Perspectives

State of emergency

EcoPerspectives // 2nd quarter 2020  
3
economic-research.bnpparibas.com  
United States  
State of emergency  
The American people and the US economy will no longer be spared the coronavirus pandemic, no more than any other country.  
Arriving belatedly on US soil and long belittled by President Trump, the virus is now spreading rampantly, to the point that WHO is  
now preparing to declare the United States the pandemic’s new epicentre. With its federal structure, the US has taken a scattered  
approach, leaving each state to decide whether or not to introduce lockdown measures. Although the White House has closed the  
country’s borders (to the European Union and Canada, among others), it was reluctant to restrict domestic movements of goods and  
people. Foreseeing recession, the markets have plunged and the central bank has launched a veritable monetary “Marshall Plan”.  
On 12 March 2020, the tone in Washington was serene even as  
1
- Growth and inflation  
Italy, already swamped by the epidemic, was strengthening its  
lockdown measures and former Prime Minister Matteo Renzi was  
urging Europe to do the same. President Trump was convinced that  
a vaccine would be rapidly discovered and the virus would  
(
Y/Y, %)  
GDP Growth  
Forecast  
Inflation  
Forecast  
5
4.5  
1
disappear quickly, with little propagation . To the contrary, the  
4
2.9  
situation has deteriorated rapidly, to the point that the World Health  
Organisation (WHO) is preparing to declare the US as the  
pandemic’s new epicentre. As we went to press, the world’s number  
one superpower had reported 280,000 confirmed cases and 7,000  
deaths. Covid-19 contamination is progressing exponentially,  
comparable to the curves already seen in European affected  
countries.  
3
2
1
0
1
2.3  
2.4  
2.2  
1.6  
1.2  
-
-2  
-
-
-
3
4
5
-4  
2
018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
With its federal structure, the US has taken a scattered approach to  
the pandemic. Since 15 March, the hardest hit states (New York and  
California) have imposed lockdown measures or social distancing  
on their residents, limiting the movements of non-essential workers  
and closing most recreational spaces (bars, restaurants, theatres,  
sports facilities, etc.) and retail stores. Other states, such as New  
Jersey, Illinois, Florida and Texas, have followed suit with more or  
less severity. Despite the President’s hopes of seeing all the  
churches packing their pews again by Easter”, measures have been  
taken at the local level to protect residents, and only a very small list  
of places have put no restrictions into place of any kind. The US  
economy is freezing up. Industrial orders as depicted by the  
Investment Supply Manager (ISM) index  that is closely correlated  
with investment and economic activity fell to 42.2 in March, the  
lowest level since 2009, and will continue to fall, raising the spectre  
of a record-breaking contraction of GDP in Q2 2020.  
Source: BNPP, Interim Forecasts (Before Global Markets updated scenario)  
2
- Initial claims  
Million/week  
7
6
5
4
3
2
1
0
2
008  
2010  
2012  
2014  
2016  
2018  
2020  
Source: US Department of Commerce  
High-risk populations and massive fiscal support  
3- Coronavirus Aid, Relief, and Economic Security Act (USD mds)  
Although the US has a leading-edge healthcare system, it is not well  
equipped to handle a mass epidemic. The highly-selective system is  
costly  the US devotes 17 points of GDP to healthcare, the highest  
among the OECD countries  but its hospital capacity is limited to  
only 2.8 beds per 1000 inhabitants, two times less than in France  
and three times less than in Germany. Without universal healthcare  
coverage, the system provides only limited access to those with no  
Cash grant to households  
634  
290  
260  
84  
881  
504  
377  
400  
175  
180  
45  
-
-
-
Tax credit (“checks”)  
Unemployed (benefits extension)  
Various (food stamp, education aid…)  
Guaranteed Loans  
-
-
Large companies and States  
Small and medium size companies  
Emergency transfers  
-
-
-
States and local authorities  
Hospitals  
Disaster Relief Fund  
1
It’s going to go away […] because of what I did and what the  
administration did with China, we have 32 deaths at this point. When you  
look at the kind of numbers that you’re seeing coming out of other countries,  
it’s pretty amazing when you think of it”. D. J. Trump, 24 February 2020.  
Corporate tax cuts and deferred payments  
TOTAL  
280  
2,200  
Source: Committee for a Responsible Federal Budget, BNP Paribas  
EcoPerspectives // 2nd quarter 2020  
4
economic-research.bnpparibas.com  
2
private insurance  i.e. nearly 106 million Americans (1 in 3) . More  
often than not, health care protection is provided through jobs, and  
the surge in unemployment (see chart 2) will only increase the  
population’s vulnerability in the face of the pandemic.  
4
- Monetary Marshall Plan  
In the US, reassessment of the risk associated with the prospects of an  
economic contraction have resulted in a widespread flight to liquidity and  
requests to convert assets (equities, bonds and shares in mutual funds)  
into cash, putting enormous pressure on key players for the smooth  
functioning of the markets, including primary dealers and money market  
funds. To avoid systemic sclerosis, the Fed re-opened the facilities  
created during the 2008 financial crisis and positioned itself as the “buyer  
of last resort” for nearly unlimited amounts.  
Finally aware of the stakes at hand, the Trump administration  
pushed Congress to pass the Coronavirus Aid, Relief, and  
Economic Security Act (CARES), an unprecedentedly large fiscal  
stimulus package (USD 2,200 bn, the equivalent to 10% of GDP or  
50% of the annual Federal budget). The bill doubled in size under  
pressure from the Democrats, who have a majority in the House, to  
cover the needs of low-income individuals and those who have lost  
their jobs. In addition to guaranteed loans for companies, which  
could amount to as much as USD 900 bn, the Federal government  
will transfer roughly USD 630 bn to American households (see table  
- A series of special financing facilities. Alongside the exceptional  
injection of liquidity via repo operations (up to USD 5800 bn from mid-  
March to mid-April), on 17-18 March the Fed reactivated its Primary  
Dealer Credit Facility (PDCF) and Money Market Mutual Fund Liquidity  
Facility (MMLF). Through these facilities, the Fed lends funds in exchange  
for collateral that has become harder to dispose of and seeks to facilitate  
debt market refinancing, a vital organ of the economy. But it does not stop  
there. Through Special Purpose Vehicles (SPV), the Fed will purchase  
high quality corporate bonds (i.e. with an investment grade rating), not  
only in the primary market via the Primary Market Corporate Credit  
Facility (PMCCF) but also in the secondary market via the Secondary  
Market Corporate Credit Facility, (SMCCF). Using an SPV, it has also  
reactivated the Term Asset-Backed Securities Loan Facility (TALF) to  
support the securitisation of new loans to households and small  
businesses (and prevent it from shutting down).  
3
) through tax credits or extended benefits. Using a means-tested  
3
system , each American household will receive a check from the  
Treasury for a maximum amount of USD 3,000 each. The Federal  
government will also top up unemployment benefits, which vary  
from state to state but which average roughly USD 300 a week, by  
USD 600 a week during the 4-month period ending 31 July 2020.  
Monetary bazooka  
The government is preparing to buffer an economic shock which it  
can no longer deny, and which has been largely foreseen by the  
markets and the Fed. Starting on 3 March, the Fed began cutting its  
-
Switch to unlimited QE. This is the most spectacular measure  
announced so far, and the first to begin to restore calm in the markets. On  
3 March, the Fed announced that its securities holdings via the System  
2
4
key rates, slashing them to virtually zero on 15 March . It reactivated  
Open Market Account (SOMA) will be increased by as much as needed to  
ensure the smooth functioning of the markets. In other words, quantitative  
easing (QE) would only be limited by the amount of eligible Treasuries  
outstanding (which are also about to increase sharply) and Mortgage-  
Backed Securities (MBS), which were expanded to include commercial  
mortgage-backed securities.  
the exceptional liquidity facilities that were set up during the 2008  
financial crisis. Quantitative easing, the Fed’s securities purchasing  
programme, which had been raised to a maximum of USD 700 bn a  
year, is now being conducted with virtually no limits (see box 4).  
These actions, coupled with swap arrangements and concerted  
actions with other central banks, have helped restore some calm, at  
least temporarily, in the foreign exchange and bond markets, where  
the squeeze on USD liquidity has led many currencies to depreciate,  
and interest rate spreads have widened sharply.  
- Swap arrangements. The squeeze on USD liquidity required central  
bank action not only because of the situation in the United States. Like in  
2008, debt issued in the US, especially corporate bonds, have been  
recycled globally, especially in the form of exchange-traded funds (ETF),  
increasing the US dollar refinancing needs of non-American financial  
intermediaries. In Japan, the eurozone and the UK, the first signs of dollar  
rarefication appeared with the depreciation of their currencies (demand for  
USD conversion) and an increase in the cost of swaps. In response, the  
Fed and five central banks the ECB (eurozone), BoE (UK)), BoJ  
(
Japan), BNS (Switzerland) and BoC (Canada)  reached an agreement  
on 15 March allowing currencies to be swapped at a reduced rate (OIS +  
5 bp), with USD lending in each jurisdiction of up to 85 days (in addition  
2
to the usual 7-day operations). On 19 March, the Fed extended these  
swap arrangements to include other key central banks around the globe  
(Australia, New Zealand, Brazil, South Korea, Mexico, Singapore,  
2
Sweden, Norway and Denmark, among others).  
Of the 106 million Americans without access to private insurance,  
7
(
2
8.4 million depend on Medicare (for persons over age 65) and Medicaid  
for low-income individuals or families), which provide only partial coverage.  
7 million Americans do not have any insurance coverage at all. See  
Source: BNP Paribas  
Census Bureau, Health Insurance Coverage in the United States: 2018,  
November 2019.  
3
Revenue of up to USD 99,000 a year for singles, USD 198,000 a year for  
a couple without children and USD 218,000 a year for a couple with  
children.  
4
On 15 March 2020 (effective 16 March), the Federal Open Market  
Committee (FOMC) decided to cut the key fed funds target rate by 100  
basis points, to a range of between 0% and 0.25%. The interest on  
reserves and excess reserves (IOR and IOER) was cut by 150 bp to 0.1%.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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