The pandemic central bank battle could turn into an endless war


WASHINGTON / FRANKFURT (Reuters) – Major central banks are buying from a growing range of government bonds, corporate debt and consumer loans to help businesses and households weather the coronavirus pandemic – and nobody knows if they can stop.

FILE PHOTO: A woman wearing a protective mask walks past the headquarters of the European Central Bank (ECB) during sunset in Frankfurt, Germany, April 29, 2020, while the spread of coronavirus disease ( COVID-19) continues. / Photo taken on November 10, 2018 / REUTERS / Kai Pfaffenbach

At best, infection rates are slowing, trade is picking up and people are returning to work this year.

In the extreme case of a recurring virus requiring even more damaging blockages, the US Federal Reserve and its peers float the whole boat – public debt, corporate debt, perhaps even mortgage and paycheck financing .

The social, political and economic implications of taking economies offline for a long time, endorsed by governments and struggling to get back to normal, could be profound.

Absence from work erodes skills. Business failures destroy wealth and hinder investment. Low-cost remittances and money are likely to fuel asset bubbles that widen the gap between the rich and the poor.

“This brings us to the question: when are we worried about the role of the Fed? Said Kathryn Judge, a professor at Columbia Law School who studies financial markets.

“If they are the only player and people are worried about liquidity and access to finance, what pressure is there? In the longer term, it is disconcerting. “

The Bank of England announced in May that it would buy more government bonds, just as the British Treasury announced that it would go deeper into debt to pay the wages of laid-off workers.

BoE policy chief Jan Vlieghe said the unprecedented coordinated action looked like what could happen “if we were the central bank of the Weimar Republic or Zimbabwe”, two disastrous examples of government ordering central banks to move. The difference, according to Vlieghe, is that no one in government told the BoE what to do.

But what if they didn’t need it, because such cooperation had become a new tacit orthodoxy?


Japan is probably at this stage.

A multi-year struggle against deflation – a chronic fall in prices that depresses incomes and economic growth – has seen the Bank of Japan’s footprint steadily increase.

He now owns almost half of all Japanese government bonds and agreed last week to buy as many as necessary during the crisis.

The BOJ, which in February held 4.7% of the Japanese corporate bond market and about 10% of short-term business loans known as commercial paper, also increased purchases of corporate debt.

“We are not monetizing public debt,” said Governor Haruhiko Kuroda, but by purchasing what is needed as part of the BOJ’s “rate curve control” policy – basically, it helps maintain low interest rates.

In Europe and the United States, similar “unconventional” political tools were used in 2008 to fight a financial crisis that has spread to the real economy.

The Fed bought about $ 4 trillion in government bonds to reduce borrowing costs and used other means to keep the markets from overflowing and to remove subprime mortgages from the books lenders.

The previously unused measures, which helped preserve jobs and support growth, were said to be exceptional.

But the shock of the coronavirus pushes the limits.


The repercussions on some European economies, notably Italy, have been so severe that analysts expect the European Central Bank to use its broad power to order a rescue.

One way would be for politicians to agree to put Italy or perhaps the whole of monetary union in an emergency program that would allow the ECB to finance national debts under a system known as the name of Outright Monetary Transactions.

“There is no doubt that the OMT will be activated,” said Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, adding: “Once the OMT is in place, it will be a lifelong situation. “

ECB President Christine Lagarde said on Thursday that her “flexible” pandemic emergency purchasing program was a better tool for the current situation than OMT, an unused relic of the previous crisis.

The Fed has closed the various emergency and “rescue” programs it launched to deal with the 2007-2009 crisis – to the benefit of the US Treasury – and hopes to avoid making long-term commitments this time.

He has added about $ 2.5 trillion to his assets since the onset of the crisis, which earned him $ 6.7 trillion in assets last week. Cornerstone Macro analyst Roberto Perli said he expects the total to peak at around $ 9 trillion and will decrease by the end of the year as conditions stabilize and loans are repaid.

Demand for three initial Fed facilities for the bond and money markets has so far been only $ 90 billion.

But without a vaccine or clear virus removal, central banks may be just getting started. The Fed, which helped financial institutions during the last crisis, is already buying corporate bonds, lending to state and local governments, and agreeing to finance up to 95% of bank loans to thousands of businesses.

Before they were even operational, programs were expanded to reach more risky borrowers, including some downgraded “fallen angel” companies, smaller cities and counties, and more leveraged companies.

All of these changes are based on capital covering losses from the Consolidated Revenue Fund – which the Fed has agreed to buy debts that the Fed believes are necessary.

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Private sector debt in the United States totaled about $ 32 trillion at the end of last year, while federal government debt is about $ 24 trillion, compared with GDP of $ 21.7 trillion. dollars in 2019.

The numbers are big. But so do the promises.

“We always put out the fire. We are still trying to win. And I think we will be there for a while, “said Fed President Jerome Powell this week. “We will not run out of money. “

Report by Howard Schneider in Washington and Balazs Koranyi in Frankfurt; Additional reports by Leika Kihara in Tokyo and William Schomberg in London; Editing by Catherine Evans

Our standards:Principles of the Thomson Reuters Trust.


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