PEPP Talk from the ECB

PEPP Talk from the ECB

What the latest actions taken by the European Central Bank mean for European market liquidity.

At today’s ECB meeting, the Governing Council took several additional measures geared at avoiding or at least limiting a potential credit crunch. First, financing for the forthcoming edition of the targeted longer-term refinancing operations (TLTRO III) became even more advantageous, especially for banks that reach established net lending goals. Second, temporary non-targeted pandemic emergency financing operations (PELTROs) were introduced to support liquidity conditions and, in theory, provide unlimited short-term funding.

Regarding the key topics the market has recently fixated on, however, the ECB did not budge: both the size and eligibility criteria for the various asset purchase programs remain unchanged for now. According to ECB President Christine Lagarde, those program changes were not explicitly discussed by the Governing Council. That said, she mentioned very explicitly, including in the post-meeting statement, that the Pandemic Emergency Purchase Program (PEPP) can be increased, extended beyond 2020 and its composition can be adjusted.

The last part of this message can be understood to indicate either that the ECB could ignore the capital key which guides the proportionality of purchases across jurisdictions and serves currently as the fundamental ex-post constraint for the PEPP, or that the ECB will consider the addition of more eligible assets below investment-grade (Greece is already eligible for purchases under the PEPP). We tend to think that the latter interpretation is probably closer to the truth. This was supported by Lagarde’s elaborations in the virtual press conference. Either way, we very much welcome the publication of more granular data for the PEPP activities, which would be more in line with the other asset purchase programs.

The ECB could possibly broaden the pool of eligible assets by introducing a “fallen angel provision” similar to the one set up recently for collateral eligibility.
Andreas Billmeier

We were somewhat surprised by Lagarde apparently shutting the door to buying assets under the ECB’s Outright Monetary Transactions (OMT) programme after a country borrows from the European Stability Mechanism (ESM) and thereby becomes eligible in principle. She stressed that the instrument was conceived in 2012 under different circumstances, that there was no automaticity in the first place and that the PEPP was the appropriate instrument for the current situation (i.e., a symmetric shock). While COVID-19 is indeed a symmetric shock, we think that the impact is not, and some countries are harder hit than others. As such, we view the statement today as a push back to what has been discussed within the Eurogroup and the European Council: borrowing from the highly rated ESM is just that—cheap financing—but not another way to have the ECB pick up the tab.

Given how explicit the ECB was in terms of flexibility around the PEPP, we expect the ECB to expand that program at a subsequent meeting, potentially as early as June. The ECB could also possibly broaden the pool of eligible assets by introducing a “fallen angel provision” similar to the one set up recently for collateral eligibility. With asset purchases geared toward Italy currently and for the foreseeable future, an extension of the program is, at some point, the only way to continue purchases of Italian bonds while still respecting the capital key ex post. 


COVID-19 is the World Health Organization's official designation of the current novel coronavirus disease.

The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.

The Eurogroup is an informal body where the ministers of the euro area member states discuss matters relating to their shared responsibilities related to the euro.

The European Stability Mechanism (ESM) is a permanent rescue funding program to succeed the temporary European Financial Stability Facility.

A fallen angel is a bond that was rated investment-grade but has since been downgraded to junk status due to the declining financial position of its issuer. The bond is downgraded by one or more of the big three rating services.

The Governing Council of the European Central Bank is the main decision-making body of the European Central Bank (ECB) and has "sole responsibility" for formulating monetary policy in the Eurozone.

Under the Outright Monetary Transactions (OMT) or bond-buying program, the European Central Bank (ECB) would offer to purchase eurozone countries’ short-term bonds in the secondary market, adding liquidity to the financial system.

A pandemic is the worldwide spread of a new disease.

The Pandemic Emergency Purchase Programme (PEPP) is a €750 billion ECB initiative that will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

PELTROs consist of seven refinancing operations that begin in May 2020 and expire, in a staggered sequence, between July and September 2021.

Targeted longer-term refinancing operations (TLTRO) is a program of the European Central Bank designed to provide liquidity to the financial sector. In TLTRO III, similarly to TLTRO II, the interest rate to be applied is linked to the participating banks’ lending patterns. The more loans participating banks issue to non-financial corporations and households (except loans to households for house purchases), the more attractive the interest rate on their TLTRO III borrowings becomes.


Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH. Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (109) Jin Guan Tou Gu Xin Zi Di 016; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

The aforementioned Legg Mason entities are wholly owned subsidiaries of Franklin Resources, Inc.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.