ECB Begins New Bond Purchases, Throwing Weight Behind Virus-Hit Nations

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03/26/2020 | 01:17 pm

By Tom Fairless

The European Central Bank sent a powerful signal to investors that it will aggressively support Italy and other indebted eurozone countries that are battling the coronavirus, starting purchases under a new EUR750 billion ($812 billion) bond-buying program and stating that it won't be bound by earlier limits on its bond buys.

The ECB's actions ricocheted through financial markets on Thursday, pinioning down the yields on Southern European government debt.

That eases pressure on European Union leaders, who are preparing to discuss new measures Thursday to support the region's financially weaker governments through the crisis, including controversial common debt instruments.

But the bank's move, which took investors by surprise, could also raise legal and political concerns in Northern European countries like Germany, where the ECB's bond purchases have faced a series of legal challenges. Germany's top court is expected to give its verdict on an earlier ECB bond-buying program on May 5.

Under a legal act adopted overnight Thursday, the ECB said it would have broad flexibility to focus its new EUR750 billion bond-buying program, announced last week, to force down the borrowing costs of any eurozone country it chooses. That represents a major shift from the bank's earlier bond-buying program, under which the ECB restricted itself to buying no more than a third of the debt of any individual government.

ECB officials had signaled last week that they would consider easing the limits on their bond purchases, but a decision didn't appear to have been made.

The change should help to ease concerns that the pandemic will unleash a new debt crisis in the currency union, as vulnerable governments step up borrowing to pay for health care and measures to support closed businesses and the unemployed.

"This decision strengthens the ECB's quasi fiscal support to the most vulnerable sovereign states," said Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.

Some observers suggested the ECB's move might be a symbolic gesture to investors, and that the bank would in fact take care to abide by limits that have been sanctioned by European courts.

"It is important for the ECB to remain within these limits," given that Germany's top court was already quite critical of the ECB's bond purchases, said Lars Feld, chairman of the Council of Economic Experts, which advises the German government.

Still, Mr. Feld said that an expected increase in government bond issuance across the region this year, including in Germany, could allow the ECB to remain within the 33% limit even as it aggressively supports Italy.

Write to Tom Fairless at tom.fairless@wsj.com

 

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