The ECB will buy junk bonds in support of the most vulnerable economies

The European Central Bank will accept the so-called junk bonds as collateral for their loans to some banks. The move aims to protect the Eurozone’s most vulnerable economies, which face the risk of a decline in credit stability due to the coronavirus.

“The ECB will accept bonds as long as they have been at least the lowest investment grade by April 7”, said the institution after a phone call between management members.

The prospect of some government and corporate bonds facing a decline in yield due to the cost of combating the pandemic has worried investors. This threatens to limit the ability of companies experiencing difficulties to have access to the financing they need to survive.

These concerns have been compounded by the failure of European Union governments to agree on joint measures to combat the recession so far.

In the meantime, the ECB has stepped up lending to companies in recent weeks and scaled back its bond repurchase programs to calm markets. The latter measures will be implemented by September 2021. “Appropriate” discounts will also be introduced for the funds that banks have access to.

The aforementioned bonds will only be applicable as collateral. A spokesman for the ECB said on Thursday that no changes to the rules governing asset purchase programs are foreseen, with the BBB- remaining minimum rating required. Buying bonds is the largest part of the ECB’s monetary stimulus. The institution plans to spend more than 1 trillion EUR (1.1 trillion USD) on bond purchases this year.

However, the central bank said it could “take further measures to further reduce its permissible rating, especially with a view to ensuring the smooth transmission of monetary policy across all euro area jurisdictions”.

The ECB has recently set a precedent for the purchase of junk bonds. Last month, it agreed to take on Greek government securities, which are well below investment grade, as part of its emergency bond buyback program in response to the economic shock of the coronavirus.

The latter measures “aim to ensure that banks have sufficient assets” that they can use to “continue to provide funding to the euro area economies”, the ECB statement said.