Abstract
The COVID-19 pandemic has been a global shock with dramatic consequences on debts of the governments which were called to alleviate the economic and social impact of the crisis on firms and households. We explore conditions for the feasibility of (COVID-19 generated) government debt relief concerning bonds held by the ECB, which can be justified by the exogenous characteristics of the shock. We outline several technically and economically feasible ways (involving debt “freezing”, debt rescheduling or outright debt cancellation) for achieving this goal and discuss their consequences on moral hazard and on the European Central Bank balance sheets. We also examine their potential impact on ECB’s independence, reputation and, ultimately, on inflation and exchange rates. We further discuss the distributive concerns which arise for a CB operating in a Union with several sovereign member states as in the Eurozone.