The COVID-19 crisis caused stress in European sovereign debt markets. The potential impact on euro resilience of rapidly increasing spreads on Italian government bonds gave rise to particular concern. The ECB’s response – ranging from the Pandemic Emergency Purchases Programme (PEPP) to several rounds of easing of its collateral policy – has been praised for quickly stabilizing government bond markets and ameliorating euro resilience concerns.
But it may not last.
As has often before been the case, the ECBs crisis response seeks to strike a balance between liquidity provision and risk control, but measures launched in the name of the latter threatens to undermine the former. From a financial stability perspective, it would be commendable if the ECB temporarily suspended key elements of its margining practices in credit operations, notably its practices of haircut differentiation and daily margin calls.
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