ECB Makes the Pandemic Emergency Purchase Program Bigger at 1.35 Trillion euros

Posted on 06/04/2020

The European Central Bank (ECB) plans to purchase an additional €600 billion of bonds. The plan seeks to augment the ECB’s Pandemic Emergency Purchase Program (PEPP) to a total of €1.35 trillion.

In addition, the ECB lengthened the scheme until at least June 2021 versus the end of 2020, leaving it on the path to buy a record €1.4 trillion of assets this year across all its stimulus programs. Maturing principal payments from assets purchased under the plan will be reinvested until at least the end of 2022.

The ECB’s asset portfolio would mushroom to more than €4 trillion, about a third of eurozone gross domestic product.

The ECB left interest rates unchanged, with the deposit rate at -0.5% and the main refinancing rate at 0%.

The ECB is at risk of being accused of the indirect monetary financing of governments, which is illegal under EU law. The Germans disclosed that the ECB should only buy sovereign bonds in proportion to an economy’s size, versus buying more Italian bonds, as the ECB has conducted itself for PEPP. The ECB’s capital key is each country’s share of the capital of the central bank, which is based on population and GDP. PEPP has mostly focused on government bonds.

Christine Lagarde, President of the ECB, said on June 4, 2020, “Incoming information confirms that the euro area economy is experiencing an unprecedented contraction. There has been an abrupt drop in economic activity as a result of the coronavirus (COVID-19) pandemic and the measures to contain it. Severe job and income losses and exceptionally elevated uncertainty about the economic outlook have led to a significant fall in consumer spending and investment. While survey data and real-time indicators for economic activity have shown some signs of a bottoming-out alongside the gradual easing of the containment measures, the improvement has so far been tepid compared with the speed at which the indicators plummeted in the preceding two months. The June Eurosystem staff macroeconomic projections see growth declining at an unprecedented pace in the second quarter of this year, before rebounding again in the second half, crucially helped by the sizeable support from fiscal and monetary policy. Nonetheless, the projections entail a substantial downward revision to both the level of economic activity and the inflation outlook over the whole projection horizon, though the baseline is surrounded by an exceptional degree of uncertainty. While headline inflation is suppressed by lower energy prices, price pressures are expected to remain subdued on account of the sharp decline in real GDP and the associated significant increase in economic slack.”

Eurosystem holdings under the pandemic emergency purchase programme

Changes in holdings in EUR millions Asset-backed securities Covered bonds Corporate bonds Commercial paper Public sector securities Total
Net purchases March-May 2020 0 2,099 10,579 35,384 186,603 234,665
Quarter-end amortisation adjustment and redemptions of coupon STRIPS 0 0 0 0 0 0
Holdings as at end-May 2020* 0 2,099 10,579 35,384 186,603 234,665

*End-of-period book value at amortised cost.
Figures may not add up due to rounding. Figures are preliminary and may be subject to revision.

Breakdown of public sector securities under the PEPP

Book value as at end-May 2020

Book value as at end-May 2020 (EUR millions) Net purchases March-May 2020 Cumulative net purchases as at end-May 2020* Current WAM of public sector securities holdings under the PEPP** WAM of eligible universe of public sector securities under the PEPP as at end-May 2020**
Austria 4,914 4,914 8.93 7.43
Belgium 6,461 6,461 5.41 8.98
Cyprus 481 481 12.36 8.19
Germany 46,749 46,749 3.15 6.59
Estonia 0 0
Spain 22,392 22,392 8.28 7.42
Finland 3,232 3,232 8.68 6.63
France 23,575 23,575 8.19 7.16
Greece 4,690 4,690 7.97 9.64
Ireland 3,000 3,000 7.95 8.85
Italy 37,365 37,365 7.07 6.79
Lithuania 1,051 1,051 8.94 8.86
Luxembourg 459 459 5.92 6.09
Latvia 396 396 10.88 9.31
Malta 123 123 6.50 8.01
Netherlands 10,389 10,389 3.89 7.65
Portugal 4,150 4,150 7.22 6.71
Slovenia 938 938 7.32 8.90
Slovakia 2,303 2,303 7.45 8.19
Supranationals 13,935 13,935 7.91 7.34
Total 186,603 186,603 6.29 7.15

Source: ECB
* Cumulative net purchase figures represent the difference between the acquisition cost of all purchase operations and the redeemed nominal amounts.
** Remaining weighted average maturity (WAM) in years.
Notes: Figures may not add up due to rounding. Figures are preliminary and may be subject to revision. The purchase volumes are reported on a settlement basis and net of redemptions.

*** START ***

From the ECB

Pandemic emergency purchase programme (PEPP)
The ECB’s pandemic emergency purchase programme (PEPP) is a non-standard monetary policy measure initiated in March 2020 to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus (COVID-19) outbreak.

The PEPP is a temporary asset purchase programme of private and public sector securities, which has an overall envelope of €750 billion. All asset categories eligible under the existing asset purchase programme (APP) are also eligible under the new programme. Under the PEPP, a waiver of the eligibility requirements will be granted for securities issued by the Greek Government. In addition, non-financial commercial paper is now eligible for purchases both under the PEPP and the corporate sector purchase programme (CSPP). The residual maturity of public sector securities eligible for purchase under the PEPP ranges from 70 days up to a maximum of 30 years and 364 days.

For the purchases of public sector securities under the PEPP, the benchmark allocation across jurisdictions will be the capital key of the national central banks. At the same time, purchases will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.

*** END ***