Lagarde Fires Bazooka #2: ECB Announces €750BN Pandemic Purchase Program

Earlier this afternoon we said that because "the Fed's Bazooka #1 was an epic dud. Here comes Bazooka #2", and this time it is the ECB that will try to fire.

Sure enough, almost three hours later, and just before 1am CET, the ECB announced plans to buy a whopping €750bn in more bonds in the delightfully named Pandemic Emergency Purchase Program (because we clearly needed another alphabet bailout soup) after holding an emergency call of its rate-setting committee on Wednesday evening in response to the Global Covid Crisis and resulting financial market turmoil.

The central bank said the additional asset purchases - as a reminder last week the ECB expanded its baseline QE - would be carried out by the end of this year, cover both sovereign bonds and corporate debt, and would last until the coronavirus crisis is over.

"The Governing Council will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year."

Because the European Central Bank of Virologists is clearly able to predict that the pandemic will not fade away until at least 2021.

The ECB said that purchases will be conducted in "flexible manner" allowing fluctuations over time, across asset classes and among jurisdictions, and unlike prior QE episodes, this time purchases under PEPP will include Greek debt.

Just like the Fed, the ECB also expanded the range of eligible assets to non-financial commercial paper and to ease the collateral standards to allow banks to raise money against more of their assets, including corporate finance claims. For those wondering if the ECB would limit itself to A1 and higher CP, like the Fed, the answer is clearly no as per the following: "all commercial papers of sufficient credit quality eligible for purchase under CSPP." What is sufficient? Anything that the ECB says.

It was a bit surprising that the ECB has yet to announce it is buying equities, but we expect that will come in a few days when the STOXX 600 crashes another 20%.

The Governing Council of the ECB is committed to playing its role in supporting all citizens of the euro area through this extremely challenging time. To that end, the ECB will ensure that all sectors of the economy can benefit from supportive financing conditions that enable them to absorb this shock. This applies equally to families, firms, banks and governments.

Then, the central bank which will be directly monetizing even more of Europe's deficit and engaging in state monetary financing which is expressly forbidden by the EU, decided to make a mockery of its permissions, and said that "the Governing Council will do everything necessary within its mandate", which apparently is the new code word for "whatever it takes." This includes increasing "the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed. It will explore all options and all contingencies to support the economy through this shock."

In recent days, economists have been calling for the ECB to increase its bond-buying programme in particular since the borrowing costs of southern European countries, such as Italy and Greece, rose sharply to levels not seen for more than a year, because somehow the ECB, which is now the world's largest hedge fund and owns billions of Italian and Greek debt, doesn't own enough Italian and Greek debt.

Translation: do the same idiotic thing over and over and hope that this time - just because it is super, turbo huge - it will work.

And just to let the market know it means business, the ECB left off with the following implicit threat to shorts:

To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face. The ECB will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.

In other words, taking a page out of the Elon Musk "burn the shorts"playbook, just because we are not allowed to do something, doesn't mean the ECB won't do it.

And speaking in a Thursday morning conference call, Lagarde just trademarked her own version of Draghi's "whatever it takes":

  • LAGARDE SAYS NO LIMITS TO ECB COMMITMENT TO EURO

Alas, nearly 8 years after Draghi's ridiculous threat, the ECB's power to influence markets is almost gone, and after an initial futures spike that sent the Dow sharply higher, and above 20,000, the market is starting to once again sell into the ECB announcement, as the surge is now halfway gone.

The full ECB statement is below:

ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP)

The Governing Council decided the following:

(1) To launch a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.

This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

For the purchases of public sector securities, the benchmark allocation across jurisdictions will continue to be the capital key of the national central banks. At the same time, purchases under the new PEPP 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.

A waiver of the eligibility requirements for securities issued by the Greek government will be granted for purchases under PEPP.

The Governing Council will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year.

(2) To expand the range of eligible assets under the corporate sector purchase programme (CSPP) to non-financial commercial paper, making all commercial papers of sufficient credit quality eligible for purchase under CSPP.

(3) To ease the collateral standards by adjusting the main risk parameters of the collateral framework. In particular, we will expand the scope of Additional Credit Claims (ACC) to include claims related to the financing of the corporate sector. This will ensure that counterparties can continue to make full use of the Eurosystem’s refinancing operations.

The Governing Council of the ECB is committed to playing its role in supporting all citizens of the euro area through this extremely challenging time. To that end, the ECB will ensure that all sectors of the economy can benefit from supportive financing conditions that enable them to absorb this shock. This applies equally to families, firms, banks and governments.

The Governing Council will do everything necessary within its mandate. The Governing Council is fully prepared to increase the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed. It will explore all options and all contingencies to support the economy through this shock.

To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face. The ECB will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.