Global fiscal and monetary responses to COVID-19

Big news came out of the US where the Fed threw everything it has at the market. It changed its QE programme from a fixed size to an open-ended programme and pledged to buy as much as needed to ensure transmission of monetary policy. The Fed also announced three new facilities. Two of them are aimed at big corporations by buying both new bond and loan issuance (Primary Market Corporate Credit Facility (PMCCF)) and buying outstanding corporate bonds (Secondary Market Corporate Credit Facility (SMCCF)). The third facility is the Term Asset-Backed Securities Loan Facility (TALF), which will facilitate asset-backed securities like auto loans, student loans, equipment loans etc. In total, this should provide USD300bn of liquidity.

On the fiscal policy side, t he US Senate approved the USD2,000bn spending package. The deal includes: USD500bn in direct payments to Americans; USD500bn for large companies, including more money into the Exchange Stabilization Fund, which can be used as guarantees in the Fed's various credit facilities; USD350bn for loans to small businesses; USD350bn worth of tax cuts mainly by cutting payroll taxes; higher unemployment benefits and USD150bn of funding for hospitals.

Euro area countries have now committed to fiscal easing in the magnitude of 2.5% of GDP on average. Added to that, liquidity and credit measures of 11.5% of GDP are made available to help struggling companies. For the first time since 2013, Germany will take on new debt of EUR156bn, as parliament approved a EUR750bn crisis package and temporarily suspended the infamous 'debt break'. The package comprises direct cash handouts to SMEs of EUR50bn and a stabilisation fund for loans to struggling businesses and direct stakes in companies. To finance the extra spending, Germany intends to increase its issuance of government bonds and bills by EUR32.5bn in Q2 and by EUR87bn in H2 20.

Eurozone finance ministers seemed to edge closer to an agreement to harness the ESM to help countries fund large-scale fiscal easing, however disagreement still reigns whether this should take the form of enhanced condition credit lines (ECCL) available to all countries in the volume of 2% of GDP, or the introduction of common debt instrument (so-called coronbonds/eurobonds) issued by the ESM. The latter still faces stiff opposition from The Netherlands, plus German economy minister Altmaier has dismissed the idea. In that light, we think that if coronabonds should ever see the light of day (and if not now when otherwise?), it would be a story for Q3 at the earliest. At the same time, with the launch of the ECB's Pandemic Emergency Purchase Programme (PEPP), ESM credit lines have become less relevant in our view.

The long-awaited details of the ECB's PEPP were also finally released . It was quite a game changer, as the ECB essentially can use the full flexibility of the purchases as it sees fit. Most surprising was the scrapping of ISIN/issuer limits as well as the inclusion of bills as short as 70d in the programme.

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