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JPMorgan Offers Model for ECB to Support Virus-Hit Firms

JPMorgan Offers Model for ECB to Support Virus-Hit Firms

(Bloomberg) -- Should the European Central Bank decide that it needs to shield smaller companies from the fallout of the coronavirus outbreak -- instead of or in addition to an interest-rate cut -- JPMorgan Chase has an idea.

The ECB, which holds a policy meeting on March 12, could start a long-term loan program for banks similar to its existing one -- known as TLTRO -- but specifically tailored to persuade them to pass the cash onto SMEs.

“The COVID-19 outbreak continues to evolve very rapidly and with it the outlook for ECB monetary policy,” Greg Fuzesi, an economist at JPMorgan in London, said in a note. “The risk is rising that the initial GDP declines will be sharper than currently expected and that activity will be depressed not just in the February to April period.”

That means potential cashflow problems for SMEs as production and supply chains are disrupted. Fuzesi expects the ECB to boost its bond-buying program to 30 billion euros ($33 billion) a month from the current 20 billion euros, but also suggests some of the characteristics that could make an SME support program viable.

  • The ECB could record each bank’s outstanding lending to non-financial companies and let them borrow a share of this
  • The length of the loans may need to be long, at least 2 years, even if the virus outbreak is temporary, to lower banks’ funding costs in a more lasting way
  • The cost would have to be “very generous” to overcome the fact that banks may be reluctant to lend to SMEs that have suffered a big drop in revenue. He suggests pricing the loans at minus 0.5% initially, falling to as low as minus 1% if banks hit their lending targets
  • He also suggests making the program a standing facility open for three months, that banks can tap whenever they need to

To contact the reporter on this story: Paul Gordon in Frankfurt at pgordon6@bloomberg.net

To contact the editor responsible for this story: Alaa Shahine at asalha@bloomberg.net

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