Mario Draghi doesn’t mince words in describing the severity of the coronavirus epidemic, both in terms of the impact on the global economy and the human toll.
“The coronavirus pandemic is a human tragedy of potentially biblical proportions”, he writes, in an Op-Ed for the Financial Times. “Many today are living in fear of their lives or mourning their loved ones”.
Europe is, of course, the epicenter of the virus, with fatalities in Spain and Italy alone accounting for around half of the total global death count.
The ECB has responded forcefully (indeed, PEPP sprang into action on Thursday), and governments have rolled out myriad measures aimed at supporting their economies and citizens. Even Germany has acquiesced to the need for spending and taking on debt to combat the crisis.
Draghi, in his comments in the FT, explains the reality of this situation to anyone who has somehow not yet accepted it. Large deficits will become a fixture of the developed world. Period. Debt cancellation will be implemented. Period.
The alternative would be catastrophic. And no, there isn’t any way around this.
I’d say he isn’t quite that unequivocal, but he is. In fact, his tone suggests he’s now doling out instructions to the ECB, as opposed to floating suggestions. To wit, from Draghi:
While many face a loss of life, a great many more face a loss of livelihood. Day by day, the economic news is worsening. Companies face a loss of income across the whole economy. A great many are already downsizing and laying off workers. A deep recession is inevitable.
The challenge we face is how to act with sufficient strength and speed to prevent the recession from morphing into a prolonged depression, made deeper by a plethora of defaults leaving irreversible damage. It is already clear that the answer must involve a significant increase in public debt. The loss of income incurred by the private sector — and any debt raised to fill the gap — must eventually be absorbed, wholly or in part, on to government balance sheets. Much higher public debt levels will become a permanent feature of our economies and will be accompanied by private debt cancellation.
He also reminds the world that were this a shooting war (as opposed to a struggle against an invisible, biological threat), there would be no debate.
“It is the proper role of the state to deploy its balance sheet to protect citizens and the economy against shocks that the private sector is not responsible for and cannot absorb”, he goes on to write, adding that “states have always done so in the face of national emergencies [with] wars the most relevant precedent”.
Over the course of his Op-Ed, Draghi quite simply argues that everyone should toss out their prejudices and abandon all pretenses to normality when it comes to lending and borrowing.
“The only effective way to reach immediately into every crack of the economy is to fully mobilize their entire financial systems: bond markets, mostly for large corporates, banking systems and in some countries even the postal system for everybody else“, he says, flatly, before demanding banks immediately extend loans “at zero cost” to companies to ensure jobs are not lost.
In addition, he says, banks should allow overdrafts and open credit facilities for everyone. Those loans and overdrafts should be backstopped and funded by governments and state guarantees.
Further, no collateral rules or regulations should apply for the foreseeable future, or at least not to the extent they impair banks’ capacity to extend credit to (literally) everyone.
If you’re wondering whether that also means Europe should throw out any reference to credit worthiness for loans to companies and also for the governments who backstop those loans, the answer is yes. “The cost of these guarantees should not be based on the credit risk of the company that receives them, but should be zero regardless of the cost of funding of the government that issues them”, he writes.
And that’s hardly the end of it. Draghi also says it really doesn’t matter whether a company can temporarily fund its operations without tapping emergency funding because, eventually, everyone (or almost everyone) will feel the squeeze at the very least in a reduced capacity to invest once the crisis abates.
His conclusion is simple. To wit:
Public debt levels will have increased. But the alternative — a permanent destruction of productive capacity and therefore of the fiscal base — would be much more damaging to the economy and eventually to government credit.
So, if you were curious to know what the ECB would be busy doing right now if “Super Mario” were still in charge, that gives you an idea.
And you can be absolutely sure that these “suggestions” have been communicated to the Governing Council.