Global | Publication | March 2020
In a further response to the COVID-19 (coronavirus) crisis, the European Central Bank (ECB) has launched a €750 billion Pandemic Emergency Purchase Program (PEPP), a new temporary asset purchase program of private and public sector securities, which will last until at least the end of 2020. This client briefing is based on currently available information and will be of interest to those financial institutions and corporates which are able to partake in the program.
The ECB’s Pandemic Emergency Purchase Program aims to support the liquidity and the financial condition of all sectors of the Eurozone economy.1
This new temporary asset purchase program is focused on both private and public sector securities, which in addition to the €120 billion increase in the ECB’s €20 billion per month program of asset purchases announced last week2 amounts to 7.3 percent of euro area GDP. Purchases under the program will continue until at least the end of 2020, but may very well extend beyond this time frame should the ECB determine that the coronavirus pandemic remains in a phase of crisis. Christine Lagarde also noted that the ECB is fully prepared to increase the size and adjust the composition of this asset purchase program as and when needed.
While to date, no specific details have been published, the ECB has stated that asset categories eligible under the existing asset purchase program of the ECB (APP) would be similarly eligible under the PEPP, those being:
The ECB also noted in its press release that it would waive the eligibility requirements for securities issued by the Greek government in respect of purchases under the PEPP.
The press release also indicated that for the purchases of public sector securities, the benchmark allocation across jurisdictions will continue to be the capital key of the national central banks (i.e. broadly speaking, each national central bank’s share of the capital of the ECB). At the same time, purchases under the new PEPP will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions,
The ECB has also committed to broadening the range of eligible assets under the existing CSPP to include commercial paper issued by non-financial institutions, making all commercial paper of 'sufficient credit quality' eligible for purchase under the CSPP. Purchases under the CSPP are conducted with counterparties that are eligible for the Eurosystem’s monetary policy operations; these are effectively Eurozone banks. It remains to be seen whether the ECB will relax this requirement to allow purchases to be made directly from corporate issuers.
The easing of collateral standards is also envisaged, in particular by expanding the scope of Additional Credit Claims (i.e. loans or other debt obligations which are not tradable bonds) that can be eligible for purchase under the PEPP.
In a bid to further encourage liquidity throughout the markets, the ECB will also make available up to €3 trillion through its refinancing operations, at interest rates as low as -0.75 percent.
The ECB’s Asset Purchase Programme (APP) consists of the four programs set out above, namely, the CSPP, PSPP, ABSPP and the CBPP3.
As noted above, it is envisaged that the criteria relevant for determining whether an asset is eligible to be purchased under the PEPP will be similar to those criteria currently applicable to each of the four programs under the APP.
It should be noted that, as a practical matter, it is not possible to consult with the ECB as to whether or not a given debt security that has not yet been issued will be eligible for use in the ECB’s monetary policy operations (including the APP). The ECB’s rules (Art 58(6) of Guideline (EU) 2015/510 of the European Central Bank) specifically prohibits giving guidance as to eligibility prior to issuance of the a debt instrument. The ECB does publish a list of all debt securities which have met its eligibility criteria, but such determination will not be made by the ECB prior to the relevant debt security being submitted to the ECB with a request for use of the same in its monetary policy operations. It is therefore very important to carefully structure any debt security intended to be used in monetary policy operations to comply with the ECB’s eligibility requirements.
We have set out some of the key eligibility criteria for the different APP programs in the table below. It should be noted that the table is not exhaustive and does not take account of the (as yet unpublished) relaxations of these criteria that may apply under the PEPP:
| Issuer |
The issuer cannot:
|
| Debt instruments |
|
| Eligible counterparties |
|
| Credit assessment information |
|
| Issuer |
|
| Debt instruments |
|
| Eligible counterparties |
|
| Issuer |
|
| ABS |
Note: The position on credit assessment is to apply slightly different criteria for ABSs with underlying claims against non-financial private sector entities resident in Greece or Cyprus. |
| Eligible counterparties |
|
| Issuer |
The issuer must not be an entity, whether publicly or privately owned, that:
|
| Covered Bonds |
Note: The position on credit assessment is to apply slightly different criteria for covered bonds which currently do not achieve the CQS3 rating in Cyprus and Greece |
| Eligible counterparties |
|
For further and more specific details of the requirements under these programs please either get in touch with a member of our team or visit the ECB’s website.
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