MNI SOURCES: ECB Could Act Between Meets If Conditions Worsen

     FRANKFURT(MNI) - The European Central Bank may take further action between

Governing Council meetings if necessary to shore up financial conditions, ECB

sources told MNI, speaking before S&P Global Ratings was set to review Italy's

credit rating after markets close on Friday.

     Acknowledging that the country's sovereign bonds could come under

additional pressure, one official said the ECB's "milestone" Apr. 22

announcement that bonds that were investment grade on Apr. 7 would remain

eligible as collateral even if their rating were cut two notches was "not an

accident."

     "These will be difficult days for Italy," the source said, indicating that

an extraordinary meeting of the ECB Governing Council may be necessary ahead of

its Apr. 30 meeting should Italian spreads continue to widen

     Italy "will be getting the QE," no matter what, the official added. 

     --PEPP

     There is no immediate need to announce any increase in the size of the

ECB's EUR750 billion Pandemic Emergency Purchase Programme or in its Asset

Purchase Programme, which has already been expanded by USD120 billion, sources

said.

     But further additions to purchases have "been discussed confidentially in

the committees," the first official said. "I don't think they will say next

week, because the urgency, the emergency next week will be Italy, and the remedy

for this is to say they will also take junk bonds for the QE programme."

     S&P Global currently rates Italy at 'BBB', the second-lowest investment

grade, with a negative outlook. Moody's has the country a single notch away from

non- investment grade, and will review the rating in May. DBRS and Fitch will

also review their ratings, in May and July respectively.

     Another Eurosystem source told MNI that at the current rate of purchases,

PEPP and APP would "hopefully" be enough to see the ECB through until the autumn

or winter, with volumes likely to shrink over the summer.

     Christine Lagarde's language regarding the ECB's willingness to increase in

asset purchases should be watched closely, the official said, adding: "Let's see

how we phrase it next Thursday."

     Current arrangements are "potent enough to keep us going for some time,"

another source said, with no new decisions expected "in the near future.

Interest rate cuts "are always on the table," the same source added, "just not

in the short term."

     --LAST RESORT

     An additional person familiar with Governing Council deliberations

described rate cuts as "some kind of last-resort measure," which would only be

deployed in the event of a "sharp deterioration," citing financial stability

concerns. "Technically interest rates can go lower (I don't know how by much),

thanks to the tiering arrangement, but the transmission to the real economy is

feeble to non-existent."

     LTROs, TLTROs and changing the tiering multiplier "are all on the agenda,"

the first source said.

     Another central banker, asked whether the ECB's self-imposed stance on

issuer limits might change long-term as a result of the crisis, said that it was

likely there would be a return to "normal process in the light of normalisation

- if it will come."

     How and when the ECB exits PEPP "will depend on how much paper the

sovereigns issue," the official said, adding that while it was important to

"have in mind the monetary financing prohibition [...] for me, it is not a

prioritised question."

     Speaking before the Apr. 23 European Council, he expressed disappointment

at Brussels' failure to agree a comprehensive recovery package, with Germany and

the Netherlands to blame for torpedoing proposals to issue mutualised debt. "I

think those countries need more severe impact of the virus, to be blunt," he

said.

     One of the other officials was also frank: "Yes, we are financing

governments, and will keep on doing so for as long as needed."

     An ECB spokesman declined to comment to MNI.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$X$$$,MT$$$$,MX$$$$,M$$EC$]