Goldman Predicts ECB Policy Boost After Fiscal Plans Fall Short

Goldman Predicts ECB Policy Boost After Fiscal Plans Fall Short

© Reuters. Goldman Predicts ECB Policy Boost After Fiscal Plans Fall Short© Reuters. Goldman Predicts ECB Policy Boost After Fiscal Plans Fall Short

(Bloomberg) —

The European Central Bank will step up its emergency stimulus measures this week to combat the pandemic’s economic hit in the absence of a more solid fiscal response, according to strategists at Goldman Sachs Group Inc (NYSE:).

The policy-setting Governing Council will likely increase its Pandemic Emergency Purchase Programme, or PEPP, by 500 billion euros ($542 billion) at a gathering on Thursday, said Goldman strategists including Sven Jari Stehn and Alain Durre. That would help support bonds from Italy and Spain and still leave room to buy “substantial amounts” of debt from core euro-area countries, they added.

“ECB officials have signaled a willingness to top up the PEPP to avoid any unwarranted tightening of financial conditions and help governments shoulder the fiscal costs of the outbreak,” they said. “But using the ECB to share sovereign risks is less efficient than an explicit fiscal mechanism — such as eurobonds.”

The central bank’s recent moves to shield weaker nations from ratings downgrades and ramp up bond-buying programs has helped calm investors’ nerves for now. The ECB could absorb almost two trillion euros of sovereign debt on top of what it’s already announced, the strategists said.

Yet they see countries such as Italy and Spain struggling to recover at the same pace as Germany, due to a combination of a larger virus outbreak and more limited fiscal support. While Italy’s bonds rallied Monday after avoiding a downgrade to junk from S&P Global Ratings, its 10-year debt has clocked four weeks of declines.

©2020 Bloomberg L.P.

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