ECB unveils fresh stimulus to counter coronavirus 'major shock'

11:00 | 14/03/2020 Global Economy

European Central Bank chief Christine Lagarde warned on Thursday that the coronavirus had delivered a "major shock" to the global economy that required urgent, coordinated action, as she unveiled fresh stimulus to keep credit flowing.

Headquarter of the European Central Bank

The latest major central bank to jump into the fray, the ECB launched a flurry of measures to cushion the impact of the virus, including increased bond purchases and cheap loans to banks.

But it surprised observers by leaving key interest rates unchanged.

The Paris and Frankfurt stock exchanges extended earlier losses after Lagarde's announcements to post drops of more than 10 percent in the early afternoon.

"The spread of the coronavirus COVID-19 has been a major shock to the growth prospects of the global economy and the euro area," Lagarde told reporters in Frankfurt.

"Even if ultimately temporary by nature, it will have a significant impact on economic activity."

She urged governments to step up and do their bit alongside monetary policymakers as fears mount of a credit crunch that could destabilise banks and hurt small businesses.

"Governments and all other policy institutions are called upon to take timely and targeted actions," she said.

"In particular, an ambitious and coordinated fiscal policy response is required to support businesses and workers at risk."

Whether the eurozone manages to avoid a recession will "clearly depend on the speed, the strength and the collective approach that will be taken by all players," she said.

Super-cheap loans

As part of its stimulus package, the ECB's governing council agreed a new round of cheap loans to banks, known as long-term refinancing operations (LTROs) "to provide immediate support to the euro area financial system".

They also eased conditions on an existing "targeted" LTRO programme, aiming to "support bank lending to those affected most by the spread of the coronavirus, in particular small- and medium-sized enterprises".

And the ECB will pile an extra 120 billion euros ($135 billion) of "quantitative easing" (QE) asset purchases this year on top of its present 20 billion per month.

The QE scheme will include "a strong contribution from the private sector," the ECB said, as room to buy government debt while respecting self-imposed limits has grown tight.

On top of the monetary measures, the ECB's banking supervision arm said it would allow banks to run down some of the capital buffers they must build up in good times to weather crises.

Its teams supervising individual lenders may provide more flexibility to institutions under their remit, such as giving them more time to patch up shortfalls in their risk management, while a broader range of assets will count towards the watchdog's capital requirements.

Stock markets had plunged again early Thursday on President Donald Trump's announcement that travellers from much of Europe would be barred from entering the US, after a Monday rout triggered by an oil price war combined with virus fears.

Governments on hook

Lagarde again reiterated the ECB's long-standing call on governments to do more with their fiscal powers to buttress the eurozone economy.

In a conference call Tuesday with European heads of government, the former International Monetary Fund (IMF) head "drew comparisons with past crises" like the 2008 financial crisis, a European source told AFP.

Such past trials were overcome by central banks and governments working in concert.

In mid-February, Lagarde reiterated that "monetary policy cannot, and should not, be the only game in town" to stimulate the economy.

Italy on Wednesday announced 25 billion euros of support to its economy and the European Union has also mobilised up to 25 billion euros.

Theo France24/AFP