ECB’s Villeroy Backs Europe’s Rescue Fund for Virus Crisis

(Bloomberg) -- Bank of France Governor Francois Villeroy de Galhau said Europe’s rescue fund should be activated to lend to states struggling with the coronavirus outbreak, a move that could pave the way for further sovereign bond purchases by the European Central Bank.

Villeroy’s call comes as euro-area officials consider a plan that would see the European Stability Mechanism set up multiple credit lines for euro-area nations. Such a step would be necessary, although not sufficient, for the ECB to undertake bond buying under its Outright Monetary Transactions program.

“I support from now the idea of exceptional European coronavirus loans, granted by the European Stability Mechanism,” Villeroy said in an interview published in Ouest France newspaper.

Launched under then-President Mario Draghi, OMT is the cornerstone of the ECB’s commitment to protect the integrity of the euro area if it’s deemed to be under threat. The program, which has never been used, would allow the ECB to buy theoretically unlimited sovereign bonds in the secondary market from currency-bloc members which have signed bailout agreements with the ESM.

Speaking on Spanish television late on Sunday, ECB Vice President Luis de Guindos also mentioned the ESM, and said European governments must act “in a collective way.”

The ECB Governing Council, of which both Villeroy and Guindos are members, stepped up its crisis response week with a pledge to spend an additional 750 billion euros ($806 billion) on debt this year. The previous week, the central bank already announced increased bond buying and cheap loans to banks.

“We have taken two historic decisions in eight days, with a unanimous determination to act,” Villeroy said.

There are hurdles to overcome to using the ESM to further bolster Europe’s crisis response. In theory, extra lending from the ESM would come with conditions attached, which could be a red flag for some states.

Bank of Portugal Governor Carlos Costa said an option that “deserves further analysis” is the possibility of the ESM issuing so-called corona bonds. The proceeds would go to EU member states in need, “repayable through the EU’s long-term budget,” Costa wrote in an opinion piece published by Reuters.

These bonds should be of “very long maturity, say 30 years” and, differently from standard ESM facilities, conditionality should consist of countries committing to using the funds in coronavirus-related spending, Costa said.

EU finance ministers will discuss the ESM and the bloc’s response to the crisis in talks on Monday and Tuesday. The European Commission has proposed suspending fiscal rules to allow governments spend more to cushion their economies.

©2020 Bloomberg L.P.

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