how the ECB reacted in times of crisis

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FRANKFURT – The coronavirus pandemic is not the first crisis to force policymakers to take drastic action to avert economic catastrophe.

As the European Central Bank prepares for a crucial meeting on Thursday to discuss soaring inflation and a way out of the stimulus, here is a look at other times the Frankfurt institution has been brought down. the ordeal and how she reacted.

– Fallout from subprime –

The subprime mortgage crisis erupted in mid-2007 in the United States, causing banks around the world to stop lending to each other and threatening the financial system with collapse.

From his summer residence in France, Jean-Claude Trichet, President of the ECB, is organizing the injection of billions of euros in liquidity in August.

Calm returns before the collapse of Lehman Brothers in September 2008, sending shockwaves around the world.

The ECB is stepping up its response by offering unlimited credit to banks at fixed interest rates, while lowering its collateral requirements.

– “Whatever it takes” –

At the start of 2010, the escalation of the Greek sovereign debt crisis put the single currency under pressure and threatened to spread to other countries in the euro zone.

To counter speculation on countries stifled by rising interest rates on their debt, the ECB is starting to buy sovereign bonds, first from Greece, then from Portugal, Spain, Ireland and to Italy to allow them to sustainably finance themselves.

About 210 billion euros (237 billion dollars) are spent between 2010 and 2012 within the framework of the controversial program “SMP”, target of sharp criticism from the part of the German central bankers, who, unfazed by the crisis, see it. a means of directly financing States, a lawlessness under European treaties.

As banks balk at providing more credit in 2011, the ECB, under the leadership of its new president, Mario Draghi, is launching a series of exceptional and cheap loan programs called LTROs (Long-Term Targeted Refinancing Operation).

In August 2012, with investors still convinced that the euro zone was in danger of sinking, Draghi improvised his famous statement that the ECB will do “whatever it takes” within the framework of its mandate to save the euro, allaying fears steps.

To back up its threat, the ECB is releasing 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 mirror, Europe faces deflation in 2014, a self-sustaining downward spiral in prices, wages and investment.

The ECB’s interest rates, its main lever of influence on the economy, have been kept at low levels for years to stimulate growth.

To stop falling prices, the Frankfurt-based institution is taking the unprecedented step of pushing rates into negative territory, including an overnight deposit rate of -0.10%, penalizing resting banks on their money instead of loaning it.

In parallel, a series of new large loans called TLTRO (Targeted Long-Term Refinancing Operations) are granted to banks which increase their supply of credit to businesses.

With inflation turning negative at the end of 2014, the ECB announced a massive asset purchase program in January 2015 known as quantitative easing in an attempt to further boost the economy.

– Pandemic emergency –

In early 2020, the spread of the new coronavirus is making waves in the financial markets.

New ECB President Christine Lagarde holds a press conference from her kitchen.

In it, she announces the Pandemic Emergency Purchase Program (PEPP), which is ultimately expanded to allow asset purchases worth € 1.85 trillion through March 2022. .

Markets are currently debating what will happen after the end of the PEPP, as once-hard-to-reach inflation hits nearly 5% in the euro area, putting pressure on the ECB to hike its rates. interest, which she hasn’t done for a decade.


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