Governments and Central Bank React while the World Economy enters a Recession coma
The EU last week announced that the enforced rules on budgetary discipline are being suspended in order the member-countries of Eurozone to deal drastically with the upcoming recession due to the Covid-19 (Coronavirus) pandemic. US Senate House on March 25 approved the $2trillion fiscal package proposal of US President Donald Trump to support the US economy against the recession which will be caused from the coronavirus.
Both the governments of the developed countries and their respective central banks are constantly rushing to upgrade with new measures the support of their economies and, more generally, the global economy which gradually all together and each separately economies enter a recession coma.
The upcoming economic crisis caused by the Coronavirus pandemic is the most difficult of all forms of recession because it is hitting both demand and supply side at the same time.
The ECB and its monetary policy to date have been exhausted in creating
artificial growth in the euro area and since before the crisis it kept its base
borrowing rate at near zero levels it does not allow room for maneuvers for to
support the effort to contain the fall in Eurozone GDP.
On Thursday, March 12th the ECB announced a €120bn capital relief for
European systemic banks to cover their losses from a future increase in the
proportion of non-performing loans by households and businesses respectively.
On Thursday, 19 March the ECB, and after much pressure from severely affected member countries such as Italy, (please read the analysis titled «ECB Backstabbing in Tested Italy»), announced the implementation of a new €720bn quantitative easing program.
At the same time, the Commission, through its President Ursula von der
Leyen, announced on Friday 20 March the suspension of the EU’s fiscal
discipline rules. An unprecedented measure that will allow EU member countries
to use the funds needed to deal with the consequences of the induced recession.
In fact, with this decision, the Commission suspends the Stability and
Growth Pact which binds all euro area member countries. The aim is to increase
public spending and to have tax-exemptions at the level of 1% of the Eurozone
GDP, in order to strengthen the economies affected by the Covid-19 crisis.
However, restrictions referred to in the Maastricht Treaty such as that
member countries are obliged to maintain an annual budget deficit of < 3% of
their GDP remain.
The Italian government announced measures of €25bn to help borrowers and at
the same time published measures suspending payments of certain mortgage and
bank loan deadlines.
The French government has announced measures of €45bn. These measures aim
to reduce or cancel debts only for the month of March. Small businesses in
difficulty will benefit from the suspension of payment of their bill for social
goods such as water, gas, electricity and their headquarters rents.
At the same time, the French state announced the granting of €300bn in
guarantees on loans granted by banks to companies affected by the Coronavirus
crisis while also acquiring shares of the most important companies.
The German government has announced the largest private and public sector
financial support plan, with guarantees and credits of €550bn.
Spain’s government has announced it will guarantee €100bn of business
USA and Federal Reserve System (FED)
President Donald Trump’s proposal and the Republican party are pushing for
a senate debate on a package of support for the U.S. economy approaching
$2trillion. Democrats have reservations about this plan. If the Democrats agree
then this draft proposal will be pushed forward for a resolution in the House
of Representatives. H
At the same time, a $100bn welfare program has already been approved by
Congress. Uncertainty among
workers and small-medium-sized enterprises is high as entire sectors of the
economy such as catering, tourism and air suspension have already been closed.
For its part, the FED has offered to support loans relating to real estate
and consumer goods such as cars and to provide loans mainly to affected
lockdown companies. Essentially, the FED is implementing a short-term debt
financing strategy to support households and businesses for the first few
months of lockdown on the economy.
On Sunday, March 15, the FED moved to cut its key basic borrowing rate to zero, while clarifying that it would maintain these interest rates for the duration of the pandemic crisis.
UK and Bank of England (ΒοΕ)
Britain’s government has announced the granting of state guarantees for
business loans of up to £330bn and financial assistance of £20bn.
At the same time, the British Government promised to grant subsidies to
cover up to 80% of the salaries of workers who have been forced temporary leave
after the closure of businesses operating in the catering and food industry.
For its part, the BoE reduced the base borrowing rate to 0,1 % from 0,25%
(from 0,75% to 0,25%, a decrease it had made last week).
Canada and Bank of Canada (BoC)
The Federal Government of Canada announced a fiscal support package
initially $10bn CAD and then announced a
second largest support package that includes a $27bn CAD to directly support
the income of workers in precarious situations and which are the companies
present a problem while $55bn CAD will be granted in the form of a suspended
China and People’s Bank of China (PBOC)
People’s Bank of China (PBOC) in turn announced extensions and business loan
renewals at the end of February. At the same time, it released 550bn Yuan
(€70,6bn) from its foreign exchange reserves to support the Chinese
The Hong Kong government has decided to give money directly to its
Japan and Bank of Japan (BoJ)
The BoJ used ETF buying shares and syndicated bonds through this fund;
these purchases reached the levels of ¥12trillion ($113bn).
South Korea and Bank of Korea (BoK)
The Central Bank of Korea in turn announced a reduction in its base
borrowing rate to 0,75%.
Australia and Reserve Bank of Australia (RBA)
The Reserve Bank of Australia cut its key lending rate to 0,25 per cent and
announced the debt redemption of small and medium-sized enterprises through
commercial banks operating in Australia.
The expected results
All these economic policies and generous fiscal liquidity packages cannot
make a substantial economic difference because they are only looking to generously strengthen the
demand side, while both demand and supply in the economies are being hit hard
at the same time.
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