EU eyes use of bailout fund to unlock ECB plan
BRUSSELS: The European Commission next week is likely to present a tool for the euro zone’s ESM bailout fund to fight the effects of the coronavirus epidemic that could unlock unlimited ECB sovereign bond purchases, Vice President Valdis Dombrovskis said.
The EU executive arm has been
asked by euro zone finance ministers, the European Stability Mechanism (ESM) and the European Central Bank to come up with a instrument to involve the fund in supporting economies hit by the coronavirus, he said. The ESM has 410 billion euros ($438 billion) of unused lending power. “This work is ongoing,” Dombrovskis said. “One of the issues is the size of ESM programs, which may be limited given it was primarily created to respond to asymmetric economic shocks and here we have a symmetric shock which affects all member states.” “From that point of it is important to have a dedicated ESM tool which would help in
case of necessity to unblock Outright Monetary Transactions of the ECB, which can buy bonds in unlimited quantities if necessary,” Dombrovskis said.
The Commission expects the pandemic, which has triggered lockdowns in most EU countries and put whole sectors of the economy out of action, to mean a 1 percent-2.5 percent EU recession or worse versus the previously expected 1.4 percent economic growth this year. The ESM now has the Enhanced Conditions Credit Line (ECCL) which it can extend to a government in need under certain conditions, but some officials worry the offer
could carry a stigma of financial trouble in the eyes of the market.
Yet securing the ECCL, together with the possibility of the ESM buying a government’s bonds at primary auctions, would make the government eligible for the ECB’s OMT program. This is key because given the scale of support needed in case the whole euro zone needs help, the ESM’s resources would not be enough, top eurozone officials said. But the size of an ESM credit line would be irrelevant if it paved the way for ECB action - enough to calm down markets. —Reuters