March 2020

21
Mar

Germany to raise €356bn in new borrowing to fight coronavirus impact

Germany is set to abandon six years of fiscal restraint with a blowout budget designed to save its economy from the brutal effects of the coronavirus pandemic and protect thousands of businesses from imminent ruin.

Angela Merkel’s cabinet is meeting on Monday to approve new borrowing of €356bn — equivalent to nearly 10 per cent of Germany’s gross domestic product — marking a new era in fiscal policy and a radical departure from Berlin’s long-held aversion to debt.

It reflects growing alarm in government circles at the profound impact the epidemic is having on the eurozone’s largest economy as big industrial companies shut down production, the service sector is disabled and economic activity melts away.

Ministers will consider plans for a €156bn supplementary budget for 2020, including a €50bn hardship fund to help small businesses and freelancers whose revenues are collapsing as the virus spreads.

They will also approve a €100bn economic stabilisation fund that will be used to take stakes in companies crippled by the fallout from the pandemic, according to a person familiar with the plans, paving the way for a radical state intervention in the workings of the market economy.

The blueprint also envisages a €100bn loan from the new stabilisation fund to the KfW, Germany’s state development bank, which is providing unlimited loans to firms facing a cash crunch under a programme announced by the finance minister Olaf Scholz earlier this month.

The stabilisation fund will also be equipped with €400bn in guarantees to underwrite the debts of companies affected by the turmoil.

The fund is a reactivation of Soffin, a government-backed vehicle set up in 2009 to bail out troubled banks. It will not only underwrite debts but also be able to inject fresh capital into stricken companies, effectively paving the way for a wave of partial state takeovers.

Just as the state helped the banks after the financial crisis, “we are now prepared to provide equity for the real economy,” Mr Scholz told German radio on Friday. The state had to help companies “that employ an incredible number of men and women and which all of a sudden have no business”.

The moves represent an extraordinary intervention by the state in the private sector. “We will not allow a bargain sale of German economic and industrial interests,” said economy Peter Altmaier. “There should be no taboos. Temporary state aid for a limited period, up to and including shareholdings and takeovers, must be possible.”

The huge increase in spending marks a radical break from the “schwarze Null” or black zero, the policy of balanced budgets and no new borrowing that has been part of German economic orthodoxy for years and has helped to deliver six consecutive annual surpluses.

The policy has become increasingly controversial in recent months, with leading economists both at home and abroad urging the government to take advantage of low interest rates to assume new debt and invest in Germany’s crumbling infrastructure.

But the black zero is now a thing of the past. Angela Merkel, chancellor, made it clear at the start of the coronavirus crisis that she was prepared to set it aside in order to ensure the survival of the German economy.

“We’re doing whatever is necessary,” she said on March 11. “And we won’t be asking every day what it means for our deficit.”

The new fiscal policy came as a number of German regions imposed a lockdown on their citizens and closed all restaurants, bars and beer-gardens. Bavaria said people would only be allowed to leave their homes to go to work, buy food or visit the doctor: they could exercise in the open air but only alone or with close family members. The German foreign ministry has also advised against any tourist travel abroad until the end of April.

As well as passing the supplementary budget and reactivating Soffin, ministers will also be asked to loosen one of the country’s most important fiscal rules — the constitutional debt brake. Introduced in 2009 it limits any new government borrowing to just 0.35 per cent of GDP, adjusted for the economic cycle.

But exceptions are allowed. Germany’s constitution says the Bundestag can relax the debt brake when Germany is hit by emergencies such as natural catastrophes that “significantly impact the government’s fiscal position”. Coronavirus is a clear example of such an eventuality. A Bundestag vote is expected in the next few days.

“This essentially paves the way for unlimited borrowing,” said the person familiar with Mr Scholz’s plans. He said it fitted in with the European Central Bank’s announcement last week that it would buy an extra €750bn of bonds in a bid to calm markets thrown into turmoil by the pandemic. “The ECB’s message to the EU member states was clear,” he said. “Fill your boots with debt.”

Though the proposals being put before the cabinet on Monday mark an extraordinary volte-face in policy terms, officials stress that Germany was only able to adopt such expansionary measures thanks to the budgetary restraint of the past few years.

“Even a few weeks ago people were saying we’d gone too far, that we were too focused on husbanding our resources,” Mr Scholz said on Friday. “Now you can see we acted correctly.”

Germany’s “economising” over the past few years had brought its debt-to-GDP ratio to below 60 per cent, he said. The equivalent figure in France is 98.9 per cent and 134.8 per cent in Italy.

Meanwhile, the public finances have rarely been in such robust health. There are reserves of €55bn in the federal budget, of €26bn in the federal labour office, which dispenses unemployment benefit, of €103in the social security system, and of nearly €20bn in the health service — the statutory “Krankenkassen”.

Jens Weidmann, head of the Bundesbank and a member of the ECB’s governing council, said that until recently there had been “passionate debate” in Germany about the wisdom of sound public finances. “Now we can see very clearly: it was exactly right that Germany consolidated its budget when the economy was doing well,” he told Die Welt on Saturday. “Now we have the latitude to deal with this crisis. Our starting position is advantageous.”

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19
Mar

ECB Announces 750 Billion Euro Pandemic Bond-Buying Program

ECB Announces 750 Billion Euro Pandemic Bond-Buying Program

Thursday, March 19, 2020 01:16 AM
  • Decision taken in emergency meeting Wednesday evening
  • Policy makers will consider raising self-imposed QE limits

The European Central Bank launched an extra emergency bond-buying program worth 750 billion euros ($820 billion) to calm a worsening financial crisis and protect the economy through the coronavirus epidemic.

The decision in an unscheduled meeting on Wednesday evening came less than a week after a policy session in which officials agreed to pump more liquidity into the financial system. Despite that step and stronger measures by other central banks, markets are in freefall, prompting a new set of measures.

  • A temporary asset purchase program to buy public and private-sector securities, worth 750 billion euros and running until at least the end of 2020
  • Program will cover all assets eligible under current quantitative-easing program, and will be extended to commercial papers of sufficient credit quality
  • Greek government debt will be included in the program under a waiver from current rules
  • Collateral standards will be eased by adjusting some risk parameters
  • Program will continue until ECB judges the crisis phase of the pandemic to be over, but not before the end of this year
  • The ECB will consider raising its self-imposed limits on QE holdings, and stands ready to increase the size of its asset purchase programs

The euro and U.S. equity futures rose after the stimulus measures. S&P 500 futures reversed losses and the single currency edged higher to trade around $1.0950.

Investors are pushing up bond yields as they fret about the cost of the massive fiscal response to the pandemic. Italy, which already has the euro zone’s second-biggest debt burden after Greece and is the worst-affected by the disease, is especially hard hit.

ECB President Christine Lagarde inadvertently worsened the problem last week when she said the central bank’s job is not to close the spreads between safer and riskier government debt yields.

In its statement, the central bank said it “will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.”

Christine Lagarde

@Lagarde

Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.
European Central Bank

@ecb

Press release: ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP) ecb.europa.eu/press/pr/date/…
7
Mar

What You Need to Know About the Spreading Coronavirus: QuickTake

Friday, March 6, 2020 07:11 PM

By Jason Gale and John Lauerman

(Bloomberg) —

The newly identified virus that emerged late last year in the central Chinese city of Wuhan has quickly spread worldwide, with the number of infections topping 100,000. The contagiousness of the so-called coronavirus, which causes a lung illness dubbed Covid-19, has health experts worried it could become a pandemic to rival some of the most devastating in recent decades. Meanwhile, the outbreak is causing turmoil in the global economy and financial markets.

(This story updates with new infection toll and fresh details on what authorities are doing in section 10 and economic impact in section 12.)

1. What makes this virus so worrying?

It has been described as “insidious” because many infected people are well enough to go about their daily business, unwittingly spreading it to others. As of March 3, the fatality rate was about 3.4% based on globally reported cases, the World Health Organization said. Such numbers are unreliable in the early stages of an outbreak, however. Some disease-modeling experts project as many as hundreds of thousands of people are actually infected, most of whom don’t even know they have it. One study published Feb. 10 estimated a mortality rate of 1% once all cases, including those with no or only mild symptoms, are counted.

2. How does this compare with other outbreaks?

A related coronavirus killed 9.5% of patients in the 2002-2003 epidemic of severe acute respiratory syndrome, or SARS, and another known as MERS-CoV has led to death in 34% of the 2,499 cases recorded since 2012. In those outbreaks, however, the viruses didn’t transmit from one person to another as efficiently as this new one appears to do. Certainly, they didn’t spread as widely as fast. In the worst pandemic in recent history, an estimated 50 million people died in the 1918 influenza pandemic that had a case-fatality ratio of about 2% but infected as much as a third of the world’s population.

3. What does the virus do?

Symptoms begin to appear on average five to six days after infection. Infections appear to cause a mild illness lasting about two weeks in children, adolescents and younger adults in most cases, and potentially more severe disease lasting three to six weeks in older people. Frequently reported early signs are fever, dry cough, tiredness and sputum production. In severe cases, studies suggest the virus invades cells in the lower respiratory tract, causing difficulty breathing and the inflammation and congestion associated with pneumonia. In an early study, more than a quarter of hospitalized patients developed a complication known as acute respiratory distress syndrome.

4. Who’s most at risk for complications?

It appears to be the elderly and those with other serious health issues. Many of the fatalities have been in patients with underlying illnesses such as cardiovascular disease. A Chinese study of 72,000 cases found most deaths occurred in patients over 60 years old. Of all confirmed cases, 81% were mild, 14% were severe and 4.7% critical. The last pandemic, an outbreak of a new strain of H1N1 flu in 2009, infected an estimated 61 million people in the U.S. alone and may have killed as many as 575,000 people worldwide in the first year it circulated — with about 80% of them younger than 65, according to the U.S. Centers for Disease Control and Prevention

5. How do people contract it?

By coming into contact with virus-containing droplets that are emitted when an infected person coughs or sneezes, according to the WHO’s first comprehensive report on Covid-19. These droplets can be transferred directly to someone else in close proximity or via hands and surfaces. How long it survives on surfaces is still not known, but preliminary studies suggest coronaviruses may remain infectious from a few hours to a few days. Simple disinfectants kill it. There’s a theoretical risk the virus can spread through feces or fartherthrough the air in tiny particles known as aerosols. People who are still incubating the virus and show no symptoms may spread it. Health authorities are concerned about what’s known as community spread, where the virus begins circulating freely among people outside of known contacts with other patients.

6. How contagious is it?

Epidemiologists try to gauge contagiousness by estimating the number of additional people a person who is infected is likely to infect. That measurement, called a basic reproduction number or r0 (pronounced “r naught”), is one indicator of how difficult an epidemic is to control. A study of an outbreak aboard a cruise ship estimated that the r0 for Covid-19 was 2.28 during the early stages. That would make it more infectious than seasonal flu, which has an r0 of about 1.3 and killed an estimated 61,000 people in the U.S. in the 2017-18 season.

6. Could warming weather help combat it?

The viruses responsible for influenza spread more easily during cold weather because they survive longer in cold, dry air. But there’s no evidence to suggest the Covid-19 virus would be affected by weather.

7. What’s a coronavirus?

Coronaviruses are named for their crown-like shape. There’s a large family of them, responsible for diseases that range in severity from the common cold to MERS. Some transmit easily from person to person, while others do not. The WHO says that new strains emerge periodically around the globe, and several known versions are circulating in animals and haven’t infected humans.

From the black death to the coronavirus, this is what we need to think about in order to tackle pandemics. (

8. Where did it come from?

The virus emerged in early December in Wuhan, an industrial city of 11 million and capital of Hubei province. Early attention focused on a seafood market where live animals were also sold, but about a third of the first 41 cases were found to have no link to it. The viral genome is closely related to several coronaviruses found in bats. Diseases transmissible from animals to humans, sometimes referred to as zoonoses, comprise a large percentage of all newly identified infectious diseases.

9. How alarming is a new virus?

There is always concern when a new human pathogen emerges because people typically lack immunity to it and there usually aren’t specific treatments or vaccines available. Novel coronaviruses — those unseen in humans before — represent a particular concern because they have been known to spark complicated outbreaks that have sickened thousands of people, as SARS did as it swept across the globe from southern China.

10. What are authorities doing?

China’s government imposed a quarantine on Wuhan and more than a dozen other cities in the region that’s keeping some 60 million people sealed off. New hospitals were built from the ground up in days, and the production of medical equipment was ramped up. (Some makeshift centers in stadiums, hotels and office buildings have started to fold up as patients have recovered.) The WHO declared a global health emergency, a designation that can help mobilize international responses. The World Bank has allocated $12 billion in virus aid for developing economies. Many countries are denying or restrictingentry for non-citizens arriving from China and other especially affected areas. With Covid-19 showing up in more places, officials began to switch their goal from stopping its spread to preparing for it amid shortages of testing kits, face masks and other equipment. U.S. President Donald Trump appointedVice President Mike Pence to lead the federal response as local governments stepped up readiness efforts. Globally, governments are using a mix of cash handouts, tax breaks and transfers to counter the virus’s impact.

11. How are they faring?

Early praise for China’s response has ebbed. The country did not immediately release genetic information about the virus and has struggled to explain changes in the way it counts new cases. In a nation where the internet is heavily censored, there was a rare outpouring of social media fury over the death from the virus of a Chinese doctor who had waved an early red flag about the outbreak but was silenced by police. The top officials in Wuhan and Hubei were later removed from their posts. But China’s strict quarantine likely bought the rest of the world two to three weeks to prepare for the virus and averted many infections, according to the WHO.

12. What about the economy?

Reductions in travel, work-from-home orders and disruptions in supply chains have slowed economic activity, especially in China and among its many trading partners. The Organization for Economic Cooperation and Development warned that the Covid-19 crisis posed the “greatest danger” to the world economy since the financial crisis more than a decade ago. Global stock markets have been volatileand the U.S. Federal Reserve cut interest rates in its first emergency move since the 2008 financial crisis. Group of Seven finance chiefs pledged to use “all appropriate policy tools” to safeguard economic growth.

The Reference Shelf

  • Related QuickTakes on efforts to contain the virus, how it spreads, the effectiveness of travel bans, efforts to develop treatments and a vaccine, the meaning of a “pandemic,” and the reallocation of capital into haven assets.
  • The WHO’s first comprehensive report on the crisis.
  • Doubts persist about whether China’s statisticson the outbreak show the full picture.
  • The Centers for Disease Control and Prevention has a coronavirus web page, and the Journal of the American Medical Association offers advicefor clinicians.
  • Bill Gates offers proposals for combating Covid-19 in the New England Journal of Medicine.
  • A top airline doctor says forget face masks, wash your hands.
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