The ECB Governing Council has decided to make the existing special loans for banks, the TLTROs, even more interesting. The banks can borrow money from the ECB until the summer of 2021 at a minimum interest rate of -0,5% and under certain conditions even -1,0%. They must then use that money to provide loans to companies.
In addition, the bank introduced a new instrument, the Pandemic Emergency Longer-term Refinancing Operations, or the PELTRO. Commercial banks can take out loans at this counter with a term until September next year at an interest rate of -0,25%. The banks may also use that money to provide mortgage loans. Together, this creates room for an impulse of €3.000 billion, according to the ECB.
Christine Lagarde, president of the ECB, also indicated that according to the calculations of the ECB economists, the economic contraction in the eurozone this year is between 5 and 12%. This depends on how long the measures against the spread of the virus remain in force and whether the virus subsides.
Buy junk bonds
Perhaps most importantly, when asked if the ECB would also buy junk bonds, Lagarde said the board hadn't mentioned it. Combined with its previous promise that the bank will keep all options open and do whatever is necessary, there is a good chance that the ECB will indeed start buying junk bonds. Certainly in the knowledge that the ECB sees the already far too low inflation for the bank further decrease in the coming period.
The other important element is that Lagarde was asked whether it will also be possible for the non-banks to have access to the new facility, the PELTRO. "We haven't discussed that, but it's an option, I don't rule it out," said Lagarde. In doing so, the ECB has opened the door for institutions other than non-banks, such as insurers, to also gain direct access to ECB funds in the near future.
Pipes do not dry up
At both the ECB and the Fed, everything is aimed at preventing the pipes of the economy from drying up. There must be sufficient liquidity to prevent companies from going bankrupt as a result of the corona crisis. As long as liquidity is the problem or the greatest risk, central banks can provide solace by providing unlimited liquidity.
It will be a completely different story if solvency becomes the problem. Central bank measures are much less helpful there. That is why it is crucial that the measures taken by the governments prevent the second-round effects. Considering all that has been announced, I have a strong feeling that solvency problems are being avoided and so recovery is imminent in the near future. It will take a long time before the damage of the corona crisis is fully compensated. Simply because the damage is enormous.
In fact, what the ECB has done is cut interest rates without calling it that. The interest at the counter where banks normally borrow, the repo rate, has been lowered to between -0,5% and -1,0% until the summer of next year.