Euro Slips as EU Leaders Fail to Agree Stimulus Plan By

© Reuters.

By Yasin Ebrahim – The euro slashed its early-day gains against the dollar on Thursday, after EU leaders failed to agreed on a coronavirus recovery package as bloc members at are odds over how to finance it.

fell 0.43% to $1.0776 after hitting a high of $1.0845 intraday.

The economic bloc of 27, however, did back a short-term $540 billion plan to support businesses and economies from the immediate fallout from the coronavirus.

But experts say a bigger, bolder stimulus plan is needed to offset the damage from the pandemic.  

Ahead of the meeting, the European Commission floated a 2-trillion-euro plan, but member states disagree on how they should share the burden.

France, Italy and Spain are pushing for the stimulus to be funded by the sale of EU debt, or so-called coronabonds, but Germany and the Netherlands have rejected the idea over worries they could be left to foot the bill 

ECB President Christine Largarde said the euro-area economy could shrink by as much as 15% this year, and urged EU leaders to roll out stimulus.

The ECB followed the Federal Reserve’s lead and said it would accept high-yield, or junk bonds, as collateral for banks to access ultra-cheap loans. But unlike the Fed, the ECB does not have the option to apply a haircut to the debt to offset against changes in value, which opens the central bank up to the risk of losses.    

“The one item that might pose an issue to the ECB is the high risk profile of BB fallen angels and the fact that, unlike repo operations, no haircut protects the Eurosystem from potential losses,” UBS said.

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