European Central Bank increases support to countries ravaged by pandemic

The European Central Bank has boosted its pandemic emergency support programme by 600 billion euros to 1.35 trillion euros in an effort to keep affordable credit flowing to the economy during the steep downturn caused by the virus outbreak.

The central bank for the 19 countries that use the euro also extended the monetary stimulus programme to at least the end of June next year, from the end of 2020 currently.

ECB President Christine Lagarde will give her assessment of the economy at a news conference after the meeting, which due to the pandemic was held by teleconference among the 25 members of the bank’s governing council.

Under the pandemic support programme, the ECB buys corporate and government bonds and other financial assets from banks, paying with newly created money.

That helps lower longer-term interest rates, keeping the pandemic from drying up needed funding for borrowers.

The large size of the intended purchases also sends a signal to financial markets that the ECB is determined to ensure interest rates remain low throughout the eurozone and prevent borrowing costs from rising for indebted governments such as Italy.

While the ECB says its purchases are not targeted at supporting Italy, the programme so far bought a larger share of Italian bonds than for other countries and is credited with keeping market pressure off a nation that has been among the hardest hit by the pandemic.

Italy’s lockdown will cost it lost tax revenues and additional spending to support the economy.

Virus Outbreak Italy
Florence in Italy which has seen its economy ravaged by the pandemic (Andrew Medichini/AP)

That means added borrowing that will boost its already large debt pile of 135% of annual economic output.

Any investor doubts about Italy’s ability to pay could lead to a spiral of higher borrowing costs and trigger a financial crisis similar to the one that led to Greece and four other member governments needing international bailouts in 2010-2015.

The support from the ECB comes on top of up to 540 billion euros agreed on by the eurozone member governments that includes credit lines from the euro bailout fund, and a longer-term recovery fund of 750 billion euro recovery fund backed by common borrowing by EU governments that is still being worked out.

Germany, the largest member economy, on Wednesday proposed an additional 130 billion euros of stimulus including tax breaks and subsidies for buying electric cars.

The different support packages aim to cushion what the European Union’s executive commission says will be a steep fall of 7.75% in economic output this year and to support a recovery in coming years.

The central bank left its key interest rate benchmarks unchanged at record lows on Thursday.

The rate at which the ECB lends to banks is zero.

Its rate on deposits left overnight by commercial banks is now minus 0.5%, a penalty aimed at pushing banks to lend the excess cash.

The bank has also set up long-term offers of credit to banks at even lower rates if they show they are lending to companies.

Banks are key to the entire eurozone economy because most companies get their operating funds from them rather than borrowing on financial markets as is more the case in the US.

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