Philippe Waechter (Ostrum AM)| The ECB puts itself in front of the States which will sharply increase their public deficit in order to fight the epidemic. The program will thus reduce financial fragmentation and weigh down on interest rates.
The ECB has just launched a new asset purchase operation worth 750 billion euros over the period up to the end of 2020 at least. The purchases will relate to public and private securities which are eligible for the asset purchase program (APP) previously implemented by the ECB. The weight of each state in this buying program will be that of each state in the capital of the ECB. The press release suggests a lot of flexibility in interpretation.
This program is called the Pandemic Emergency Purchase Program (PEPP). It is set up to fight the coronavirus epidemic. It will end at best at the end of the year if the epidemic is stopped.
The logic of this program is simple. States will spend huge amounts of money to compensate for the negative effects the epidemic will have on activity. At the same time, interest rates will need to remain low to avoid a financial shock to both the state and corporate budgets. The ECB faces new issues to neutralize them. A measure of this type was expected quickly, especially after the blunder by Christine Lagarde on the management of spreads. She had done an ”anti-whatever it takes” since she indicated at the press conference after the meeting on the monetary policy of the ECB that this latter was not ready to do everything to maintain the cohesion of the euro zone.
Tonight, the President of the ECB, corrected the situation by indicating that the ECB’s intervention was limitless in its support for the euro.
These measures are expected to reduce the financial fragmentation that emerged and worsened after the ECB press conference last week. This is what is important. Governments will be able to implement their spending programs which will result in a dramatic increase in public deficits but without having to worry too much about the level of interest rates since the ECB will be opposite. Interest rates will drop again.
Ex ante, the negative impact of the epidemic will therefore be contained by the means of economic policy in the euro area under the leadership of the ECB.