ECB’s Panetta: Need Clearer Picture to Use More of Our Firepower

16 June 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank did not have a sufficiently clear picture ahead to deploy more of its firepower than it did at the June 4 meeting of the Governing Council, ECB Executive Board member Fabio Panetta said on Tuesday.

In an interview with French daily Le Monde, a text of which was made available by the ECB, Panetta said that although monetary authorities had not yet discussed the possibility of purchasing so-called fallen angels, they would consider it if the need arose.

Asked whether the ECB’s pandemic emergency purchase programme (PEPP) was working, Panetta said it was, but that the ECB was ‘fighting against strong headwinds’ that require ‘forceful measures to avoid the tightening of credit conditions, stabilise the economy and thus respond to inflation moving further away from our aim.’

Such considerations were behind the June 4 decision to increase the size of the PEPP from the original €750 billion to €1.35 trillion, he said. The ECB’s approach is pragmatic and dictated by its mandate in line with medium-term prospects, he said.

Given the high uncertainty about the pandemic and its economic fallout, ‘[i]t would have been unwise to go for the “full monty” – using our firepower to a larger extent – without a clearer picture’, he said by way of explanation of the €600 billion PEPP increase.

Panetta reminded that monetary financing by the ECB of government debt is not allowed, so that simply never seeking repayment of sovereign debt purchases would be prohibited. Such a move would also undermine confidence in the euro, he said.

As for rolling over debts in perpetuity, he observed that the ECB already intends to reinvest maturing principal payments from its asset purchases ‘until it is necessary to do otherwise to achieve our price stability objective.’

ECB Chief Economist Philip Lane similarly warned last week that there would be no reinvestment ad infinitum, as policy would be modified along with the evolving inflation outlook.

Although the Governing Council had not yet discussed buying the debt of companies that had been investment-grade rated before being downgraded to junk status – known as fallen angels – ‘we will consider that if necessary’, Panetta said.

‘We have shown that we are ready to take all the necessary measures to reach our inflation objective and we are still guided by this aim’, he affirmed.

Panetta predicted ‘a prolonged period of very accommodative monetary policy to fulfil our mandate’, and called on authorities at the level of national governments and Europe to take advantage of the opportunity to implement needed reforms.

The euro’s international role should be bigger, he said. Among the necessary conditions for this to happen, he said, in times of volatility the ECB needs to backstop with central bank liquidity euro-denominated liabilities.

Asked if the ECB should thus become a lender of last resort internationally, Panetta agreed: ‘Personally, I do think we should do more in this direction, yes.’