(Bloomberg) --
European Central Bank President Christine Lagarde followed through on her pledge to counter the economic shock of the coronavirus outbreak with a stimulus package that included more bond purchases and loans for banks but not an interest-rate cut.
The move reflects mounting concern over the impact of the disease as it disrupts tourism, business travel and global supply chains, giving Lagarde a major test just over four months into the job. Only two days ago, she told European Union leaders in a conference call that they risk a 2008-style crisis if they don’t come up with coordinated action.
In response, the Governing Council took the following decisions:
- Additional long-term loans for banks to provide immediate liquidity
- More favorable terms on its targeted loan program
- An extra 120 billion euros ($135 billion) of asset purchases focused on the private sector
- The decision was complemented with temporary measures by the ECB’s supervisory arm to ease capital demands for banks
European stocks extended declines after the announcement, with the Stoxx Europe 600 Index down 7.8% as of 2:02 p.m. in Frankfurt. The euro fluctuated between gains and losses before falling 0.4% against the dollar as of 2:02 p.m. in Frankfurt.
Meanwhile, the yield on Italy’s 10-year government bonds soared as much as 34 basis points. German bonds briefly erased gains; the yield on the nation’s 10-year securities declined three basis points to minus 0.77%.
Follow coverage of the ECB’s policy decision and briefing in our live blog
Lagarde is likely to use her 2:30 p.m. press conference to warn that governments must also step up. The ECB’s action is notably more nuanced than its central-bank peers, which have led the economic response to the outbreak with sizable emergency rate cuts.
That reflects Lagarde’s limited ammunition after years of massive stimulus under her predecessor, Mario Draghi. Her institution already holds about a quarter of the region’s outstanding government debt, while its negative rates risk damaging the banking system and eroding financial stability.
In contrast, the Federal Reserve and the Bank of Canada were able to slash rates by half a percentage point last week. The Bank of England cut its key rate by the same magnitude on Wednesday, freed up cash at lenders, and introduced a new program to provide easy and cheap credit. It acted in concert with the government, which unveiled 30 billion pounds ($39 billion) of fiscal stimulus the same day.
Yet with the euro-area economy already stuck in a manufacturing recession and the virus now hitting the services sector -- President Donald Trump has suspended travel to the U.S. from Europe -- the 25-member Governing Council decided they had to do something.
The loan measures and the increase in quantitative easing will pump liquidity into the financial system. The decision to direct buying toward corporate debt will aid larger companies, while the new funding operations “will support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises,” according to the ECB’s statement.
Euro-zone governments have started to wake up to the need for economic support. Italy, where a national lockdown has been imposed, is the hardest hit so far by the spread of the virus in Europe, and has said it’s ready to spend as much as 25 billion euros on stimulus.
Even in Germany -- which despite having the most fiscal firepower has been reluctant to spend -- Chancellor Angela Merkel said the government will do whatever is needed to limit the impact of the coronavirus. The administration is prepared to abandon its long-standing balanced-budget policy, according to people with direct knowledge of its economic policy.
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