The Eurogroup has reached an agreement on bringing EUR 500 bn -4.2% of eurozone GDP- of additional firepower to attenuate the immediate economic impact of the Covid-19 pandemic. Three tools will be used: the SURE programme to temporarily support national safety nets, the EIB guaranteeing lending to companies -in particular SMEs- and a Pandemic Crisis Support via the ESM. The work on the creation of a Recovery Fund to boost European investments will continue. The difficult part will be to agree on its funding.
Recent activity and demand data for China show the huge impact of the coronavirus epidemic. German business expectations have seen an unprecedented monthly drop in March . The drop in the price of oil acts as an additional drag on growth and a source of increased credit risk. The strengthening of the dollar is a source of concern for issuers with foreign currency debt in dollar. Despite swift action of the major central banks and the announcement of increasingly important fiscal policy support in various countries, equity markets have barely reacted: lack of visibility dominates.
Wall Street has entered a bear market, having declined more than 20% from its high. Equity markets globally have seen huge declines this week and corporate bond spreads have widened significantly.Despite the positive news from China, the combination of an uninterrupted international propagation of the coronavirus has dealt a blow to expectations about the growth outlook for the next several months. The oil shock has made matters worse.Central banks have reacted. After the Fed rate cut last week, the Bank of England cut rates as well and the ECB also took several measures to support activity.The instrument of choice at the present juncture is fiscal stimulus of a sufficient size. Both in the US and the eurozone, we are still waiting for this impulse.
