Market Overview

10 April 2020

Markets Measure the Difference in Rescue Packages, But Aren’t They Eager to Compare the Amount of Money Printed?

The Eurogroup, which is represented by the finance ministers of the EU countries, has agreed on a €540 billion bailout package of measures to combat the economic fallout of the global pandemic. The negotiations were difficult and protracted so this final accord has drawn a round of applause from the participating officials. In reality, it's difficult to determine whether this was a victory for Europe as a whole or whether the point of view of some individual countries with a stronger political weight prevailed.

American financial elites are the virtual concerned party and their assessments for European processes cannot be truly objective. Still, it is noteworthy to mention an article in the New York Times published today under the headline: "E.U. Backs Half-Trillion Euro Stimulus, but Balks at Pooling Debt" can be considered provocative. Unfortunately, its authors are right when they emphasise that the final consensus of the Eurogroup "dealt a blow to their worst-hit members, Italy and Spain, by sidestepping their pleas for the bloc to issue joint debt" and "even in the face of an unprecedented economic crisis caused by a virus that has killed more than 50,000 bloc citizens and infected over a half million, wealthier northern European countries were reluctant to subsidize cheap debt for the badly hit south".

The approved programs included a €100 billion joint employment insurance fund plus €200 billion of liquidity for smaller businesses and access to €240 billion in loans for the euro-area countries from the European Stability Mechanism (ESM) to backstop each of the EU countries as it has to go on a spending spree to help the economy back on its feet. But the Eurogroup ministers failed to reach a more solid agreement on issuing joint "corona-bonds" despite pleas from Italy and Spain, two countries which are less prepared for the crisis in financial terms. At the same time, they bear the main load of the pandemic in Europe. Germany and the Netherlands insisted on tough control over the use of limits even from ESM funds as the ministers decided they should be limited to health-related programs. "We are and will remain opposed to Eurobonds," Dutch Finance Minister Wopke Hoekstra said. "We think this concept will not help Europe or the Netherlands in the long-term."

French Finance Minister Bruno Le Maire said the fund within the ESM frame could be around €500 billion, thus also promoting the concept of a larger aid package. Italian finance minister Roberto Gualtieri expressed hope that while they endorse the overall agreement, their leaders would bring up this issue of joint debt issuance at the next Eurogroup meeting. The issue of "corona-bonds" would make it possible to allocate funds at corresponding national levels in the most efficient manner and this would be a more flexible response compared to the current highly centralised approach. Throughout its history the European Union has refused several times to take a common responsibility for the joint bonds but the scope of the current crisis had led many people to think the bloc might back the idea this time. Unfortunately, even this time such hopes were in vain. It is clear now that such a move could happen only in theory and under the conditions of some very dark prospects linked to the spread of infection, which no one would like to happen, of course.

Another field for conflicts of interest is the "green" agenda. Sweden, the Netherlands, Italy, Spain, Austria, Denmark, Finland, Portugal, Latvia and Luxembourg representatives signed an open letter to the Eurogroup and to all the EU leaders to adopt a "green" recovery plan as natural fears grow that the economic hit could weaken all the previous actions for a low-carbon future. "We need to send a strong political signal to the world and our citizens that the EU will lead by example even in difficult times like the present and blaze the trail to climate neutrality and the fulfilment of the Paris Agreement," the letter says. Ten environment ministers said any bailout package should support the Green Deal strategy, but both Germany and France, which are the two richest economies in the 27-country bloc, were not among the signatories.

The American concept of "Easy money" is sharply highlighted against the general background of all these complex discussions and compromises in Europe. Not hundreds of billions, but trillions of Dollars are allocated over and over again for more and more rescue programs in the United States, either from the Federal reserve system (Fed), or from the government with the support of bipartisan congress. The package of more than two trillion Dollars was approved a couple of weeks ago at the request of the White house. Previously, almost the same amount was made up of Treasury bonds purchases plus mortgage bonds and corporate assets purchases, plus liquidity injections to support stock markets. All these measures were officially declared by the Fed. On top of this, yesterday the Fed introduced another $2.3-trillion program to support mid-sized businesses with less than 10,000 employees and $2.5 billion in revenues by offering them four-year loans. Financing through the Payroll Protection Program to the institutions will also increase three existing credit facilities for households and businesses.

The monetary scale of the US rescue programs exceeds $6 trillion in total and it seems to look like a kind of mockery in comparison with the so-difficult-to-agree new measures in the EU. All the European packages are about three times lower in amount even if all the quantative easing (QE) programs directly from the European Central Bank (ECB) are added. This is probably why the S&P500 and other US stock indexes rose with much more enthusiasm on Thursday before the markets Easter closing than the similar stock indexes in France, Italy or even Germany. At the beginning of next week after the long Easter weekend in many countries, the notion of whether this burst would be enough for a start of a longer time uptrend could be seen.

However, there is another delicate question. The Forex market could possibly consider how seriously the American financial system is affected by the fantastic fact that in some six weeks it has become much thicker by the printing of $6 trillion, unsecured money? Generous financial assistance to economic entities and citizens and an inherent determination of Americans can only be welcomed when such intentions coincide with opportunities. But there are no statistics yet on how many hundreds of billions (or even trillions?) of American Dollars the US Treasury was able to attract as new loans to its government bonds in the course of the virus-induced panic. It is unlikely that purchases of American bonds cover at least 20% of easily distributed "pocked money". This extra money is simply not backed by any higher level of the national or world economy, by new products and services. On the contrary, they reflect a state of deep recession.

This fundamentally unprecedented depreciation of the US Dollar as a national currency due to excessive central bank emission is hidden so far from the eyes. On Thursday evening and at a "narrow" Good Friday's trading session, the AUD/USD rose more than 140 points, from 0.6220 to 0.6360 area, and the EUR/USD climbed from 1.0860 to the 0.0950 area just after the Fed $2.3 trillion announcement and after a €540 billion decision by the Eurogroup. When the long weekend will be over, it may become more clear whether the currency market will continue to pick up this trend, comparing the scale of potential depreciation of different national currencies, or whether the markets will again focus on the lack of measures in the EU. In the last case, the markets could pressure the single European currency unfairly to its previous levels below 1.09, even though the Euro is not so much diluted with stray money from the printing press.


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