion of Greece and corporate commercial paper was the cherry on top of the quantitative easing cake», – said Frederic Ducrozette, senior economist at Pictet Wealth Management.
ECB surprised markets a week ago by not cutting interest rates as a way to boost economic activity during the outbreak. Instead of this he announced new support bank lending and expanded its asset purchase program by 120 billion euros.
″The fact that the eurozone has finally come to terms with the scale of the crisis should soften the economic downturn and is an important prerequisite for a quick rebound.», – said Carsten Brzeski, Chief Economist at ING Germany.
A number of eurozone countries have also put forward financial stimulus measures to mitigate the impact of COVID-19. France, for example, pledged to allocate 45 billion euros to support business.