My previous article in The Sunday Times of Malta (February 2), was entitled ‘The ECB – The market’s lifebuoy in 2019’. Fast forward to today, the COVID-19 outbreak has forced central banks and governments around the world to bring out all their weapons in order to safeguard the global economy.

The shock caused by the virus will affect the economy in various ways. The production contraction due to the lockdowns imposed worldwide, disruption in supply chains given absences from the workplace, demand shock in the global economy caused by lower consumer demand because of higher uncertainty, and the impact on firms’ liquidity constraints are some of the ways in which the pandemic is damaging the global economy.

In a circular published by the European Commission, the forecasted 1.4 per cent GDP growth for 2020 could fall to just over -1.0 per cent. In light of the potential repercussions, higher authorities had to intervene to try and minimise the aftermath of this situation.

The Commission responded in a number of ways, including the following: €1 billion EU budget guarantee was made to support hard-hit SMEs with liquidity, and mobilising €8 billion in working capital financing by providing liquidity and guarantees to banks. Credit holi­days have been granted to help alleviate the financial strain on affected companies.

It also introduced the Coronavirus Response Investment Initiative, whereby €37 billion are to be directed under the European Structural Investment Fund to fight the crisis; an additional €28 billion of unallocated structural funds should be fully eligible for fighting the crisis; and the EU Solidarity Fund’s scope may also be extended to include the public health crisis, mobilising up to €800 million to the hardest-hit member states.

Dismissed and self-employed workers, who will probably be greatly impacted by the virus may benefit from the European Globalisation Adjustment Fund, which will mobilise up to €179 million. Governments that need to utilise state aid may benefit from a facilitated procedure that speeds up the commission’s approval of such aid.

The Commission has also allowed national governments to provide access to liquidity to banks in the form of state guarantees. Full flexibility of the EU fiscal framework is also being allowed; specifically, it is ready to accommodate exceptional spending to counter the virus and adapt fiscal efforts required from member states.

On March 12, the European Central Bank (ECB) decided on a comprehensive package of monetary policy measures, including: additional longer-term refinancing operations; providing an injection of low interest rate funding to eurozone banks with sovereign debt as collateral on the loans; more favourable terms in the TLTRO-III operations outstanding during June 2020 to June 2021; and additional net asset purchases of €120 billion and reinvestments of the principal payments from maturing securities purchased under the APP will continue.

The ECB announced that banks can utilise capital and liquidity buffers and also allowed banks to use capital instruments that do not qualify as CET1 capital to meet Pillar 2 requirements. On March 18, the ECB surprised the market by introducing the Pandemic Emergency Purchase Programme, a new APP having an overall envelope of €750 billion.

This announcement included a relaxation in the modalities of the programme, which will now include Greek government bonds and non-financial commercial paper. Moreover, collateral standards for bank re­financing operations have also been eased.

Central banks and governments all over the world have taken drastic measures, such as reducing interest rates and introducing high stimulus packages. Locally, the Maltese government has introduced a number of measures to assist local businesses and employees in these difficult times. However, some analysts believe that the monetary policy decisions will eventually lead to higher debt in already indebted nations, and therefore people will not consume more.

Leading economists around the world continue to urge governments to bring out the ‘big artillery’ to fight the economic fallout of the pandemic, and have not excluded the possibi­lity of introducing helicopter money into the economy.

www.curmiandpartners.com

Noelle Micallef is analyst at Curmi and Partners

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