Huge amounts of salvation, aimed at combating the financial crisis of 2008, provoked a backlash from populists in many countries, since a huge bill was handed over to taxpayers.
This time it feels different. Governments and central banks too well aware that they are faced with an unprecedented test by an invisible enemy that could kill their economy.
Amounts mobilized now – trillions in the form of direct financial and monetary support, and loan guarantees– get ahead of what was proposed in 2008 to save banks from their own stupidity.
What is being offered?
“We are witnessing a panic movement when markets, like enterprises, seek liquidity at all costs and sell everything that can be sold,” said Agnes Benassi-Kere, professor at the Paris School of Economics.
According to her, "there is no other way than to release a lot of debts and make sure that they will be bought by central banks."
While the virus appears to be in China, European countries and the United States are working hard, promising spending to limit the effects of their own outbreaks.
The largest stimulus package comes from Washington, where Senate Republicans on Thursday unveiled a $ 1 trillion plan in line with President Donald Trump's demands.
Democrats are not convinced by some of Trump's wish list. But, avoiding the Republicans' traditional rejection of debts and deficits, Senate Majority Leader Mitch McConnell emphasized that “this is not a normal time.”
Finance Minister Stephen Mnuchin said the government “has no problem issuing more debt” at ultra-low rates after recent Federal Reserve interventions.
What is the cost?
The Fed and others, including the European Central Bank, use shock and fear tactics to calm markets and provide enough money for businesses.
Their actions, lower interest rates or direct purchase of public debt (“quantitative easing”) finally brought some calm to the markets on Friday.
One of the benefits for governments — at least the richer ones with access to deep capital markets — is that they can issue long-term bonds now at fixed rates with little to no cost.
“The only problem is in 10-20 years, when you have to refinance your debt,” said Charlie Robertson, Renaissance Capital’s chief economist in London.
“No one pays the bill, because the cost of borrowing is close to zero – it's magic money,” he said, adding that there is no risk of inflation, given the magnitude of the shock.
The situation is much more alarming for developing countries that do not have access to cheap loans and modern medical systems.
“If South Africa cannot afford to control the virus, it will spread again. No country can afford to ban travel to other countries, ”Robertson told AFP.
“Therefore, I would say that a global financial solution is needed to combat this viral crisis,” he said, calling for action from the G7 and G20 countries.
What else can be done?
As the G20 presidency in Saudi Arabia prepares for a virtual summit, Allianz chief economist Louis Subran agreed on the need for concerted action for poorer countries, especially in Africa.
“All international measures were taken without any coordination, this is completely unprecedented,” he said.
Christopher Dembik, head of macroeconomic research at Saxo Bank, said advanced economies should emulate the United States and Hong Kong in providing cash directly to households.
“We must go beyond tax deferrals and government guarantees,” he said, suggesting also “a temporary but sharp reduction in corporate taxation” to stop the massive collapse of companies.
In addition to extreme budget cases, such as Italy, “there is no concern about sovereign debt,” because central banks themselves are accumulating new issues, he said.
Italy, which surpassed China in the number of registered deaths from coronavirus, wants its EU partners to go further using the Eurozone military chest of 410 billion euros ($ 440 billion).
© AFP 2020
Pandemic money: where does it come from and who pays? (2020, March 20)
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