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Lagarde Demands Fiscal Firefighting After ECB’s Own Crisis Salvo

Lagarde Demands Fiscal Firefighting After ECB’s Own Crisis Salvo

(Bloomberg) --

European Central Bank President Christine Lagarde urged governments to stop dithering in their economic response to the coronavirus as she warned that the outbreak already constitutes a “major shock” to global growth prospects.

“Governments and all other policy institutions are called upon to take timely and targeted actions,” the Frenchwoman told reporters in Frankfurt as she explained how her institution will spearhead the region’s monetary answer to the crisis with liquidity measures and more bond purchases. “An ambitious and coordinated fiscal policy response is required to support businesses and workers at risk.”

The placing of that demand front-and-center in Lagarde’s opening statement is symbolic, and highlights added urgency to fiscal action that no ECB president has dared state previously. She had already taken the unusual step of committing beforehand to a stimulus package in a call with European leaders this week, where she warned them that without appropriate action, the outbreak threatened to create conditions similar to the 2008 crisis.

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.

Economic firefighting in Europe, the world’s second-biggest agglomeration of the coronavirus outbreak after China, now seems at a more advanced stage than in the U.S., which had arguably taken the lead last week when the Federal Reserve delivered an emergency half-point rate cut. President Donald Trump raised the stakes on Wednesday with travel restrictions on arrivals from Europe.

Describing the euro-zone economy, Lagarde said that data already signal a considerably worse outlook, and that the virus had “heightened market volatility” in the run-up to the decision. She unveiled new forecasts which showed projections that were “notably” lower for 2020.

Where Lagarde defied market 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.

Here’s a quick recap on what the ECB announced earlier on Thursday:

  • Additional long-term loans for banks to provide immediate liquidity
  • More favorable terms on its so-called TLTRO targeted loan program
  • An extra 120 billion euros ($135 billion) of asset purchases focused on the private sector
  • Temporary measures by the ECB’s supervisory arm to ease capital demands for banks

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, which is already half a point below zero.

The ECB’s measures announced on Thursday also open a new dimension to the central bank’s crisis toolkit by marrying liquidity provision intended to channel money to small and medium-sized enterprises with an easing of capital demands, also aimed at encouraging banks to lend.

--With assistance from Piotr Skolimowski, Jana Randow and Carolynn Look.

To contact the reporter on this story: Craig Stirling in Frankfurt at cstirling1@bloomberg.net

To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Iain Rogers

©2020 Bloomberg L.P.