European Central Bank Prepares Additional Stimulus

The bank is likely to increase a half-trillion euros or more to its existing bond purchases.

The European Central Bank (ECB) is expected to unleash another blast of stimulus on Thursday, December 10, 2020, to help businesses bridge the financial gap until the economy recovers from the pandemic.

The bank is likely to add a half-trillion euros or more to its existing bond purchases. The central bank will vacuum up much of the new debt being issued by hard-pressed governments, lowering the risk of a new Eurozone debt crisis.

The ECB will continue to absorb a large part of gross debt issuance from Euro area states if the pandemic purchases are expanded as expected, and combined with a previous bond purchase program amounting to 20 billion euros ($24 billion) per month.

Analysts suggest that the ECB will remain extremely active in the bond market. They expect the ECB to purchase an amount similar to the entire new net issuance in 2021. They also estimate that the 19 countries that use the Euro will issue some 1.3 trillion euros in medium and long-term bonds next year, covering new deficits and existing debt.

ECB President Christine Lagarde informed a meeting on 28 October that there was little doubt that the 25-member governing council would conduct a recalibration of existing stimulus programs at the December meeting.

She subsequently pointed to the current 1.35 trillion ($1.58 trillion) pandemic emergency bond purchase program as a likely place for action.

Estimation is that the council could add 500 billion euros or more to the purchases and extend their duration to the end of 2021 or mid of 2022.

Governments are spending heavily to keep businesses afloat until they can reach the other side of the pandemic downturn.

At the national level, government spending means bigger deficits and debt piles – not an irrelevant issue in the Eurozone, where a rise in governments’ market borrowing costs threatened to break up the currency union in 2010-2012. The size of Italy’s debt pile is expected to rise to 170% of annual gross domestic product, from 135% at the end of 2019.