Can the PEPP improve the euro area’s financial health?

Chris Scicluna

With questions increasingly being raised about its commitment to do “whatever it takes” to counter the economic and financial impact of COVID-19, and the associated threat to the future of the euro itself, earlier tonight the ECB announced a new temporary asset purchase programme, the Pandemic Emergency Purchase Programme (PEPP). In particular:

  • The PEPP will amount to €750bn with purchases to be conducted until the end of the year. Added to the €120bn of purchases committed under the existing Asset Purchase Programme, under the new plans the ECB will now purchase on average almost €100bn per month until the end of 2020.
  • All asset classes eligible under the existing asset purchase programme (APP) will be included, i.e. public sector bonds, corporate and covered bonds, and asset-backed securities.
  • In terms of the public sector purchases, the capital key will nominally still be the benchmark for allocation across jurisdictions. Crucially, however, the purchases will be conducted “in a flexible manner” to allow “fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.” As such, the capital key is no longer a binding constraint to prevent the ECB from increasing purchases of BTPs (or any other member state’s bonds).
  • The ECB also committed to revising any of its self-imposed limits on the public sector bond purchases (i.e. the 33% issue and issuer limits) if they would prevent the ECB from buying assets to the extent necessary to achieve its mandate.
  • In addition, for the first time, Greek government bonds will be incorporated in the ECB’s asset purchases in the PEPP.
  • In terms of the corporate bond purchases, the ECB took a lead from the Fed and BoE and will now, for the first time, include non-financial commercial paper, an important source of funding for many companies. The collateral framework will also be adjusted to incorporate claims related to the financing of the corporate sector.

Overall, therefore, the announcement of the PEPP brings the response of the ECB closer in line with that of the Fed in terms of its magnitude and scope. And coupled with the recent increase in fiscal commitments over the past couple of days, the euro area macro policy response is starting to look a little bit more fit for purpose. But only time will tell whether it is commensurate to the task in hand. As the full magnitude of the shock underway will only be evident over time, much more support from the ECB and governments might yet be required.

The greater flexibility within the PEPP should, however, at least allow the ECB, should it so wish, to relieve the pressure on Italian and Greek bonds that harmful comments on Thursday from Lagarde, and yesterday from the Austrian Governor Holzmann, had generated. But to allay the doubts about its commitment, the ECB will still need to demonstrate that flexibility by driving Italian and Greek spreads significantly lower from the get-go when euro area bond markets reopen this morning.

If not, the other euro area authorities might not want to stop contemplating an ESM bailout for the two most heavily indebted southern member states. And the issuance by governments of a common euro area ‘coronabond’ would still be the ideal counterpart to the PEPP. That, however, still seems likely to remain on the drawing board.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at