Euro-area officials are looking at activating the region’s bailout fund to help contain the impact of the coronavirus, a crucial step toward triggering the European Central Bank’s most powerful bond-buying powers.
With government bond yields spiraling, officials are giving serious consideration to a plan that would see the European Stability Mechanism set up multiple credit lines for euro-area governments, according to three people familiar with the discussions. Italian bonds trimmed losses after the report, with the yield on securities trading up 5 basis points at 2:46 p.m. in London. Earlier it had been more than 60 basis points higher.
In addition to tapping into 410 billion euros ($450 billion) of ESM money to bring down borrowing costs, such agreements could also pave the way for the ECB to buy vast amounts of sovereign bonds through its Outright Monetary Transactions program if the stability of the euro area is in jeopardy.
Discussions are accelerating as policy makers witness the rout in euro-area bonds, one of the officials said. All three cautioned that no decisions have been taken, and asked not to be named due to the sensitivity of the issue. Spokesmen for the ECB and the ESM declined to comment.
Originally built to bail out nations at the peak of the debt crisis, the ESM has been mostly idle since Greece exited its aid program in 2018. OMT was the program that grew out of the then-ECB President Mario Draghi’s “whatever it takes” pledge in 2012. Draghi’s promise and the existence of OMT steered the euro zone out of its debt crisis, although the program itself has never actually been used.
While sovereign bond yields across the euro area are nowhere near their crisis-era highs, the prospect of a deep recession caused by the coronavirus pandemic has led to a sharp spike in borrowing costs over recent days.
In theory, lending from the ESM comes with conditions attached, though one of the officials said that in this case they would be narrowly focused on tackling the contagion and its impact on the economy and the fund wouldn’t demand any belt tightening. What’s more, establishing credit lines with several countries at once would remove the stigma that typically goes with financial aid.
All the same, deploying these tools would need unanimous approval by euro-area member states and officials insisted that would still be difficult. Even limited conditionality could be a red flag for Italy but without it countries like Germany, Finland and the Netherlands might not be prepared to sign off, the officials said.
EU leaders discussed the possibility of deploying the ESM during a teleconference on Tuesday and German Chancellor Angela Merkel cautioned that it would be difficult to use the fund without attaching conditions. Dutch Premier Mark Rutte was even more skeptical, saying that any changes in the way the ESM operates would struggle to get approval from the Dutch parliament, according to an EU official with knowledge of the discussion. Still, neither of them shot down the idea, the official said.
In a further indication that leaders are prepared to forego budget restrictions while the tackle the virus, the European Commission is expected in the coming days to propose that governments to invoke a general crisis clause allowing them to spend as much as the need to. The suggestion may be presented to leaders ahead of a videoconference next week, one of the officials said.
The option of using the ESM’s credit lines is less complicated and faster than other ideas being floated, such as the joint issuance of debt, in the form of so-called “coronabonds.” Among other obstacles, that plan would require the backing of the German Bundestag and there are doubts as to whether Merkel could secure that given her domestic weakness as she prepares to step down.
(Updates with markets in second paragraph.)
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