ECB officials are said to be planning a scheme to cope with potentially hundreds of billions of euros of unpaid loans amid the fallout from the coronavirus outbreak, according to Reuters in citing two people familiar with the matter.
Adding that this scheme will be aimed at shielding commercial banks from any secondary fallout as the crisis deepens, should there be a rise in unemployment that results in a hit to income needed to repay the related loans.
One of the sources said that the ECB had set up a task force to look at the idea of a ‘bad bank’ to warehouse the unpaid debt and such an idea has accelerated in recent weeks.
A discussion point for such a move is said to involve the ESM as standing in as a guarantor for the ‘bad bank’, allowing for the issuance of bonds in which commercial banks will purchase them in exchange for portfolios of unpaid loans.
In essence, this effectively removes the financial risks involved and can be seen as a backstop for banks and the euro area financial system.
It’ll be interesting to see if they will follow up on this but if they do, party on.