The European Central Bank (ECB) unveiled plans on Saturday to widen access to its euro liquidity backstop, making it globally available and permanent in a bid to bolster the international role of the single currency.
Access to such repurchase lines — often called repo lines, a crucial source of funding during times of market stress — has been limited to just a handful of mostly Eastern European countries but ECB President Christine Lagarde has long seen it as a tool to boost the euro’s global reach.
“The ECB needs to be prepared for a more volatile environment,” Lagarde said at the Munich Security Conference, the first time an ECB president spoke at the event.
Photo: EPA
“We must avoid a situation where that stress triggers fire sales of euro-denominated securities in global funding markets, which could hamper the transmission of our monetary policy,” she said in announcing the new facility.
The facility, to be available from the third quarter of this year, would be open to central banks around the world, provided they are not excluded for reputational reasons, such as money laundering, terrorist financing or international sanctions, the ECB said.
“This facility also reinforces the role of the euro,” Lagarde said. “The availability of a lender of last resort for central banks worldwide boosts confidence to invest, borrow and trade in euros, knowing that access will be there during market disruptions.”
Used when banks are unable to obtain funding on the market, the repo line allows lenders to borrow euros from the ECB against high-quality collateral, to be repaid at maturity along with interest.
Unlike previous lines, which had to be extended from time to time, the new facility would provide standing access for up to 50 billion euros.
With investors reassessing the US dollar’s status due to the unpredictable nature of US President Donald Trump’s economic policy, Lagarde has said this was the time for the euro to gain market share, but this required a revamped financial and economic architecture.
The US Federal Reserve maintains a similar tool, called the FIMA Repo Facility, which essentially protects the Treasury market since stress might otherwise force lenders to sell government bonds below market value.
“These changes aim to make the facility more flexible, broader in terms of its geographical reach and more relevant for global holders of euro securities,” the ECB said in a statement.
Such a guaranteed access to euros could naturally increase demand for euro-denominated assets and encourage banks outside the 21-nation euro zone to buy assets from the bloc.
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