Whatever it takes 2.0

In support of the economic aid packages launched by governments in Europe and, in line with the action plan taken this week by the US Federal Reserve System (Fed), the European Central Bank (ECB) has announced an additional €750 billion bond buyback programme. This programme called Pandemic Emergency Purchase Programme will cover the purchase of government bonds and corporate bonds and will last until the disapperance of COVID-19.

The ECB will also extend the range of assets that can be repurchased to include commercial paper and promissory notes and will ease the requirements for banks to provide assets for the ECB’s liquidity window.

This measure (a ‘whatever it takes’ from Draghi0 2.0 version) was expected by the markets and should contribute to a narrowing of risk premium, which have been stressed in the wake of the pandemic, especially in Italy. On that occasion, in 2012, the Spanish risk premium was 7.6% and Draghi’s announcement helped to reduce it to 6.8%. Today, despite the economic impact of the virus and the virulent reaction of European markets, Spain’s financial reality is different. Our risk premium is below 1.5% despite having almost doubled in the last month. However, in the corporate world is the opposite, as spreads have been rising, especially in the High Yield segment.

The announced programme will join the €2.6 trillion of assets accumulated by the ECB since the financial crisis erupted in 2008. It will also help to quell criticism following Christine Lagarde’s speech last week in which, among other things, she said that the ECB’s mission is not to lower the sovereign risk premium of eurozone countries.

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