By Jan Strupczewski
BRUSSELS (Reuters) - The European Commission next week is likely to present a tool for the euro zone's ESM bailout fund to fight the effects of the coronavirus epidemic that could unlock unlimited ECB sovereign bond purchases, Vice President Valdis Dombrovskis said.
The EU executive arm has been asked by euro zone finance ministers, the European Stability Mechanism (ESM) and the European Central Bank to come up with a instrument to involve the fund in supporting economies hit by the coronavirus, he said.
The ESM has 410 billion euros ($438 billion) of unused lending power.
"This work is ongoing," Dombrovskis said. "One of the issues is the size of ESM programmes, which may be limited given it was primarily created to respond to asymmetric economic shocks and here we have a symmetric shock which affects all member states."
"From that point of it is important to have a dedicated ESM tool which would help in case of necessity to unblock Outright Monetary Transactions of the ECB, which can buy bonds in unlimited quantities if necessary," Dombrovskis said.
The Commission expects the pandemic, which has triggered lockdowns in most EU countries and put whole sectors of the economy out of action, to mean a 1%-2.5% EU recession or worse versus the previously expected 1.4% economic growth this year.
The ESM now has the Enhanced Conditions Credit Line (ECCL) which it can extend to a government in need under certain conditions, but some officials worry the offer could carry a stigma of financial trouble in the eyes of the market.
PAVE WAY FOR UNLIMITED ECB ACTION
Yet securing the ECCL, together with the possibility of the ESM buying a government's bonds at primary auctions, would make the government eligible for the ECB's OMT programme.
This is key because given the scale of support needed in case the whole euro zone needs help, the ESM's resources would not be enough, top euro zone officials said. But the size of an ESM credit line would be irrelevant if it paved the way for ECB action - enough to calm down markets.
Whatever instrument euro zone ministers agree to use for the ESM -- the ECCL or something new -- would probably be set in a way that makes all euro zone countries eligible for it, even if not all apply to get it, officials said.
Germany and the Netherlands, sporting large budget surpluses and falling debt, do not need support.
To provide the credit, the ESM would have to, as always, borrow more cheaply on the market via what officials say would be called "coronabonds" to make clear money from the operation would go only towards fighting the effects of the epidemic.
EU finance ministers will hold a teleconference on Monday on the coronavirus and Dombrovskis said the Commission would then present its ideas on how to use existing ESM tools or how to create a new one.
"Whether it is the ECCL or some dedicated tool -- that is still being worked on," he said, noting there is no urgency regarding the ESM's involvement given the ECB programme announced last week for bond purchases worth 750 billion euros.
"It is not urgent because all member state have access to markets and the pandemic programme from the ECB is helping very substantially, but we will make an effort to have it for the next Eurogroup meeting early next week," he said.
EMERGENCY UNEMPLOYMENT RE-INSURANCE
The Commission is separately accelerating work on a European unemployment re-insurance scheme, scheduled for presentation in the fourth quarter. It will change to function as an emergency tool for now, rather than a permanent feature of the euro zone architecture.
An 2020 recession caused by the epidemic would likely strongly boost unemployment making an euro zone-wide unemployment re-insurance scheme, based on loans that can be repaid during economic good times, very valuable.
"The legal basis is going to be EU Treaty article 122.2 and we will propose it as a temporary, emergency instrument," he said.
In case non-euro zone countries of the EU needed financial help, the Commission could use its Balance of Payments facility, for which it can borrow against the collateral of the EU budget.
(Reporting by Jan Strupczewski; editing by Jason Neely)
This story has not been edited by Firstpost staff and is generated by auto-feed.
Updated Date: Mar 22, 2020 01:05:39 IST