European stock markets opened to gains this morning after a late-night announcement by the ECB marked the start of a huge €750 billion bond buying operation designed to slow the sell-off. The strategy is focused on propping up sovereign and corporate debt markets, which, with the EU economy highly leveraged by particularly corporate debt, is considered a key stress point. Several EU nations, including Italy and Greece, are also in a perilous position on sovereign debt.
The move was described in the Financial Times by Commerzbank economist Marco Wagner as a “new bazooka” wheeled out by the ECB in its struggle to keep the EU’s economies afloat, commenting:
“This will help the bonds of highly indebted countries.”
National benchmark indices including Germany’s Dax 30 and France’s CAC 40, as well as the broad Europe-wide Stoxx 600 index, all reacted to the news by opening the day to gains. The relief proved short lived however, with market starting to slide again by late morning before a new rally as 3 pm approached.
A similar pattern unfolded in the UK, though the afternoon recovery in the FTSE 100 was even stronger than across the channel. By mid afternoon the London Stock Exchange’s benchmark index was back close to where it had started the day.
ECB president Christine Lagarde has now responded definitively to earlier criticism the trading block’s central bank was not doing enough to protect Italy from the rising cost of its sovereign debt. The situation has been intensified by a rush into the dollar, which has pushed its value up against other major currencies, including the euro. Part of Italy’s sovereign debt is dollar-denominated.
Ms Lagarde this morning released a statement which read:
“Extraordinary times require extraordinary action. There are no limits to our commitment to the euro,” We are determined to use the full potential of our tools.”
The stimulus programme is temporary and will only run until such point as the worst of the coronavirus crisis is judged to be over. But the ECB confirmed there is no expectation there is a possibility for that to be the case before the end of the year. The bond buying will continue until at least the end of 2020. The ECB has now ploughed €1.1 trillion into bonds so far this year – 6% of the eurozone’s GDP.
There was some immediate impact this morning, with cost of borrowing on Italian ten-year treasury bonds down. That has, at least for now, allayed fears that the economic collapse could be quickly compounded by a new eurozone sovereign debt crisis.
Pressure is rising for European countries that have not yet implemented a China-style lockdown to do so. Yesterday Dutch health minister Bruno Bruins collapsed in parliament during a heated debate on the issue. He said afterwards that he was suffering from “exhaustion after intensive weeks”, in his government’s and department’s efforts to fight the coronavirus pandemic while trying to avoid a complete shutdown. The Dutch, like the British, have so far delayed an extreme response.