In an expected move that essentially mirrors the Fed’s cushion for fallen angels in the US, the ECB said Wednesday it will change its collateral rules to mitigate the impact of downgrades.
The headline will invariably be “ECB accepts junk collateral”, but that’s completely devoid of nuance. All they’re doing is grandfathering in assets which met eligibility requirements as of April 7. The statement specifically references COVID-19 as the proximate cause of the decision – you know, in case you missed the whole “pandemic” story over the past three months.
“The Governing Council aims to avoid potential procyclical dynamics”, the press release reads. “This would ensure continued collateral availability, which is crucial for banks to provide funding to firms and households during the current challenging times”.
Still, this can be fairly (if hyperbolically) described as another manifestation of a “bailout”. After all, if you aren’t eligible for central bank programs and funding facilities, it becomes decidedly dicey for you as an issuer. In this case, “you” probably means “Italy”, which is staring at a possible downgrade. Thanks to the ECB’s decision, the country no longer has to be concerned about at least one of the myriad financial and economic nightmare scenarios it faces in the difficult months ahead.
This affords me an opportunity (or maybe ‘an excuse” is more apt) to step back and take stock of just how dramatic and all-encompassing the global policy response (both monetary and fiscal) to COVID-19 has been.
In a note dated Tuesday, UBS delivered the rather daunting figures on the fiscal side.
“Our Global Fiscal Stimulus Tracker now estimates the fiscal measures enacted to fight the slowing economy are equal to 3.7% of global GDP, a little more than double the discretionary stimulus provided during the global financial crisis”, the bank says, noting that these are cyclically adjusted figures. If one looks at the headline numbers, the bank says “the deficit is much larger and swells from -3.2% GDP in 2019 to -11.2% GDP in 2020”.
(UBS)
The chart in the right pane shows global public debt (as a percentage of GDP) rising to levels not seen since World War II.
The bank discusses the breakdown shown in Figure 1 at some length, but the labels on the stacked bars speak for themselves. What’s particularly interesting is outsized role played by direct cash payments (pink in the visual). Here’s the breakdown by country:
(UBS)
“Most noteworthy here is the amount of ‘pink’ for EM”, UBS notes. Long story short, if you thought the “free money” train was chugging along in developed economies, direct cash handouts have much more traction in the developing world (as a portion of total stimulus, anyway).
Meanwhile, Deutsche Bank rolls up both government and central bank measures into one “bailout” figure. Suffice to say the normal chart isn’t very useful due to the sheer size of the COVID-19 response versus historical “interventions”. Deutsche uses a log scale (on the left axis) to help “better identify the earlier bailouts and get a rough feel visually for the numbers”.
(Deutsche Bank)
“For 2020 we have aggregated the fiscal and monetary support programs announced from the US and the largest economies in Europe”, the bank’s Jim Reid writes. “Obviously we won’t know how much will be used until much further down the road”.
Yes, “obviously”.
And in that regard, UBS seems to doubt what’s already been deployed is anywhere close to sufficient.
“Whether the stimulus is remotely enough remains to be seen”, the bank wrote, in the same note cited above. “The hit to global activity is severe: our forecast for DM’s Q2 GDP contraction is 3x larger than the worst quarter during the GFC and the speed with which labour is being shed is unprecedented”.
Indeed.
Or you can listen to the sage Rick Santelli……