Confronted with a deep economic recession and the need for massive fiscal spending to protect the economy, risk sentiment deteriorated abruptly and sharply. Financial intermediation ceased to function, markets dried up and sovereign and corporate spreads spiralled. The announcement and prompt implementation of the pandemic emergency purchase programme (PEPP) stabilised markets. It quickly instilled confidence when the market failed to coordinate.
One reason why the PEPP was so powerful was its flexibility, which allowed the ECB to provide liquidity when and where it was most needed. Purchases were allocated flexibly across time, asset classes and jurisdictions. Just like the OMT, which was never used, the PEPP’s backstop function worked primarily via the confidence channel.