Markets were mixed Wednesday as traders digest the latest news flow around the virus and ponder a failed effort in Europe to craft a coherent, bloc-wide rescue initiative.
After a marathon teleconference which apparently lasted some 16 hours, finance ministers were unable to come to terms on a €500 billion plan to cushion the economic impact of the epidemic, which has hit Europe’s most important economies especially hard.
Once again, the issue fell along “north versus south”, core versus periphery lines – or at least that’s the way it sounds from the various postmortems. Among the sticking points: A disagreement between Italy and the Netherlands around what stipulations should apply when accessing the EU’s bailout fund for virus relief spending. Italian bond yields moved nearly 20bps higher following news of the acrimonious call. The euro fell.
“After 16 hours of negotiations, no agreement on the economic response to the coronavirus crisis”, French Finance Minister Bruno Le Maire said, in a tweet. “We [will] resume tomorrow. With Olaf Scholz, I call on all European states to rise to the exceptional challenges to reach an ambitious agreement”.
“In this difficult hour you have to stand close together”, Scholz said, in a tweet of his own. “I therefore call on all euro countries not to refuse to solve these difficult financial questions and to enable a good compromise – for all citizens”.
This is, of course, made more complicated by the ECB’s ambitious response to the crisis, which includes expanded QE and relaxed collateral rules for various liquidity facilities. The central bank’s efforts may well have taken some of the pressure off finance ministers, a tragically ironic development considering one of Christine Lagarde’s highest priorities after taking the reins from her legendary predecessor was to prod the bloc’s fiscal authorities into action to help bolster the European economy, which was already stumbling prior to the epidemic. Now, economic activity is in free fall.
A trio of proposals are under discussion, including the utilization of the European Stability Mechanism, credit facilities amounting to 2% of national output and the establishment of a pan-European Guarantee Fund with the capacity to disburse some €200 billion in liquidity to struggling companies. There are also plans to develop a vehicle to preserve employment across the bloc.
The idea of jointly-issued “coronabonds” – an emergency version of EU-wide debt issuance – is opposed by Germany, Austria, the Netherlands and Finland. It’s the same as it ever was: The “fiscally responsible” nations whose “houses are in order” (if you will) don’t want to be on the hook for shared debt instruments – even when lives are at stake across the bloc.
The Dutch finance minister is insisting that tapping the ESM be conditioned on economic “measures”, as he put it, in a tweet. Predictably, Matteo Salvini doesn’t want Italy to access the bailout fund, calling it “illegal and senseless”.
All of this, as Europe suffers the most from the crisis.
The ECB spent some €40 billion buying assets over the course of just a week towards the end of last month, as PEPP (the €750 billion coronavirus emergency asset purchase program) ramped up alongside existing QE (which was expanded by €120 billion at the March meeting).
All told, the central bank will likely spend around €1 trillion.
This is, in many ways, Lagarde’s worst nightmare. She was forced into a trial by fire just months into her tenure as ECB chief, and now, her own efforts to combat the crisis are accidentally undercutting the very same pan-European fiscal cohesion she wanted so badly to foster.