The European Central Bank’s meeting on April 30 might be its most important as it tries to manage the devastating economic impact of the Covid-19 virus. While its reaction so far has worked, it will need much greater firepower in the future. It will also have to be much more flexible in how it applies its rules on asset purchases.
While the European Union’s political leaders haggle over their fiscal package at a meeting on Thursday, the real heavy lifting will have to be done by the ECB, as usual. The central bank signaled on April 7 that a loosening on junk-rated debt might be coming when it said it would “assess further measures to temporarily mitigate the effect on counterparties’ collateral availability from rating downgrades.” Bloomberg News reported that this may be discussed in detail in a policy makers’ call on Wednesday. This would allow for a comprehensive plan to be unveiled at the ECB’s Governing Council meeting next week.
The situation is urgent. S&P Global Ratings is set to review Italy’s BBB (negative outlook) rating on Friday. The expected one-notch downgrade would still leave Rome on just the right side of the investment grade boundary, but it would push the debt of many other Italian issuers — effectively tied to their country’s rating — into junk. That would create liquidity constraints in the Italian banking system if a raft of bank and corporate debt became ineligible for use as collateral with the ECB.
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