ECB Will Do ‘Everything Necessary’ to Help Economy, Lagarde Says

(Bloomberg) --

The European Central Bank will do its bit to help the region’s economy cope with its worst crisis in decades, but more international cooperation is needed to overcome the pandemic, according to President Christine Lagarde.

“The Governing Council is committed to doing everything necessary within its mandate to help the euro area through this crisis,” Lagarde told the International Monetary and Financial Committee. “It is fully prepared to increase the size of its asset purchase program and adjust their composition, by as much as necessary and for as long as needed. It will explore all options and all contingencies to support the economy through this shock.”

The ECB has unleashed a barrage of support over the past weeks to support an economy in lockdown, including committing to spend more than 1 trillion euros ($1.1 trillion) on public and private debt this year. Banks get paid for borrowing money to lend to companies and households, and can pledge those loans as collateral in exchange for yet more cash.

Lagarde said the ECB is also assessing the need for more steps to help lenders, including freeing up cash by further easing the buffers they are required to keep.

The International Monetary Fund -- holding its spring meetings virtually for the first time -- has warned of the worst global recession in almost a century and started to deploy unprecedented support. It has already granted billions of dollars of aid to the most vulnerable countries, approved debt service relief for 25 low-income states and established short-term liquidity lines to prevent a global shortage of dollars.

“The ECB supports the crisis-response measures by the IMF, notably the adjustments to its emergency lending toolkit and the creation of a short-term liquidity line for countries with strong macroeconomic fundamentals,” Lagarde said. “We are also open to exploring a possible new special drawing rights allocation for all IMF members.”

The ECB has already agreed to swap-line arrangements to provide euros to some European central banks outside the currency bloc, and Lagarde said further requests are being assessed.

IMF forecasts published earlier this week showed the euro area will be hit hard. Output in the bloc is seen shrinking 7.5% this year, more than twice as much as the global economy. While the Washington-based lender expects a recovery in 2021, it cautioned that much depends on the longevity of the crisis and how it affects business activity.

“What shape the recovery will ultimately take remains highly uncertain at the current juncture, even as authorities gradually start to ease lockdown measures in some economies,” ECB Executive Board member Isabel Schnabel said during a webinar on Thursday.

Countries in Europe are carefully testing an easing of restrictions, after public life was put on halt to rein in the spread of the virus. Austria was among the first to reopen smaller shops this week, and German Chancellor Angela Merkel pointed to “fragile” progress in containing the disease.

She outlined a plan on Wednesday that would see some retailers returning to work next week and children starting school again in early May.

What Bloomberg’s Economists Say...

“With the European Union circling in on an exit strategy, the question now is: What output gain is achievable as containment measures are eased? Our back-of-the-envelope calculations suggest the move from full lockdown to moderate containment could allow output gains of about 20%, with a further 10% boost achievable as mild social distancing becomes the norm.”

-- Jamie Rush and Maeva Cousin. Read the EUROPE INSIGHT

Euro-area governments have made available hundreds of billions of euros in support -- from emergency loans and credit guarantees to employment subsidies and health-care investments. Yet they’ve struggled to agree on a joint response.

A 540 billion-euro package presented last week fell short of demands by countries struggling most with the pandemic -- Italy and Spain -- and notably omitted any reference to debt sharing.

Investors are already expressing concern that spiraling debt burdens might become unsustainable. The spreads between bond yields in the European periphery and those of Germany, the region’s benchmark, have widened recently, stirring memories of the debt crisis of 2012.

©2020 Bloomberg L.P.