Europe agrees on $260 billion credit lines to stem fallout

Euro-area finance ministers agreed to allow the region’s bailout fund to extend credit lines to each of the bloc’s governments on concessionary terms, paving the way for countries including Italy to draw cheap liquidity amid an unprecedented spending spree.
The deal struck at a video conference on Friday forms a key part of the bloc’s response to the crisis brought on by the coronavirus pandemic, that’s put the European Union on track for the steepest recession in its history. Italian bonds rallied, with yields on 10-year notes dropping 8 basis points to 1.84%.
Under the emergency support instrument, euro-area governments will have access to cheap funds worth up to 2% of their 2019 output, without any of the onerous belt-tightening terms that were attached to the loans granted during the sovereign debt crisis. The European Stability Mechanism will be able to lend to countries on terms normally reserved for sovereigns with a pristine credit rating, and with few questions asked.
For Italy, this means it could receive 36 billion euros in ultra cheap loans – a sum that could conceivably increase should there be a major need.
Backed by Germany’s creditworthiness, the ESM borrows money at negative yields, which it then lends to euro-area member states after charging small service fees. In current terms, the interest rate on such loans could be around 0.1%, ESM Managing Director Klaus Regling said.
With borrowing costs in the euro-area periphery creeping up over the past few months amid a virus-induced economic slump, cash-strapped governments could benefit from billions in much-needed interest savings for the outlays needed to cushion the blow.
Under the ministers’ agreement, the loans countries would be able to receive would have a maximum average maturity of 10 years. Requests can be made until the end of 2022, and the initial availability period for each credit facility will be 12 months, which could be extended twice for 6 months. MDT/Bloomberg