Europe Weighs Using Bailout Fund Bazooka in Virus Crisis

(Bloomberg) -- The euro area’s gigantic bailout fund is exploring how it can use its reserves to cushion the impact of a virus-induced recession, in a move that could help reassure markets after a spike in borrowing costs for the region’s most vulnerable economies.

Klaus Regling, the head of the European Stability Mechanism, said Monday it has an unused lending capacity of 410 billion euros ($458 billion).

Originally built to bail out nations at the peak of the debt crisis, the ESM has been mostly idle since Greece exited its emergency assistance program in 2018. While sovereign bond yields across the euro area are nowhere near their crisis-era highs, the prospect of a deep recession caused by the coronavirus has led to a sharp spike in borrowing costs.

“We have a number of facilities and several of them have never been used,” Regling said after a conference call with European Union finance ministers.

The potential use of the ESM comes as public finances face increasing strain from cash injections to struggling companies and additional spending to support battered healthcare systems. EU governments have already announced fiscal measures of about 1% of output, on average, for 2020, to support their economies, and committed to provide liquidity facilities of at least 10% of the bloc’s GDP to help struggling companies, according to finance ministers.

“These figures could be much larger going forward,” ministers said in a joint statement after their call.

According to a memo sent to national governments by the EU’s executive arm, and seen by Bloomberg, “GDP growth in 2020 might fall to well below zero or even be substantially negative as a result of the COVID-19 outbreak, and a coordinated economic response of Member States and EU institutions is crucial to mitigate these negative repercussions on the EU economy.”

Strings Attached

Funding from the ESM is tied to conditions, such as structural economic reforms and fiscal belt-tightening. However, all EU governments, including hawks such as Germany and the Netherlands, have acknowledged that an expansionary fiscal policy is now necessary to help companies deal with the liquidity crunch triggered by the viral outbreak.

“We were asked to look at what we can do, how we can contribute under these very different circumstances,” Regling said, following a call in which finance chiefs pledged to use all available resources to cushion the economic fallout from the public-health emergency.

While the details of a potential ESM intervention are still unclear, the involvement of the bailout fund in any euro-area country could pave the way for the European Central Bank to launch its Outright Monetary Transactions program, under which it can buy unlimited amounts of sovereign bonds.

To contact the reporters on this story: Nikos Chrysoloras in Brussels at nchrysoloras@bloomberg.net;Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, ;Ben Sills at bsills@bloomberg.net, Richard Bravo

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