Notes for a Bloomberg interview
This morning I was interviewed by Bloomberg about the recent big Pandemic Emergency Purchase Program (PEPP, we just missed another acronym!). These are the notes that I had prepared for this interview.
• The announcement clears any doubt that the ECB will throw its full weight to deal with the economic, grave consequences of COVID-19
• The decision shows that the European Union is like a plum tree: if you shake it enough plums will start falling. And the ECB’s plum tree normally delivers fruits earlier than other parts of the EU
• The program has a number of novelties, essentially more flexibility in carrying out the purchases, but I would have liked even more of that, for instance purchasing bank loans and initiating a Derivative Market Program (https://www.bruegel.org/2020/03/the-case-for-a-derivative-market-programme/)
• Still it is true that, once you have decided for such a big envelope, there is a lot of innovation that you can put into it, so there is room for more novelty
• In particular, I think that the big envelope could accommodate very large purchases by the ECB of European Stability Mechanism bonds on the secondary market. These would in turn serve to finance a large, EU agreed and governed fiscal expansion program. All Member Countries should take the ESM money, while conditionality should be limited to agreeing that the money should only serve to deal with the consequences of COVID-19
• The joint effect of ECB purchases under the PEPP and ESM issuance (if it comes) will consist in a significant step towards common issuance and a common bond, even if the risk of PEPP purchases will remain for a large part with national central banks. This would be a big plum indeed
• The ability to use more “additional credit claims” as collateral for refinancing operations is a nice accompanying measure, which could facilitate the outright purchases of these loans
• In current conditions the ability of financial markets to generate significant prices is severely affected even if they remain the best at doing this, just because anybody else is even worse. The paroxsymal volatility of prices is evidence of this
• Italy was hit by a genuinely exogenous shock, not by a bout of economic stupidity like the one shown by the previous government. This explains and justifies less dramatic yield developments (net of the serious gaffe by the ECB President) and more forthcoming attitude by the EU Commission and Council and the market.