How the ECB Averted a Liquidity Crisis in Europe’s Short-Term Corporate Debt Market

As the COVID-19 pandemic swept across Europe in March 2020, it triggered an acute financial crisis that reverberated through the continent’s short-term corporate debt markets. A new working paper by Johannes Breckenfelder and Glenn Schepens, researchers at the European Central Bank (ECB), sheds light on how the ECB took extraordinary action to stabilize the commercial paper market, a key source of liquidity for European non-financial firms. Conducted under the ECB’s Research Directorate, the study maps the entire arc of this intervention, from the market’s near-total freeze to the ECB’s exit strategy, offering a rare empirical view of a central bank acting as a market-maker-of-last-resort.

At the heart of the crisis was a sudden and massive run on money market funds (MMFs), traditionally the main investors in euro-denominated commercial paper. By the end of 2019, MMFs held nearly 60% of this market. When the pandemic-induced panic struck, investors rapidly withdrew funds, forcing MMFs to retreat from buying new commercial paper. Issuance volumes plummeted, from more than €8 billion per week to less than €2 billion by late March, leaving companies struggling to refinance their maturing obligations. Many turned to bank credit lines but could only replace around 27% of the lost funding, exposing a severe liquidity shortfall and underscoring the fragility of the financial architecture underpinning corporate finance.

Enter the ECB: A Bold New Role as Market Stabilizer

Faced with a collapsing market and a looming corporate liquidity crunch, the ECB launched the Pandemic Emergency Purchase Programme (PEPP) on March 26, 2020. For the first time in its history, the ECB directly purchased commercial paper issued by non-financial corporations, injecting roughly €35 billion into the market in just two months, more than 40% of the pre-crisis total market size. These purchases were predominantly made in primary markets and were guided by a strict set of eligibility criteria, including investment-grade ratings, issuer type, and maturity requirements.

The researchers employed a difference-in-differences methodology to compare firms with eligible versus non-eligible commercial paper, thereby isolating the impact of the intervention. The results were striking: eligible firms saw their issuance volumes rise by around 20%, compared to a 30% drop for ineligible peers. They also extended debt maturities by 70% and secured significantly lower interest rates, particularly for debt maturing in one to six months. This stabilization in terms and volume signaled a clear success in restoring confidence and liquidity to the short-term funding market.

After the Rescue: The Return of Private Investors

As the ECB began to taper its purchases in early 2021 and eventually exited by 2023, the market entered a new and more uncertain phase. Firms that had been more heavily reliant on ECB purchases, defined as those with a greater share of their paper held by the central bank, began to experience rising costs and reduced access to funding. These firms faced an additional 20.2 basis points increase in yields compared to less-exposed firms. Money market funds also cut back their holdings in these companies by an average of €180 million and were less likely to establish new investment relationships with them.

This divergence suggested a lingering fragility in post-crisis corporate finance, especially for firms whose stability had become too dependent on public support. The ECB’s exit, though necessary to restore market discipline, revealed that some firms were left in a more vulnerable position than before the intervention. While the central bank had effectively replaced the role of MMFs during the crisis, it had not fundamentally altered the market’s reliance on such institutions or the risks that stem from their volatility during times of stress.

Rethinking the Role of Credit Lines

The study also examined whether firms turned to traditional bank credit as a fallback once the ECB withdrew. Using data from AnaCredit, the euro-area credit registry, the researchers found that while credit line drawdowns spiked in the first quarter of 2020, they returned to pre-crisis levels soon after PEPP’s launch. Interestingly, although the volume of drawn credit remained flat post-PEPP, the total amount of committed credit lines increased significantly and stayed elevated. This suggests that firms began to treat credit lines as insurance against future shocks, expanding their available buffers without actually tapping them more frequently.

Notably, the exit of the ECB had no material impact on credit line take-up, signaling that bank-based funding was not used as a long-term substitute for the liquidity once provided by MMFs or the ECB. Instead, companies appeared to retain expanded credit access as a precautionary tool, an institutional memory of the liquidity drought experienced during the onset of the pandemic.

A Playbook for Future Interventions

Breckenfelder and Schepens’ work is not just a case study in emergency central banking, it is a blueprint for future crises. It illustrates how central banks can act decisively to prevent systemic breakdowns in corporate debt markets and restore liquidity when traditional investors flee. However, the study also offers a cautionary tale: central bank support, while effective, can foster dependency that is difficult to unwind. Once the ECB exited, more-exposed firms struggled with higher funding costs, weaker investor demand, and diminished access to fresh capital relationships.

This dynamic reveals an enduring tension in modern monetary policy between providing short-term stability and encouraging long-term resilience. The paper contributes to growing academic discourse on the evolving responsibilities of central banks, particularly as financial intermediation shifts away from banks toward non-bank entities like MMFs. With detailed, security-level data and rigorous empirical methods, this study stands as one of the most comprehensive analyses yet of what it means for a central bank to step into, and eventually step out of, the role of corporate market stabilizer.