ECB Launches Mega Bond Repurchase Drive To Counter The Coronavirus Threat

In a meeting held late on Wednesday 18^th March 2020, the European Central Bank agreed on a decision to repurchase bonds worth €750 billion, to pump in cash into the eurozone, which is currently in a battle to protect its people and its economy from the coronavirus pandemic. The bank is the latest amongst a host of central banks who has announced similar stimulus packages to fight the effects of the outbreak. Only yesterday, the British government had announced that the Bank of England would by refinancing loans worth £350 billion to help affected British companies, and in the previous week, it had announced cash infusion worth £30 billion into small and medium-sized British businesses to help them deal with deteriorating trading environment.

Named as the Pandemic Emergency Purchase Programme (PEPP), the repurchase programme would involve the purchase of both public sector and private sector securities from within the union. The emergency programme, which would continue till the end of 2020, will see the banks’ total repurchase for the year increase to €1.1 trillion which is around six per cent of the GDP of the European Union. The bank has also decided to be a little flexible around the quality of assets so that more diverse types of assets can be included in this asset repurchase scheme. Under the plan, all commercial papers of adequate credit quality would be made eligible for repurchase under the corporate sector purchase program.

The bank has decided to relax the standards governing the collateral by reconfiguring the primary risk factors. It has decided to include claims for financing the corporate sector within the scope of additional credit claims in order to ensure that the respective counterparties can make full utilization of the refinancing options available in the union. The central bank’s governing council is geared up to increase the size of its asset repurchase program and tweak its composition for as long as necessary and continue to support the economy in times of distress.

This decision of the European Central bank, however, has come a little late as compared to other central banks who have already announced similar stimulus packages in recent past. On 10^th of this month, the Federal Reserve of the United States cut the US benchmark interest rates by half a percentage point and set it in the 1 per cent to 1.25 per cent range and again to 0.25 per cent a few days later. The magnitude of the rate cut, not seen since the 2008 Lehman brothers collapse, demonstrated how concerned the central bank was regarding the financial and economic impact of the virus outbreak. On the same day, the Reserve bank of Australia also cut its rates by a record half a percentage point to set a new record low of 0.5 per cent. Both of the above countries have significant trading relations with China and other adjoining countries which have been facing the maximum brunt of the coronavirus outbreak. Japan, one of the closest and economically largest neighbours of China has also announced contingency measures to offer aids of nearly $15 billion to businesses affected by the virus outbreak and public spending of nearly $4 billion to prop up the country's economy. Closer to Europe, the Bank of England also cut its rates from 0.75 per cent to 0.25 per cent after its monetary policy committee in an unscheduled meeting voted unanimously in favour of a rate cut to confront this latest threat to the British economy.

Soon after the announcement of the repurchase programme, the Euro rose against both the US dollar and the British pound. Most experts speaking on the topic opined that while the move was bold on the part of the ECB, the strengthening of the Euro against other currencies will be short-lived. The limiting factors were seen as the rising incidence of infection in the continent, and the expected time it would take before the pandemic is contained.

International trade has taken a beating due to this pandemic. Many large and small countries in Europe have a large portion of their GDP coming out of tourism. A large number of tourists from Asia, the Americas and from within Europe as well, bring in revenues to the European hotel, travel and food and beverage industries, which in turn employ millions of people. However, the tourism industry is the one which is being held responsible for the spread of the virus. Chinese tourists who travelled to Italy are being suspected of bringing in and causing the massive outbreak of the infection in the country, which then progressed to other countries via travellers from Italy. The industry that has taken the second-worst beating is the travel industry, led by the airline sector, the industry is losing billions by the day. IATA, The International Air Transport Association in a report published on 5th March 2020, has said that should there be an extensive spread of the virus, then the European Air travel markets of Austria, France, Italy, Germany, Netherlands, Norway, Spain, Switzerland, Sweden and the United Kingdom would be the hardest hit, losing as much as 24 per cent of its passenger base, resulting in a $37.3 billion loss in revenues. Railways and road transport operations have also been reporting a massive drop in demand for seats leading to many of the scheduled departures being cancelled indefinitely.

Europe is now the new epicentre of the Coronavirus epidemic. Though not originating in Europe, the virus has now killed a greater proportion of people in Europe than anywhere else in the world. Italy is the worst affected country in the world, with nearly 35,713 people infected till date out of which 2,978 have been reported dead. Spain is the second most infected country reporting as many as 14,769 cases till date out of which 638 have already succumbed. Germany, France, Netherlands, Switzerland, United Kingdom, Austria, Sweden, Belgium and Denmark are other European countries that have reported thousands of cases with hundreds dead while not as badly affected as Italy or Spain. Many of these countries have gone into lockdowns and all, but essential travel has been restricted. Most commercial establishments have asked their employees to either work from home or take leaves while some businesses have even shut down temporarily. Business activity across the continent is thus at an all-time low, with millions becoming unemployed across industries.

The pandemic has also led to restricted movement of goods across the world. Basic commodities like ores and minerals, semi-finished goods as well as general merchandise are either waiting in warehouses to be loaded onto cargo vessels or are lying idle in vessels waiting to be unloaded at their destinations. Consequently, manufacturing activity across the world has also come down with several national and international companies issuing revenue and profit warnings for the entire year. Given the situation many several national and international financial institutions have voiced their concerns that should these conditions prevail for an elongated period, there could be massive unemployment in the continent.

This measure of reducing interest rates and pumping in more liquidity into the world economy is being criticized by many. This increased amount of liquidity in the international markets though intended to create demand and spur growth may not actually materialize as desired. The present threat faced by the world economy is structural; manufacturers are not able to manufacture though there is demand, goods are not reaching their intended consumers though there is enough in stock. The increased money supply in such a situation could lead to heightened inflationary conditions which in the medium term could prove to be harmful.