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Lagarde: the ECB is ready to increase its anti-crisis bazooka

2020-04-30T15:35:31.152Z


The European Central Bank anticipates a recession of between -5% and -12% over the year. It is examining "all options" to further strengthen its support system for the economy.


Christine Lagarde has only been head of the European Central Bank (ECB) for a little over six months, when she was faced with an "unprecedented crisis in peacetime". On Thursday, for the third time since the start of the economic turmoil linked to the Covid-19 pandemic, she chaired an ECB Governing Council entirely devoted to this challenge.

Read also: LIVE - Coronavirus: GDP could fall by 12% in the euro zone, warns the ECB

According to estimates by ECB economists, the recession in the euro zone will lead to a fall in GDP of between -5% and -12% over the year, depending on the duration of the epidemic and confinements. This follows a drop of 3.8% in activity in the first quarter (-5.8% in France), of which only the last few days were affected by the confinements which resulted in “a halt” to the economy, spreading to the labor market. An “uncertain” recovery is hoped for in 2021.

The ECB has already acted with strength and speed since mid-March. It provided for an envelope of more than 1,000 billion euros in asset repurchases over the year, including 750 billion for a specific emergency program linked to the pandemic (PEPP). It “stands ready to review it, recalibrate, adjust its size and composition”, as well as to extend it beyond its deadline set at the end of the year.

Risk of fragmentation of the euro area

Concretely, this means that a new layer of several hundred billion is likely to be added to it. But also that new types of assets may be concerned: corporate debts or degraded government bonds ("junk bonds" or "fallen angels") if necessary. "We are completely flexible and we will study all the options," says Lagarde.

Read also: How the ECB sucks the debts of the States in the crisis

"We will not tolerate any risk of fragmentation of the eurozone," she promises. To do this, it implicitly implies its commitment to buy back Italian debt without limit, the most fragile, if necessary. This is both a way to support the recovery of the economy of Italy, like other particularly affected countries (Spain, France), and to discourage speculation on sovereign debts in the euro zone. Within the PEPP program, the ECB already allows itself to buy back Greek debt and to overweight the securities of certain countries compared to others. Details on the allocation of these investments will be provided shortly.

Subsidized bank credit

The second pillar of its action, the ECB is further increasing its action aimed at smoothing the distribution of credit via the banks. If it leaves its main policy rate unchanged (-0.5%), it further reduces the rate at which it lends to banks to -1% via the TLTRO (targeted long term refinancing operations) program. In practice, banks are subsidized (at a rate of -1%) to draw loans from the ECB, while the funds they deposit there are remunerated at -0.5%. Or a profit for them of half a point, intended to boost their supply of loans to businesses and individuals. A system supplemented by a new plan (PELTRO) at the rate of -0.75%. Objective: to ensure that "monetary policy is transmitted to all sectors of the economy".

In addition, Christine Lagarde welcomes the action taken so far by the governments and institutions of the European Union. But it is renewing its pressure on European leaders to show "crucial ambitious and coordinated efforts" to prepare for the recovery. It welcomes the idea of ​​an economic recovery fund pushed by France and taken up by the Twenty-Seven, the principles of which remain to be determined in Brussels. The members of the monetary policy council of the Frankfurt institution are waiting to know more about this project, before their next meeting, scheduled for June 4. Be that as it may, the ECB has not finished being the firefighter responsible for putting out the economic fire.

Source: lefigaro

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