A new, less stringent line can, however, be established we understand either in revising the existing ECCL standards, or by coming up with a new dedicated instrument created solely for the COVID -19 crisis response.
The creation of an entirely new instrument, if proposed by the Commission, can be done through a vote of the ESM’s Board of Governors, meaning the Eurozone finance ministers. Some ministers/governors would need to then obtain national parliamentary approval – which under normal circumstances might be an issue in for example Germany, the Netherlands, and Finland. But these are far from normal times.
The ESM epidemic-focused tool, and its trigger mechanism, is being designed in a way where al Eurozone members would be eligible to tap the line. With the understanding that budget surplus countries Germany and the Netherlands, for example, would likely never need to tap such a line, its availability to everyone would be intended as a signal to remove stigma akin to the US Federal Reserve’s pressure on all US banks to tap the Fed’s Discount Window lines.
The borrowing the ESM would do on the open market if the need were to arise may be called “Corona-bonds,” but they will likely fall along similar fiscal rules as the current ESM and fall short of some hopes that they might represent a first step to full capital markets union “mutualization” of debt.
Germany Ready to Back a Rescue Plan to Help Italy Weather Virus
Berlin sees ESM credit line for Italy with minimal conditions
Finance ministry not ready to move on joint coronavirus bonds
By Birgit Jennen and Viktoria Dendrinou
German officials are ready to help Italy get through the coronavirus pandemic and are prepared to support an emergency loan from the euro area’s bailout fund.
The preferred option in Berlin would see Italy granted an enhanced credit line by the European Stability Mechanism with minimal conditionality, according to a German official with knowledge of the government’s thinking. While Chancellor Angela Merkel has said she’s happy to discuss Italy’s request for jointly issued coronavirus bonds to shore up euro members’ finances, the official said Germany isn’t ready to move forward with that idea.
BTPs Extend Gains; Germany to Help Italy Combat Virus Crisis
By James Hirai
BTPs rise, extending outperformance over peripheral peers, after Germany says it is prepared to help Italy weather the impact of the coronavirus.
Italy’s 10-year yield falls as much as 7bps to 1.56%, paring its underperformance over bunds to 2bps at 197bps