[Good Morning Stock Market] "Stop the Recession"... Governments Worldwide Announce Measures

Jerome Powell, Chairman of the U.S. Federal Reserve (Photo by AP Yonhap News)

[Asia Economy Reporter Kum Boryeong] To prevent the economic recession triggered by the novel coronavirus disease (COVID-19), not only governments around the world but also central banks are implementing countermeasures. It remains to be seen whether large-scale policies such as drastic interest rate cuts, expanded asset purchases, and helicopter money will be effective.

◆ Jo Seungbin, Researcher at Daishin Securities = Various policies are emerging worldwide, but these movements also indicate that problems are occurring in various sectors. The U.S. Federal Reserve (Fed) decided to expand asset purchases to include commercial paper (CP) because the CP interest rate spread rose rapidly, and investors expect the Fed’s asset purchase scope to extend to corporate bonds as corporate bond spreads remain high. The recent crisis at Boeing is another factor prompting expectations for additional measures. Boeing, facing a crisis due to the chain crashes and defects of the 737 Max, requested $60 billion in emergency support from the government, and U.S. President Donald Trump expressed willingness to provide support. However, Boeing’s CDS premium continues to rise.

Attention should also be paid to Europe’s movements. On the 18th, the European Central Bank (ECB) announced plans to purchase an additional 750 billion euros in bonds. Recently, government bond yields in major European countries such as Italy and Spain have risen rapidly, and with CDS premiums rising alongside, it is judged that investors’ moves to secure liquidity and concerns about European sovereign debt risks have begun to be partially reflected. If European sovereign debt risk rises again, it could adversely affect European banks holding large amounts of European government bonds. Currently, Deutsche Bank’s stock price is lower than during the 2008 global financial crisis and the 2011 European debt crisis, and its CDS premium has risen to an all-time high. It is necessary to check whether the announcement of the ECB’s large-scale bond purchase plan will curb the rise in Deutsche Bank’s CDS premium.

In the short term, a shift to dollar weakness is important. Recently, global demand for the dollar has surged. This is because dollar circulation has decreased due to a slowdown in global trade, and securing dollar liquidity has become a top priority amid increased financial market uncertainty. The decline in the global dollar basis swap indicates a rise in dollar funding costs. Recently, the global dollar basis swap has risen rapidly since early February. The Fed’s currency swap agreements with major countries on the 19th can be seen as a preemptive measure to prevent a sharp rise in dollar funding costs. It is now crucial to see whether the large-scale policies of governments and central banks are effective and whether various risk indicators ease.

◆ Ha Geonhyeong, Researcher at Shinhan Financial Investment = To break the vicious cycle between financial instability and the real economy, central banks have adopted aggressive monetary policies. Primarily, the Fed, ECB, and Bank of Japan (BOJ) have supplied liquidity. The U.S. supports liquidity through $2.4 trillion in repo operations and currency swaps. The ECB has restarted its Long-Term Refinancing Operations (LTRO) and strengthened benefits under TLTRO III. Measures to prevent the spread of credit risk and financial institution insolvency have also been implemented. The Fed revived the Commercial Paper Funding Facility (CPFF) for the first time since the Lehman crisis. The Eurozone is already purchasing corporate bonds, and Japan announced increased purchases of CP and corporate bonds. The combined asset purchase pace of central banks such as the Fed ($750 billion) and ECB (€870 billion) is faster than ever. However, central banks’ monetary policy measures cannot prevent the fundamental slowdown in the real economy caused by COVID-19. They only serve to break the vicious cycle between financial instability and the real economy.

To preserve real demand, major countries’ fiscal policies are also accelerating. The overall scale is aggressive. The U.S. and Eurozone have announced fiscal spending equivalent to about 4% and 10% of GDP, respectively. However, looking at the details, the focus is more on liquidity support to suppress financial instability rather than fiscal spending that directly aids growth. Except for some countries like Germany, fiscal capacity is limited, making it difficult to implement bolder policy responses than during the 2008 financial crisis.