ECB to Judge If Trillion-Euro Stimulus Is Enough: Decision Guide

(Bloomberg) -- The European Central Bank will decide on Thursday if more than 1 trillion euros ($1.1 trillion) in asset purchases and a generous lending plan are enough to keep companies and households afloat during an historic slump.

Most economists predict the Governing Council will pause after a series of actions to support the economy since its last official meeting, to see whether governments can agree on comprehensive fiscal support. A minority including Goldman Sachs though expect a bump up in monetary stimulus immediately.

Fresh data on Thursday underscored the scope of the ECB’s challenge, with first-quarter output in the currency bloc falling the most since the series began in 1995.

President Christine Lagarde is likely to reiterate her pledge to do everything necessary as most of the 19-nation euro members face more severe recessions this year than during the global financial crisis. Investors will be listening carefully, after a verbal slip-up in March sent bond markets tumbling.

The ECB will announce its decision at 1:45 p.m. in Frankfurt, and Lagarde’s virtual briefing begins 45 minutes later. Here are the issues that are likely to be discussed:

Purchase Program

With policy makers showing little appetite for further interest-rate cuts -- the deposit rate is already at -0.5% -- economists polled by Bloomberg expect the ECB to boost its 750 billion-euro pandemic bond-buying plan by another 500 billion euros at the September meeting. That would take this year’s tally across all programs above 1.5 trillion euros.

But size isn’t the only option to make the plan more powerful. Citigroup’s Arnaud Mares, a former adviser to Lagarde’s predecessor Mario Draghi, has suggested policy makers could ditch a rule on how purchases are distributed across the bloc, a move that would allow them to respond more flexibly to market shifts.

Another question is whether junk-rated debt will become eligible for buying, after the ECB said it would temporarily accept some of it as collateral.

Economic Outlook

Even though updated economic projections won’t be available for another five weeks, Lagarde will be quizzed about the ECB’s latest view. Last week, she told European leaders euro-area output could drop by as much as 15% this year.

Just before the policy decision, data showed the economy shrank 3.8% in the first quarter, the most on record. France and Spain saw contractions of more than 5% in the period, and Germany reported a record 373,000 surge in jobless claims in April.

Developments in the rest of the year will depend on how quickly governments will ease restrictions. Bloomberg Economics expects the economy to shrink 8.1% in 2020, with risks skewed to the downside.

Italian Debt

Investors have zoomed in on Italy, the European epicenter of the pandemic, where government debt could climb above 160% of output this year.

The country was dealt a blow on Tuesday when Fitch surprisingly downgraded its credit rating to one level above junk, citing debt-sustainability concerns. Separately, S&P Global Ratings affirmed its assessment.

So far, bond purchases by the central bank and a more conciliatory approach by Prime Minister Giuseppe Conte to EU efforts have prevented bigger spikes in yields. Yet the situation could deteriorate quickly if financial market see stimulus measures falling short.

Bank Lending

The ECB’s actions -- both on the monetary-policy and the supervisory fronts -- are focused on ensuring bank lending won’t dry up. Loan growth to companies surged in March as businesses rushed to ensure they can pay rents and wages during the lockdown.

After the ECB allowed banks to temporarily use financial cushions built up after the last financial crisis, they got another lifeline from the European Commission on Tuesday, which proposed a series of tweaks to further ease the burden.

With many of their borrowers in trouble, lenders are still expecting major losses in the wake of the pandemic. Economists at Banque Pictet encouraged officials to consider cutting the interest rate on long-term loans. It’s already below the ECB’s deposit rate, meaning banks are effectively paid by the central bank to extend credit.

Fiscal Stimulus

The ECB hasn’t received much support from politicians in the form of a joint response. While large in scale, national fiscal stimulus has varied widely across the euro area, raising concerns that the recovery -- once it arrives -- will be uneven.

What Bloomberg’s Economists Say...

“A rebound is likely in 3Q, reflecting ample fiscal support in some countries and a return to work for many workers in the more flexible segments of the labor force.”

-- Jamie Rush, David Powell and Maeva Cousin. Read the EURO-AREA PREVIEW

EU leaders have only agreed on a rough outline for a reconstruction plan, leaving unresolved the key issue whether it should be based on grants or loans to member states. There’s also concern they’re relying too much on leveraging their own contributions with private investments.

The press conference gives Lagarde an opportunity to send another message to wavering politicians, after she warned them last week that they risk doing too little, too late.

©2020 Bloomberg L.P.