Sub-Prime to Covid: How ECB Reacted in Times of Crisis
The coronavirus pandemic is not the first crisis to force monetary policymakers into drastic action to avert economic disaster.
As the European Central Bank readies for a crunch meeting Thursday to discuss soaring inflation and a path out of stimulus, here is a look at other times the Frankfurt institution was put to the test, and how it reacted.
- Sub-prime fallout -
The sub-prime mortgage crisis explodes mid-2007 in the United States, leading banks around the globe to stop lending to each other and threatening the financial system with collapse.
From his summer home in France, Jean-Claude Trichet, the president of the ECB, organizes the injection of billions of euros of liquidity in August.
Calm returns before the collapse of Lehman Brothers in September 2008, sending shockwaves around the world.
The ECB ups its response by offering unlimited credit to banks at fixed interest rates, while lowering its collateral requirements.
- 'Whatever it takes' -
In early 2010, the escalation of the Greek sovereign debt crisis puts the single currency under pressure and threatens to spread to other countries in the eurozone.
To counter speculation on countries being squeezed by rising interest rates for their debt, the ECB begins buying sovereign bonds, first from Greece, then Portugal, Spain, Ireland and Italy to allow them to finance themselves sustainably.
Around 210 billion euros ($237 billion) are spent between 2010 and 2012 under the controversial "SMP" program, the target of fierce criticism from central bankers in Germany, who, unfazed by the crisis, see it as a means of directly financing states, a no-go under the European treaties.
As banks balk at the idea of providing more credit in 2011, the ECB under its new president, Mario Draghi, launches a series of exceptional inexpensive loan schemes, known as LTROs (Long-Term Targeted Refinancing Operation).
In August 2012, with investors still convinced that the eurozone risks going under, Draghi improvises his famous utterance that the ECB will do "whatever it takes" within its mandate to save the euro, assuaging market fears.
To back up its threat, the ECB brings out a financial bazooka, "Outright Monetary Transactions", to buy unlimited amounts of debt from vulnerable countries. The program never needs to be used.
- Deflation challenge -
With the sovereign debt crisis in the rear-view mirror, Europe comes face-to-face with deflation in 2014, a self-sustaining downwards spiral in prices, salaries and investments.
The ECB's interest rates, its main lever for affecting the economy, have been kept at low levels for years to stimulate growth.
To stop the fall in prices, the Frankfurt-based institution takes the unprecedented step of taking its rates into negative territory, including a -0.10 percent overnight deposit rate, penalizing banks who sit on their money instead of lending it out.
In parallel, a series of big new loans known as TLTROs (Targeted Long-Term Refinancing Operations) are handed out to banks that increase their supplies of credit to business.
With inflation going negative at the end of 2014, the ECB announces a massive program of asset purchases in January 2015 known as quantitative easing to further try to fuel the economy.
- Pandemic emergency -
At the beginning of 2020, the spread of the novel coronavirus sends ripples through financial markets.
The new president of the ECB, Christine Lagarde, holds a press conference from her kitchen.
In it, she announces the Pandemic Emergency Purchase Program (PEPP), which is ultimately extended to permit 1.85 trillion euros' worth of asset purchases up to March 2022.
Markets are currently debating what will come after PEPP ends, as inflation, once hard to come by, surges to almost five percent in the euro area, piling pressure on the ECB to raise its interest rates, something it has not done in a decade.
Source: Agence France Presse
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