FRANKFURT – The European Central Bank could soon expand its anti-pandemic stimulus program to more than a trillion euros, giving it more firepower to keep the virus crisis from sliding into a new financial crisis for the 19 countries that use the euro.
Analysts say that the ECB's 25-member governing council could decide as soon as its meeting Thursday to boost the so-called pandemic emergency purchase program by 500 billion euros, bringing it to 1.25 trillion euros ($1.4 trillion). Under the program, the central bank buys government and corporate bonds with newly printed money, a step that helps keep a lid on borrowing costs for businesses and governments.
That's particularly relevant in the case of Italy, whose already-large debt pile is expected to balloon from the current 135% of annual economic output as a result of the huge costs involved in managing the virus outbreak. Loss of market confidence in Italy's creditworthiness could see its sovereign borrowing costs rise - and turn the virus crisis into a financial crisis for the entire 19-country eurozone.
The currency union's vulnerability to market turmoil was underlined by a 2010-2015 debt crisis that saw Greece and four other member countries need massive bailout loans from the other members and the International Monetary Fund.
Right now, Italy's market borrowing costs are under control, thanks in part to purchases of its bonds by the ECB under the pandemic program. The ECB says the program is not targeting help for Italy specifically. But boosting the potential amount sooner rather than later would signal to markets that the bank is ready to take forceful action to make sure its low interest rates reach all parts of the currency union.
Holger Schmieding, chief economist at Berenberg bank, estimates there is a 60% chance that the central bank will decide to boost its pandemic stimulus program at Thursday's meeting. If it doesn't, he says the central bank could so in July. The ECB could also lengthen the pandemic stimulus program's duration; right now it is slated to run through the end of the year.
Moving now would also demonstrate to investors that the ECB and its president, Christine Lagarde, will not let themselves be held back by a May 5 legal ruling by Germany's Federal Constitutional Court against a different bond purchase stimulus. The court ruled that the ECB must present a new decision within three months, justifying those purchases as proportional, meaning the bank took only the action needed and no more.
Lagarde has said the ECB is accountable to the EU parliament and the European Court of Justice, which had approved the purchases. Lagarde may underline that stance at her news conference following the policy decision on Thursday. The council members will meet by teleconference and the news conference will be held online.
While the court ruling applies to a different bond purchase program, it had raised concerns that it might hinder ECB stimulus efforts in the future as well.
The ECB support comes as the eurozone economy is expected to shrink by a massive 7.75% this year, according to estimates from the European Union's executive commission.
The central bank's actions are complemented by up to 540 billion euros in support for national governments from the EU, including possible credit from the eurozone bailout fund. European leaders are also negotiating over a proposed 750 billion-euro recovery fund that would support a rebound in coming years and be financed through shared borrowing.