Financial Times Europe - 20.03.2020

2 ★ FINANCIAL TIMES Friday 20 March 2020

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CORONAVIRUS

M A RT I N A R N O L D— FRANKFURT

Divisions have again emerged between

top European Central Bank officials

after they disagreed over how far to take

its new “no limits” policy to shield the

eurozone from the economic and finan-

cial turmoil of the Covid-19 pandemic.

Following an emergency session of its

governing council on Wednesday night,

the ECB announced plans to buy €750bn

more bonds in a significant expansion of

its asset-purchase programme to

address rising tensions in government

and corporate bond markets.

Christine Lagarde, ECB president,

decided to act after political leaders

from countries including Spain, France

and Italy told her that it should do more

to support the eurozone and to calm

bond market tensions shortly before she

arranged the emergency session.

“A few very senior people started to

talk to Lagarde and [ECB chief economist

Philip] Lane and they realised, ‘we need

to do more’ and they started to move,”

said one member of the bank’s governing

council. The ECB declined to comment.

Investors welcomed the vastly

increased package of bond purchases by

the ECB, and eurozone sovereign bond

markets rebounded yesterday morning,

reducing the financing costs of govern-

ments from Italy and Greece to Ger-

many and France.

In the three-hour conference call,

council members agreed unanimously

on the need to step up action. But they

diverged on whether the ECB should lift

the self-imposed limits on its asset-

purchase programme that have led

some investors to believe it is running

out of ammunition, according to three

people briefed on the matter.

There was also dissent about the size

of the new bond buying plan, known as

the Pandemic Emergency Purchase Pro-

gramme. Some council members com-

plained that by opting for such a large

envelope of €750bn extra purchases the

central bank would hit its limits within

only a few months — bringing forward

the debate over whether to raise them.

In what has the potential to become a

damaging rift within the ECB’s top eche-

lons, one camp that included the Ger-

man and Dutch central bank bosses

argued against even saying it was con-

sidering lifting the limits, while a more

dovish group proposed immediately

lifting the limits to remove any doubts

among investors. In the end the council

opted for what one member described

as “a compromise solution”.

The split hinges on the central bank’s

decision to so far restrict itself to not

buying more than a third of any govern-

ment’s available debt — a limit it is close

to hitting in some countries, such as

Germany and the Netherlands. This

limit is designed to avoid it falling foul of

a ban on the ECB directly financing gov-

ernments via “monetary financing”.

The hawks on the council argue that if

the ECB owns more than a third of a

country’s debt it would have a blocking

minority in any future debt restructur-

ing negotiations, which would force it to

vote. A vote in favour of a debt restruc-

turing that favoured a member state by

reducing its overall debt could be

attacked for being monetary financing.

But doves on the council reject this and

say the argument has little legal basis.

Additional reporting by Victor Mallet in

Paris, Miles Johnson in Rome and Daniel

Dombey in Madrid

Financing costs

ECB divided over bond-buying plan

Top officials disagree on

lifting limit on bank’s asset

purchase programme

C O L BY S M I T H— NEW YORK

EVA SZ A L AY— LONDON

The dollar has blasted higher since the

coronavirus crisis intensified, hitting a

record high against a trade-weighted

basket of other currencies this week.

The Federal Reserve yesterday

stepped in by opening dollar swap lines

with other central banks, measures it

extended to a wider group,including

some in emerging markets.

The aim is to stop stress in dollar mar-

kets from spiralling out of control and

spreading the strain through the finan-

cial system.

Why is the dollar strengthening?

Investors tend to buy dollars in times of

geopolitical uncertainty and financial

market stress.

Just as families stock up on staples,

investors and companies, as well as

banks and hedge funds, are scrambling

for dollars to see them through the slow-

down. Sudden demand has made it

more expensive to buy the dollar out-

side the US, and the rush to buy has led

to problems with availability.

Equities have plunged this month,

and debt markets, including those for

US Treasuries and mortgages, have

started to fray along with short-term

funding. Policymakers have taken steps

to address these issues but equities and

bonds have at times fallen simultane-

ously — a classic sign of distress.

This prompts companies, for exam-

ple, to bulk up on dollars to make up for

lost revenues. “People are craving the

most secure asset they can find, and that

is the dollar. People are hoarding dol-

lars. Banks are hoarding dollars,” said

Nick Maroutsos, co-head of global

bonds at Janus Henderson. “There isn’t

anywhere to hide. People are coming to

the realisation that you have to be as

defensive as possible, meaning you hold

cash and some assets when you can.”

Is this a problem?

The dollar is the currency in which most

global trade and investment takes place.

The overall size of global liabilities

denominated in the dollar stands at

$12tn, or 60 per cent of US gross domes-

tic product, according to JPMorgan ana-

lysts. That means many companies and

governments have dollar debts to pay at

a time when revenues are collapsing and

economies are grinding to a halt.

Pressure built in one metric of dollar

demand: cross-currency basis swap

spreads. These track the premium that

market participants pay to swap one

currency for another. This week, the

three-month cross-currency basis

between the euro and dollar soared to its

widest level since 2011, suggesting

investors were willing to pay about

twice as much to borrow the greenback

against the euro than a few days before.

Investors seeking to swap Japanese yen

also faced steep costs to secure dollars.

“Just as no part of the global economy

will be insulated from the impact of the

virus, no major part of the global econ-

omy will be insulated if dollar funding

markets break down,” said Brad Setser,

an international economist at the Coun-

cil on Foreign Relations.

Should that happen, said Mark

McCormick, global head of foreign

exchange strategy at TD Securities, the

liquidity problem could turn into a sol-

vency issue. “The [US dollar] sits at the

epicentre of that, and its strength

reflects a mismatch of supply and

demand for funding.”

What has the Fed done?

The US central bank had already set up

dollar swap lines with the European

Central Bank, Bank of Japan, and Bank

of England when the crisis bit seriously

into markets. The move means it can

provide dollars directly to local central

banks in exchange for local currency, in

an effort to increase the availability of

dollars in those local markets.

That did not stop the rally, however,

with the dollar continuing to rip into

UK, Australian and a range of Asian cur-

rencies. Now, the Fed has added nine

more countries, including Australia,

Brazil and Mexico, to the list to keep

funding pressures from evolving into a

full-blown crisis.

The Fed said: “These facilities, like

those already established between the

Federal Reserve and other central

banks, are designed to help lessen

strains in global US dollar funding mar-

kets, thereby mitigating the effects of

these strains on the supply of credit to

households and businesses, both

domestically and abroad.”

This has happened before. During the

2008 financial crisis, the Fed extended

swap lines to G10 countries and a hand-

ful of emerging markets including Bra-

zil, Mexico, South Korea and Singapore.

Will it work?

Calvin Tse, head of North American FX

strategy at Citigroup, said the first

round of FX swaps had a “large effect” in

countries where lines were deployed.

“Barring another shock, the worst of the

cross-currency basis widening... may

be behind us,” he said.

A sense of normality had to return to

financial markets. “As long as there

remains volatility and concerns on

growth and health, which then weigh on

credit, it will keep feeding on itself,” Mr

Tse added.

Secure asset Fed tackles stress in global dollar markets

M I L E S J O H N S O N A N D DAV I D G H I G L I O N E

ROME

SA M F L E M I N G— BRUSSELS

EU member states need to work

together to confront the coronavirus

crisis, Italy’s prime minister said yes-

terday as the nation’s death toll from

coronavirus overtook China.

Giuseppe Conte said there was a press-

ing need to put the €500bn European

Stability Mechanism to work to respond

to the virus that has claimed 3,

Italian lives.

France agreed that the need for joint

action was urgent, imploring reluctant

countries led by Germany to support

use of the ESM or permit the issuance of

common bonds. Bruno Le Maire,

finance minister, told parliament:

“Either the eurozone responds in a

united manner to the economic crisis

and emerges stronger, or it is all over the

place and is in danger of disappearing.”

The European Central Bank inter-

vened on Wednesday with a late-night

plan to buy an extra €750bn in bonds

that eased investor nerves. Some offi-

cials, however, fear it could reinforce the

reluctance of Germany and like-minded

states. “The ESM was crafted with a dif-

ferent type of crisis in mind, so it must

be adapted to the new circumstances so

that we can make use of its full fire-

power,” Mr Conte said in reference to

the 2012 eurozone sovereign debt crisis.

“The route to follow is to open ESM

credit lines to all member states to help

them fight the consequences of the

Covid epidemic, under the condition of

full accountability by each member

state on the way resources are spent”.

As officials in Brussels worked on

plans to deploy the ESM, a French offi-

cial said: “Do we breach the taboo on

European financial solidarity? Are we

capable of financing together? Are we

ready to do it?”

Mr Conte, a little-known legal aca-

demic before he was thrust into the

position of prime minister in 2018, has

earned the approval of voters during

this crisis. A national opinion poll pub-

lished this week showed seven out of 10

Italians regard him favourably.

“We are confronted with an exoge-

nous, global shock that has no prece-

dents in modern history,” he said. “And

as political leaders we are called to make

necessary, bold, yet tragic choices.”

Mr Conte praised the moves taken by

the ECB this week, but said more must

be done to tackle a downturn that econ-

omists fear could be even sharper than

the last financial crisis.

“Knowing President [Christine]

Lagarde and having had several conver-

sations with her I had little doubt — the

ECB has the will and the power to sup-

port the euro,” he said.

“The best, probably the only way” to

avert large-scale economic damage

would be through the creation of a com-

mon European debt instrument to

“fight against the socio-economic con-

sequences of the pandemic”.

“What we need is not just a co-

ordinated reaction but a bold European

reaction to sustain our economies,” he

said. “This bond will allow all European

countries to access finances at the same

conditions, and will put the whole Euro-

pean economy on the best footing to

recover rapidly once the emergency will

be over.”

Italy was the first country in Europe to

impose stringent restrictions on the

movement of people and its economy to

combat the spread of the coronavirus.

France and Spain followed Rome’s lead

in enforcing social distancing measures.

Mr Conte warned that if Europe failed

to make a robust and unified response

to the virus it risked emboldening

nationalist politicians on the continent

and weakening support for the EU.

“Europe must show unity and solidar-

ity. There is no alternative to this,” he

said. “If Europe fails, I fear it will fade

away in the conscience of our fellow citi-

zens, giving space to the worst national-

istic instincts. This is a different virus

that we need to defeat now.”

Crisis management

Conte calls for EU unity on day Italian fatalities surpass China

Greenback:

a woman passes

a dollar sign

outside a

currency

exchange office

in Saint

Petersburg

Olga Maltseva/AFP/

Getty Images

Modi calls for one day ‘people’s curfew’

to help limit spread of outbreak in India

Cases so far

Prime Minister Narendra Modi has asked India’s 1.3bn

people to observe a one-day “people’s curfew” on Sun-

day, in which the entire population, except for essential

service workers, will stay home all day to demonstrate

their resolve to stop a major coronavirus outbreak.

In a national prime time television address, Mr Modi

said the curfew would be in force from 7am until 9pm.

Mr Modi sought to explain the threat f rom coronavi-

rus and the concept of “social distancing”.

Audit rules forcing banks to take higher

losses must be delayed, FDIC head says

The chair of one of the US’s major bank regulators has

thrown her weight behind a campaign to delay the

introduction of new accounting rules that would force

banks to take higher losses as they deal with the fallout

of the coronavirus crisis.

Jelena McWilliams, chair of the Federal Deposit

Insurance Corporation, has written to US accounting

standards board FASB urging it to postpone the imple-

mentation of the rules due to come in this year.

US urges release of citizens jailed abroad

Iran’s worst-hit provinces report

slowdown in rate of infection

Iran’s health ministry said yesterday the rate of infec-

tion in the 11 provinces most stricken by coronavirus

had begun to decline.

Alireza Raisi, deputy health minister, said this

showed Iranians were taking the risk of Covid-19 more

seriously than before.

The number of deaths has continued to rise, however,

increasing yesterday to 1,284 from 1,135 on Wednesday.

Confirmed cases climbed to 18,407.

Anxiety grows as Ireland fears up to

500,000 workers risk losing their jobs

Ireland has reported the loss of 58,000 jobs within days

after the closure of schools and bars as anxiety grows

that the outbreak could put as many as 500,000 people

out of work. The number seeking emergency welfare

payments is close to 2.5 per cent of the 2.36m working

before the pandemic struck. The government said the

scale of job losses in less than one week was on par with

huge losses that took months to unfold when the econ-

omy crashed during the financial crisis of 2008.

The US Department of State is making a new diplomatic

push for the release of prisoners held in Venezuela, Iran

and Afghanistan, citing coronavirus fears.

Those on the list include five US citizens and a US

resident held in Helicoide prison in Caracas, Venezuela.

230,

cases and 9,358 deaths as of March 18 17.13 GMT

Source: Johns Hopkins University

Read more at ft.com/coronavirus

CORONAVIRUS

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‘As political leaders we are

called to make necessary,

bold, yet tragic choices’

Giuseppe Conte

Riot: Venezuelan jails are notoriously tough

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