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ECB announces plan to help eurozone banks withstand coronavirus ECB unveils plan to help eurozone banks withstand coronavirus
(about 4 hours later)
Central bank eases pressure on banks after prediction virus will spark economic downturnCentral bank eases pressure on banks after prediction virus will spark economic downturn
The European Central Bank (ECB) has eased pressure on eurozone banks as it prepares for the coronavirus outbreak to worsen. European Central Bank boss, Christine Lagarde, has come under fire after she refused to echo her predecessor and say the bank would do whatever it takes to protect the eurozone from a recession triggered by the coronavirus outbreak.
Announcing measures that it said would allow banks to continue “to fulfil their role in funding the real economy”, the ECB said it would continue to monitor the economic effects of the coronavirus (Covid-19) as they become apparent. The normally sure-footed Lagarde, speaking after the ECB put in place measures to support commercial bank lending, suggested it was the responsibility of governments to protect highly indebted eurozone countries rather than the central bank.
“The coronavirus is proving to be a significant shock to our economies. Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties. The supervisory measures agreed today aim to support banks in serving the economy and addressing operational challenges, including the pressure on their staff,” said Andrea Enria, the chair of the ECB supervisory board. Referring to calls for the ECB to go further and cut interest rates to ease borrowing costs for highly indebted eurozone countries, Lagarde said: “We are not here to close [bond] spreads, there are other tools and other actors to deal with these issues.”
Going on the offensive, Lagarde said it was the responsibility of governments to act to support growth.
“An ambitious and coordinated fiscal stance is now needed in view of the weakened outlook and to safeguard against the further materialisation of downside risks,” she said.
Within minutes of her comments, the spread between what investors will buy and sell Italian bonds widened, sparking fears of a repeat of the 2012 eurozone debt crisis when the then ECB boss, Mario Draghi, declared he would do “whatever it takes” to preserve the euro.
The interest rate on 10-year Italian bonds jumped from 1.3% to 1.8% as concerns quickly escalated that the bonds issued by Europe’s most indebted country posed a greater risk to investors without the full protection of the ECB.
The FTSE 100 tumbled more than 60 points adding further to a near-record breaking drop of 10.87% to 5,237 points. The German Dax index dropped 12.2% to 9,161, while the Madrid Ibex slumped 14.% to 6,390.
Lagarde later attempted to backtrack in TV interviews, telling CNBC: “I am fully committed to avoid any fragmentation in a difficult moment for the euro area. High spreads due to the coronavirus impair the transmission of monetary policy.”
But her comments failed to prevent analysts describing the package of ECB measures and Lagarde’s comments as inadequate or worse.
Claus Vistesen, the chief eurozone economist at Pantheon Macroeconomics, said Lagarde’s comments “will go down as a catastrophic failure”.
He said: “It is one of the world’s largest central banks, and today markets were crying out for a backstop; they got anything but.
“The ECB has grossly underestimated the severity of the situation, and failed to exploit its position as lender and liquidity provider of last resort. Redemption is possible, but it won’t be easy,” he added.
Earlier this week, the Bank of England provided a package of measures to boost bank lending in a synchronised move with the Treasury, including a 0.5 percentage point cut in the bank’s base interest rate. The US Federal Reserve has also cut interest rates by 0.5 percentage points to support households and businesses through the worst of the virus epidemic.Earlier this week, the Bank of England provided a package of measures to boost bank lending in a synchronised move with the Treasury, including a 0.5 percentage point cut in the bank’s base interest rate. The US Federal Reserve has also cut interest rates by 0.5 percentage points to support households and businesses through the worst of the virus epidemic.
The ECB boss, Christine Lagarde, has predicted that the virus will spark an economic downturn in Europe similar to the 2008 financial crash unless EU governments provide financial support for their economies. Andrea Enria, the chair of the ECB supervisory board, said: “The coronavirus is proving to be a significant shock to our economies. Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties.
“The supervisory measures agreed today aim to support banks in serving the economy and addressing operational challenges, including the pressure on their staff.”
The ECB said it will conduct a new kind of targeted longer-term refinancing operation (TLTRO) aimed at banks lending to small- and medium-sized businesses (SMEs). These TLTROs will be conducted under even more favourable conditions than previous ones, it said, penalising banks if they fail to expand their lending to SMEs.The ECB said it will conduct a new kind of targeted longer-term refinancing operation (TLTRO) aimed at banks lending to small- and medium-sized businesses (SMEs). These TLTROs will be conducted under even more favourable conditions than previous ones, it said, penalising banks if they fail to expand their lending to SMEs.
It also announced an additional “envelope” of €120bn of net asset purchases until the end of the year, effectively expanding its already vast quantitative easing programme.It also announced an additional “envelope” of €120bn of net asset purchases until the end of the year, effectively expanding its already vast quantitative easing programme.
But the decision to ease rules on capital and liquidity buffers allowing banks “to withstand stressed situations like the current one” and the other targeted measures were considered a weak response by investors, who sent shares on European markets further into the red. Marchel Alexandrovich, a senior European economist at investment firm Jefferies, said: “This is an underwhelming package from the ECB. There are better TLTRO terms, but no rate cut, and only €120bn of extra QE to be added until the end of the year.
The FTSE 100 tumbled more than 60 points after the move, adding further losses on a day when the index was down by more than 9% at lunchtime in London. The German Dax index dropped 170 points to 9,634, adding to losses earlier in the day that amounted to 804 points. “On the ECB’s own forecasts the euro area in now likely entering a recession. So, one obvious question is: ‘What will the ECB do next if the crisis escalates?’.”
Marchel Alexandrovich, a senior European economist at investment firm Jefferies, said: “This is an underwhelming package from the ECB. There are better TLTRO terms, but no rate cut, and only €120bn of extra QE to be added until the end of the year The European Banking Authority, an industry regulator, added that it would delay its EU-wide stress test by a year so that banks can focus on the challenges posed by the coronavirus outbreak.
“On the ECB’s own forecasts the euro area in now likely entering a recession. So, one obvious question is: ‘What will the ECB do next if the crisis escalates?’.
“How Lagarde tackles that question could be critical in terms of the market reaction. And if she says ‘whatever it takes’, what will that mean in practice? On the face of it, the official measures are well short of what they should have been.”
The ECB said it could ease capital constraints on the banking sector after it built up a “significant amount of these buffers”.
“The measures provide significant capital relief to banks in support of the economy. Banks are expected to use the positive effects coming from these measures to support the economy and not to increase dividend distributions or variable remuneration,” the ECB said.
The European Banking Authority, an industry regulator, is delaying its EU-wide stress test by a year so that banks can focus on the challenges posed by the coronavirus outbreak.
Instead, the EBA said it would launch a transparency exercise to determine how much risk they hold on their balance sheets.Instead, the EBA said it would launch a transparency exercise to determine how much risk they hold on their balance sheets.
“Addressing any operational challenges banks may face should be the priority. The EBA has decided to postpone the EU-wide stress test exercise to 2021. This will allow banks to focus on and ensure continuity of their core operations, including support for their customers,” the EBA said.
It also urged national regulators to take advantage of existing rules that allow for some flexibility around the kind of capital that banks have to hold to cushion against potential downturns and risks.
The announcement comes just a week after EBA banned all external meetings at its Paris headquarters until 20 April to try to tackle the spread of Covid-19.