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FINANCIAL TIMES - Brussels Briefing: Your daily insight on Europe

The ECB swings into action

By Martin Arnold in Frankfurt

March 12, 2020

Christine Lagarde is preparing to announce the first monetary policy stimulus package in her short time as European Central Bank president today, as she tries to shield the eurozone from the economic havoc created by coronavirus.

With ever-growing swaths of the region’s economy being shut down by measures imposed to contain the virus’s spread, economists are predicting the eurozone will suffer its most serious economic shock since the 2008 financial crisis. Lagarde will be acting in a situation that grew even more febrile overnight as US president Donald Trump banned non-American citizens travelling from much of Europe to the US for 30 days.

The pressure is firmly on the ECB after the Bank of England cut rates and launched a package of targeted measures to deal with the virus on Wednesday and the US Federal Reserve announced an emergency rate cut last week. Here are the three areas to watch when Lagarde, who arrived at the ECB last November, presents the ECB’s decisions this afternoon in Frankfurt.

1 — Deeply negative

Financial markets are predicting the ECB will cut its main deposit rate from minus 0.5 per cent to a new record low of minus 0.6 per cent and possibly even lower.

This would be controversial in some quarters. Banks will complain that their profits are being squeezed by the €11bn of annual negative interest that analysts say they would have to pay on their excess central bank deposits after a 10 basis point cut. The ECB may give banks a break by expanding an exemption under its so-called tiering policy.

Others say lower interest rates will do little to solve the problems of quarantined consumers not spending and factories not producing. “Cutting interest rates is not particularly helpful right now, when we are facing a medical crisis,” said Erik Nielsen, chief economist at UniCredit.

Yet as well as the symbolic importance of cutting rates, such a move may also slow the recent appreciation of the euro, which threatens to have a tightening effect on the export-dependent eurozone economy.

2 — Dual rates

There are growing fears of a credit crunch for small businesses hit by coronavirus disruption. To avoid this, the ECB is widely expected to beef up its existing programme of cheap loans for banks, known as Targeted Long-Term Refinancing Operations, or TLTRO.

The central bank could make the existing programme more attractive for banks by extending the maturity of the loans, relaxing the conditions attached or lowering the interest rate. Alternatively, it could introduce a second programme that specifically incentivises banks to lend to small businesses.

Map showing the coronavirus situation in Europe. For coverage on the novel coronavirus and up-to-date graphics, please visit ft.com/coronavirus-latest

Whichever option it chooses, ECB watchers are excited at the possibility it may cut the interest rate on TLTROs below its sub-zero deposit rate. In becoming the first central bank to operate a “dual rate” system, the ECB would provide an effective subsidy to banks by lending to them at a lower rate than they pay to deposit money at the central bank.

The ECB could also widen the criteria for collateral it accepts in return for lending to banks to include more small business loans. Banks may still be reluctant to lend to struggling small companies hit by the virus in northern Italy and elsewhere. So expect Ms Lagarde to call for more state guarantees on such loans, similar to those that France and Germany are promising.

 3 — Quantitatively easier

With one eye on early signs of stress in corporate and sovereign debt markets, Ms Lagarde may also announce an increase in the size of the ECB’s existing quantitative easing (QE) programme, under which it has already bought more than €2.6tn of bonds.

The ECB could increase its rate of monthly purchases from €20bn to as much as €40bn, while focusing the extra firepower on buying corporate bonds rather than sovereign bonds. The latter idea would help to ease the self-imposed constraint on the QE programme. That means the ECB cannot buy more than a third of any government’s available debt — a limit it is close to hitting in some countries, such as Germany and the Netherlands.

Ms Lagarde may decide to lift this “issuer limit” to 50 per cent to convince investors it still has plenty of QE ammunition if needed — although this could be unpopular with Germany’s Bundesbank, which opposes bond purchases.

More extreme ideas are for the ECB to expand its QE programme to target the stock market by buying exchange-traded funds — as the Bank of Japan has done for years — or to start buying bank bonds, which are currently excluded. Neither seem particularly likely.

martin.arnold@ft.com; @MAmdorsky

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Coronavirus update

Trump stuns Europe In a television address, Trump announced the drastic step of barring travel from large parts of Europe for 30 days, blaming the rising number of cases in Europe. The travel restrictions mirror measures taken to ban travel from China and Iran.

The ban will not affect Britain, Ireland or other countries outside the 26-nation Schengen common visa area. The ban does not cover US nationals or green-card holders. The homeland security department said it applied to “most foreign nationals” who had spent any time in any of the Schengen nations during the 14 days before their scheduled arrival in the US.

The Commission’s blueprint In Brussels, the European Commission has been drawing up options to handle the economic fallout from the crisis in preparation for meetings of finance ministers early next week, write Sam Fleming and Javier Espinoza. 

The proposals, which are still being drafted, will propose flexibility in the realms both of fiscal policy and state aid. On the budget front, the commission’s dealings with Italy — which has already asked for forbearance as it ramps up borrowing to deal with the crisis — provide the template for a broader, EU-wide approach.

One-off blasts of spending to fight the coronavirus are by definition excluded from measures of the country’s so-called structural deficit (the deficit stripping out swings in the economic cycle) and so can be disregarded. On top of this, the commission will make clear that its rules allow it to be understanding about extra spending that is related to “unusual events” outside a country’s control.

European Union (EU) flags fly in front of the European Commission Berlaymont building in Brussels, Belgium, on Friday, June 8, 2018. Chief negotiator for the European Union Michael Barnier rejected the key elements of U.K. prime minister Theresa May’s plan to overcome one of the thorniest divorce questions, but said talks continue. Photographer: Jasper Juinen/Bloomberg

Public support for companies and individuals hit by coronavirus would clearly fall under this heading, officials say. The commission is also likely to make clear that it is not ruling out further steps if things get far worse. The fiscal rules contain an “escape clause” for major shocks to the EU, under which the commission can suspend the requirement for countries to make progress towards their medium-term budgetary goals.

For the time being, some officials feel it would be premature for this kind of tool to be wielded given the commission already has plenty of capacity to be flexible when it comes to coronavirus-related deficits. However no one can exclude more radical action being taken down the line.

The commission’s communication will also spell out its readiness to be flexible when considering applications for state aid approval from governments that want to help companies that are struggling because of the coronavirus — for example in the travel and tourism sectors. Under its plan, the EU will dramatically speed up the process of approving coronavirus-related requests from member states — for example when it comes to decisions to defer tax and VAT payments. Under normal circumstances state aid approvals could take weeks or months.

The concern is that member states use the current situation to sneak through aid for companies that are at risk of failing anyway, so officials stress that the commission will be on the lookout for dubious requests.

Alongside all this, the Luxembourg-based European Investment Bank is considering ways of helping out. Its board is due to meet today. One idea used in the past is for the EIB to extend finance to commercial banks which are then able to leverage it to boost their own lending to small and medium-sized enterprises, and this will probably be on the menu this time.

Merkel pledges action Angela Merkel broke her relative silence over the coronavirus yesterday with a rallying cry promising Germany will do “whatever is necessary” to fight the spread. The chancellor warned that around two-thirds of Germans are likely to be affected by the virus, adding:

 “We will not ask ourselves every day what this means for our deficit. This is an extraordinary situation. We will do whatever is necessary.”

The WHO yesterday confirmed the virus can now be considered to a global pandemic. The FT’s data team finds that according to the current rate of spread — where cases are averaging 33 per cent daily rises — European countries are on the same trajectory of infection spread as Italy (see below):

Virus insurance

So what more can EU countries do to fight the disease? Experts at Bruegel, the think-tank, have put together some advice for the EU finance ministers meeting next week.

They recommend ample funding for health services; targeted measures to help individuals such as the self-employed; and some “broad macroeconomic insurance” in the form of a halving of companies’ social security contributions for three months (or a cut to payroll tax). The latter measure could provide support of some 2.5 per cent of GDP, they say.

“Whatever it takes needs to be the motto to preserve lives and reduce the impact on the economy of the epidemic.”

The full plan is by Maria Demertzis, André Sapir, Simone Tagliapietra and Guntram Wolff. Read it here. A separate set of proposals are put forward on Voxeu.org. The article argues that Europe needs to take far more drastic measures than it has thus far, advocating a comprehensive emergency package through which the EU would take responsibility for a meaningful share of the overall effort.

Balm for the banks Europe’s banking sector yesterday published a manifesto of measures that it says regulators should take to help it sustain the economy through the epidemic.

The European Banking Federation’s proposals include “a moratorium tool” that would allow banks to go easy on businesses that owe money but are facing a liquidity crunch. The group, which represents the EU’s 8,000 banks, wants regulators to follow the Bank of England’s lead by using existing flexibility in the bloc’s prudential rules to free up lending capacity. It is also calling for a planned toughening of capital requirements to be postponed.

In its letter to the EU institutions, which was published just ahead of this week’s meeting of the ECB governing council, the EBF said the central bank should extend its TLTRO “in time and scope”.