Lagarde Unveils ECB Surgical Aid for Economy to Fight Crisis
European Central Bank President Christine Lagarde unveiled a calibrated package of stimulus, spearheading the region’s financial response to the coronavirus with measures intended to “surgically” support key parts of the economy.
Warning of a “major shock” to prospects for global growth, Lagarde and colleagues crafted what she called a “comprehensive” program to support activity by helping companies to stay in business and banks to keep lending. They promised to buy more bonds, and enhanced a loan program with terms that effectively amount to an interest-rate cut for banks that use it to pump money into the economy.
The move failed to stem a global stock rout however, which resumed even after the U.S. Federal Reserve took aggressive steps to add liquidity to Treasury financing markets. Meanwhile a stumbled comment by Lagarde on bond spreads had already caused Italian yields to surge.
Observers were divided on the overall effectiveness of the package. Erik Nielsen, group chief economist at UniCredit, said that it was “pretty good” with enormous liquidity on “amazingly attractive terms.” By contrast, Roberto Perli at Cornerstone Macro said that the stimulus was “not entirely weak, but was not overwhelming either.”
Overshadowing the presentation of the package at a press conference in Frankfurt was Lagarde’s observation that “we are not here to close spreads,” a declaration met with alarm by investors focused on Italy, the economy suffering the region’s worst outbreak of the virus. Widening bond spreads are reminiscent of the debt crisis in 2012 that almost splintered the euro zone.
“I don’t understand why she said that,” Nielsen told Bloomberg Television. “As the head of the ECB, she should be very concerned about spreads, because spreads prevent the ECB from having a proper transmission mechanism.”
Lagarde backpedaled a bit in an interview with CNBC, saying that the ECB is mindful of fragmentation risks and its tools will be completely available to Italy.
A centerpiece of her message on Thursday was to urge governments to form “an ambitious and coordinated fiscal policy response” to match the ECB’s new injection of liquidity. She called for “decisive and determined” action by finance ministers as soon as Monday, when they meet.
The dramatic escalation in the ECB’s own response after weeks of monitoring the worsening outbreak arrived in parallel with news of a loosening in Germany’s reluctant stance toward fiscal easing, though still laced with caution. One day earlier, the U.K. had delivered a coordinated package including an emergency interest-rate cut, complementing a 30 billion-pound ($38 billion) budget stimulus.
European stocks extended a slump in the hours after the ECB announcement, with the Stoxx Europe 50 Index down more than 12% at the close. The euro fell as much as 1.9%. Italian bonds plunged.
Questioned on the market reaction, Lagarde said it takes time for such decisions to be analyzed and appreciated.
Where she defied investor expectations on Thursday was in keeping the deposit interest rate at minus 0.5%, staving off pressure for a cut deeper below zero. With negative interest rates hurting banks and irking some voters in northern European countries, the arguments in favor of shunning such a move were clearly persuasive.
|What the ECB Did...|
No rate cut was even on the table in the meeting as policy makers considered that there was little that monetary policy alone could do to respond to the crisis, according to people familiar with the matter.
The TLTRO measure has possibly created a dual-rate regime through the back door, by allowing the rate offered on the program -- which would be used by banks to lend into the real economy -- to fall by as much as a quarter-point below the deposit rate. The ECB’s package also opens a new dimension to the central bank’s crisis toolkit by marrying liquidity provision with an easing of capital demands.
“It looks actually quite promising,” said Anatoli Annenkov, senior economist at Societe Generale SA. “They are clearly sending a signal that liquidity should not be an issue. On that level it’s a positive, and I’m maybe surprised a little bit that the market reaction is so poor.”
What Bloomberg’s Economists Say...
“We expected Christine Lagarde to heed calls for stimulus and the European Central Bank president did not disappoint. Much more favorable conditions on TLTRO-III will support lending and offer some support to businesses in Europe disrupted by the coronavirus outbreak, though governments will still need to do their part.”
--By Maeva Cousin, David Powell and Jamie Rush
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Lagarde’s call for governments to take timely action has yet to be heeded throughout Europe. While indebted Italy has added stimulus, Germany in particular has been reticent. Still, it is prepared to abandon its long-standing balanced-budget policy, according to people with direct knowledge of its economic policy.
“The central bank acted decisively,” Bundesbank President Jens Weidmann told Bloomberg. “Health and fiscal policy is, however, required to be in the front line of combating the causes and the immediate consequences.”
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