PEPP and NGEU: Short-Term Reactions to the Monetary and Fiscal Policy Paradigm Shift in Light of the Lagarde Gaffe

This chapter examines the short-term financial market reactions of four issuer-specific gauges for eleven Eurozone countries in relation to PEPP (Pandemic Emergency Purchase Programme) and NGEU (Next Generation EU) events in 2020 using event-based regressions. In addition, the Lagarde gaffe “… we are not here to close spreads” on 12/3/2020 is considered. The gauges encompass the bond yield, credit spread, CDS spread and CDS-bond basis, each with a ten-year maturity. The results suggest that the PEPP and the NGEU have essentially achieved the desired effects, especially for countries with high sovereign debt ratios. However, the reactions of these countries' gauges to the Lagarde gaffe indicate that moving away from the ECB's “whatever it takes” stance is likely to pose major challenges. This was highly relevant in the context of the fight against high inflation rates in the Eurozone beginning in 2022.