(Bloomberg) --
In the absence of more fiscal support, strategists at Goldman Sachs Group Inc. say the European Central Bank will probably step up its emergency stimulus measures this week.
The policy-setting Governing Council will likely increase its Pandemic Emergency Purchase Programme, or PEPP, by 500 billion euros ($542 billion) at a gathering on Thursday, according to strategists including Sven Jari Stehn and Alain Durre. That would help support bonds from Italy and Spain and still leave room to buy “substantial amounts” of debt from core euro-area countries, they added.
“ECB officials have signaled a willingness to top up the PEPP to avoid any unwarranted tightening of financial conditions and help governments shoulder the fiscal costs of the outbreak,” they said. “But using the ECB to share sovereign risks is less efficient than an explicit fiscal mechanism -- such as eurobonds.”
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The central bank's recent moves to shield weaker nations from ratings downgrades and ramp up bond-buying programs has helped calm investors' nerves for now. The ECB could absorb almost two trillion euros of sovereign debt on top of what it's already announced, the strategists said. Barclays Capital analysts said the ECB could double its pandemic bond buying program to 1.5 trillion euros.
Countries such as Italy and Spain will likely still struggle to recover at the same pace as Germany, due to a combination of a larger virus outbreak and more limited fiscal support, Goldman strategists said. While Italy's bonds rallied Monday after avoiding a downgrade to junk from S&P Global Ratings, its 10-year debt has clocked four weeks of declines.
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