ECB boosts pandemic support scheme

The European Central Bank has boosted its pandemic emergency support program by an unexpectedly large 600 billion euros ($673 billion) to 1.35 trillion euros in an effort to keep affordable credit flowing to the economy during the steep downturn caused by the coronavirus outbreak.

The new stimulus came on top of added spending by European governments and similar stimulus efforts by the US Federal Reserve, the Bank of England, the Bank of Japan and other central banks around the globe as the world tries to cope with a sharp, simultaneous blow to both developing and rich economies.

The central bank for the 19 countries that use the euro also extended its monetary stimulus program to at least the end of June next year, from the end of 2020 currently.

The bank said it expects the eurozone economy to shrink by a painful 8.7 percent this year and to recover by a more modest 5.2 percent in 2021. ECB President Christine Lagarde warned that "the speed and scale of the rebound are highly uncertain".

The ECB's moves in many ways reflect similar concerns to those motivating the Fed, which has slashed short-term interest rates to near zero and started buying $2 trillion in Treasury securities and mortgage-backed bonds to keep credit markets functioning.

Under the pandemic support program, the ECB will buy corporate and government bonds and other financial assets from banks, paying with newly created money. That is expected to help lower longer-term interest rates, keeping the pandemic from drying up needed funding for borrowers.

Signal to financial markets

The large size of the intended purchases also sends a signal to financial markets that the ECB is determined to ensure interest rates remain low throughout the eurozone and prevent borrowing costs from rising for indebted governments such as Italy.

While the ECB says its purchases are not targeted at supporting Italy, the program so far bought a larger share of Italian bonds than for other countries and is credited with keeping market pressure off a nation that has been among the hardest hit by the pandemic.

Italy's lockdown will cost it lost tax revenues and additional spending to support the economy. That means added borrowing that will boost its already large debt pile of 135 percent of annual economic output. Any investor doubts about Italy's ability to pay could lead to a spiral of higher borrowing costs and trigger a financial crisis similar to the one that led to Greece and four other member governments needing international bailouts in 2010-15.

Analysts had expected the ECB to enhance its emergency bond-buying scheme with hundreds of billions of euros, providing national governments with the breathing space to decide their own response, Agence France-Presse reported.

In March, the bank unveiled its Pandemic Emergency Response Programme, or PEPP, which will see it buy 750 billion euros of eurozone government bonds this year.

Agencies and Jonathan Powell in London contributed to this story.