European Central Bank is expected to unleash another blast of stimulus on Thursday to help businesses bridge the gap until the economy recovers from the pandemic – and to support governments that are ramping up spending to cushion the blow as the winter wave of the virus worsens. The bank could add a half-trillion euros or more to its existing bond purchases. That means the central bank will vacuum up much of the new debt being issued by hard-pressed governments lowering the risk of a new eurozone debt crisis. Bond purchases drive down borrowing costs in the bond market, where governments get their financing, and thus takes some of the financial pressure off governments that otherwise might restrict their spending at the worst possible time.
Estimate the 19 countries that use the euro will issue some 1.3 trillion euros in medium and long-term bonds next year, covering new deficits and existing debt. Council could add 500 billion euros or more to the purchases, and extend their duration to the end of 2021 or to mid-2022. Currently the purchases are slated to run until mid-2021, or until the end of the COVID-19 crisis phase. Governments are spending heavily to keep businesses afloat until they can reach the other side of the pandemic downturn. Forms of aid include furlough support programs that pay most of workers’ salaries if they are put on short hours or no hours instead of being laid off, loans, and tax breaks and deferrals, such as Germany’s temporary cancelling of value-added tax. Assuming the dispute with Hungary and Poland is resolved, the amounts of EU aid will boost growth but will have only a small impact on debt dynamics.