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Lagarde Set for All-Out ECB Action on Virus: Decision Day Guide

Christine Lagarde will bid to prevent the coronavirus outbreak from sparking a repeat of the 2008 financial turmoil 

Lagarde Set for All-Out ECB Action on Virus: Decision Day Guide
Christine Lagarde, president of the European Central Bank, speaks during the central bank’s rate decision news conference in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

(Bloomberg) -- Christine Lagarde will bid to prevent the coronavirus outbreak from sparking a repeat of the 2008 financial turmoil when the European Central Bank finally unveils its monetary response to protect the region’s economy.

The president effectively -- and exceptionally -- pre-committed action this week when she told European leaders that the region risks an economic shock that echoes the crisis of the last decade unless they act urgently. She said the central bank would do its part.

Yet she doesn’t have the same room to cut interest rates as peers like the Federal Reserve and the Bank of England, forcing policy makers -- some of whom will dial in by teleconference because of the virus -- to be more creative in crafting a stimulus package bold enough to bolster the euro-area economy as it reels from the epidemic.

Convincing companies, households and financial markets that the ECB is willing and able to offer meaningful support will be the biggest test of her leadership just four months into the job. The decision is complicated by a global stock rout that extended Thursday, after President Donald Trump suspended travel from Europe.

Lagarde Set for All-Out ECB Action on Virus: Decision Day Guide

“The March meeting may well define Lagarde’s presidency,” said Frederik Ducrozet, global strategist at Banque Pictet & Cie in Geneva. “Credibility remains the ECB’s biggest asset.”

The central bank will announce its decision at 1:45 p.m. in Frankfurt, and Lagarde’s briefing begins 45 minutes later. Here are the options the ECB has to hand.

Follow Lagarde’s media briefing on our live blog

Rate Cuts

The central bank is almost universally expected to lower its deposit rate by at least 10 basis points to minus 0.6% -- small in comparison to the 50 basis-point emergency reductions by the Fed, the BOE and the Bank of Canada.

Nonetheless, it would be an important move in highlighting policy makers’ determination to prop up the economy -- after many of them expressed skepticism about more rate cuts in the past.

HSBC economist Simon Wells reckons lower rates will do little to support growth, but they could help stem the euro’s surge against the dollar. The single currency is close to the highest level in 1 1/2 years on a trade-weighted basis, a problem for an economy that relies heavily on exports.

Lagarde Set for All-Out ECB Action on Virus: Decision Day Guide

Any cut will likely come with a higher exemption for banks’ deposits from the rate, which works as a charge on their overnight reserves. They’ve complained vociferously that their ability to lend could be hampered, and policy makers are listening.

Cheap Loans

Lagarde told European Union leaders on Tuesday the ECB is looking at all tools that provide “super-cheap” funding and ensure liquidity and credit don’t dry up.

One way would be to ease the terms of its existing program of cheap longer-term loans for banks known as TLTROs. JPMorgan Chase economist Greg Fuzesi said the ECB could also start a new program specifically tailored to persuade lenders to support small and medium-sized companies.

The idea of fresh funding facilities has already been endorsed by Austrian Governor Robert Holzmann and his French colleague Francois Villeroy de Galhau. The ECB could also loosen conditions for the collateral that banks post in return for liquidity.

Lagarde Set for All-Out ECB Action on Virus: Decision Day Guide

More Bond-Buying

Increasing the pace of monthly asset purchases from the current 20 billion euros ($23 billion) could be controversial -- Lagarde’s predecessor, Mario Draghi, faced unprecedented opposition to restarting the program last year. It would also reignite criticism that the ECB is effectively bankrolling governments by pushing down yields on sovereign bonds. That’s a refrain heard often in Germany, where the nation’s highest court is about to rule on the legality of quantitative easing.

Still, economists at Citigroup predict that the pace of QE could be tripled for a limited time. Deutsche Bank strategist George Saravelos is among those calling specifically for an increase in corporate-bond purchases to restore calm to those markets.

Also potentially controversial, Pictet’s Ducrozet argued the ECB should lift the self-imposed constraints that limit buying to a third of each government’s outstanding debt. That rule is intended to stop the ECB breaching EU law that bans it from financing governments.

What Bloomberg’s Economists Say

“We already expected President Christine Lagarde to announce a rate cut and new targeted liquidity measures. We now forecast asset purchases will be doubled as well. This package would [...] help prevent the needless bankruptcy of otherwise viable companies [...] and address the lingering weakness in demand and confidence that will inevitably follow.”

-- Maeva Cousin, David Powell and Jamie Rush. Read the ECB PREVIEW

The Bank of Japan, which like the ECB has negative rates that it’s reluctant to cut further, is likely to take a more aggressive stance on buying assets such as exchange-traded funds when it meets next week, according to people familiar with the matter.

Looser Supervision

The ECB’s monetary policy may be supplemented by more leniency from its bank supervisors. Changes to rules on how to provision for soured loans is one suggestion. While that may be too explosive for some policy makers, they might allow supervisors to show flexibility if lenders dip below the financial strength they’re expected to meet.

“It is important also to play on the regulatory side,” former Executive Board member Gertrude Tumpel-Gugerell told Bloomberg Television. “Liquidity is the most important in this moment, and also avoiding that spreads are going up too much between different countries and regions.”

Italy is considering a moratorium on mortgage payments, Germany is weighing easing capital buffers for banks, and France has pushed regulators to go easy on institutions whose customers face difficulties repaying loans.

The BOE reduced the buffer it imposed on U.K. banks as part of its package on Wednesday. That’s harder to replicate in the 19-member euro zone.

Fiscal Requests

Lagarde will undoubtedly call on governments to be bold in their response to the virus epidemic, reiterating her message that urgent action is needed to prevent an economic shock.

Italy, the hardest-hit European country, has imposed a national lockdown and said it’s ready to spend as much as 25 billion euros on stimulus. But even in Germany -- which despite having the most fiscal firepower has been reluctant to spend -- Chancellor Angela Merkel said the government will do whatever is needed to limit the impact of the coronavirus.

Economic Projections

The ECB is largely flying blind into this crisis. Data available are mostly backward looking, and new quarterly forecasts due to be presented on Thursday will already be out of date. Yet they could still signal the economy is going into recession, according to Philipp Hildebrand, Blackrock vice chairman and former Swiss National Bank president.

Lagarde Set for All-Out ECB Action on Virus: Decision Day Guide

HSBC concurs, saying a euro-area recession “looks unavoidable” and predicting output will drop by 0.4% in the first quarter and 1% in the following three months.

“I don’t think you can throw up you hands and say that’s just the way it’s going to be,” Hildebrand told Bloomberg TV. “We need to learn from history, we need to think about creative ways to respond and most importantly we need this coordinated an aggressive response.”

--With assistance from Harumi Ichikura, Craig Stirling, Carolynn Look, Matthew Miller and Anna Edwards.

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow

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