Policy vs Pandemic: Contagion outpaces consensus on response

By Dan Burns and John Chalmers NEW YORK/BRUSSELS (Reuters) - As the contagion from the coronavirus pandemic wrecks the global economy, Western policymakers are scrambling to find a consensus on how best to contain the crisis shredding financial markets. While governments have agreed to ditch decades of fiscal orthodoxy to flood their economies with cash, arguments over how the vast sums of money should be spent have stalled measures to prevent a global recession becoming a debilitating slump. The U.S

Reuters March 24, 2020 00:05:27 IST
Policy vs Pandemic: Contagion outpaces consensus on response

Policy vs Pandemic Contagion outpaces consensus on response

By Dan Burns and John Chalmers

NEW YORK/BRUSSELS (Reuters) - As the contagion from the coronavirus pandemic wrecks the global economy, Western policymakers are scrambling to find a consensus on how best to contain the crisis shredding financial markets.

While governments have agreed to ditch decades of fiscal orthodoxy to flood their economies with cash, arguments over how the vast sums of money should be spent have stalled measures to prevent a global recession becoming a debilitating slump.

The U.S. Federal Reserve unveiled a major expansion of its lending programmes on Monday, ramping up efforts to shield the world's largest economy after party politicking stymied efforts to get a rescue package worth more than $1 trillion through the U.S. Senate on Sunday.

Despite the optimism from the Federal Reserve's unprecedented easing, Wall Street slipped on concerns over the mounting death toll from COVID-19 in the United States and growing evidence of the economic hit to corporate America.

Tuesday brings the first snapshot of the damage to the global economy with the release of preliminary corporate purchasing manager surveys from five of the world's largest economies, which are all expected to paint a picture of a widespread deceleration in business activity this month.

Finance ministers and central bank governors from the G7 wealthy said they plan to discuss responses to the coronavirus on Tuesday while the International Monetary Fund said it was ready to unleash its $1 trillion of lending capacity.

Analysts said the challenge for policymakers was to act faster.

"Swift implementation is of the essence, given the lingering level of stress in the markets," AXA Group Chief Economist Gilles Moec said.

'WE ARE AT WAR'

Across Europe, policymakers have deployed a raft of measures, collectively pledging hundreds of billions of euros to cut taxes and extend unemployment benefits as businesses shut their doors and lay off thousands of people.

Germany on Monday agreed a package worth up to 750 billion euros ($808 billion) to mitigate the damage to Europe's largest economy, with Berlin aiming to take on new debt for the first time since 2013.

The European Union's executive has expedited reviews of state aid schemes in a record two to three days to provide liquidity to small- and medium-sized businesses across the 27-country bloc.

The European Commission will also present a tool for the euro zone's bailout fund - the European Stability Mechanism (ESM) - which has 410 billion euros ($438 billion) of idle lending muscle. That could unlock unlimited purchases of sovereign debt by the European Central Bank.

But the idea of issuing EU eurobonds — debt backed by all members states — to raise more cash is still too much to stomach for some richer countries and hopes for a breakthrough at a virtual gathering of EU finance ministers on Monday are slim.

Spanish Prime Minister Pedro Sanchez, whose country is struggling with Europe's second-worst outbreak of the COVID-19 disease after Italy, says much more is needed.

"We are at war," he said on Sunday, calling on Europe to launch a massive, coordinated public investment programme akin to the post World War Two Marshall Plan.

However, diplomats say Germany and the Netherlands, which have large budget surpluses and falling debt levels, are wary of pooling risk with weaker EU economies, some still emerging from the fallout from the financial crisis nearly a decade earlier.

'OVER THE CLIFF'

In Washington, there is similar wrangling over how exactly "helicopter bailouts" should be spent even as some central bankers call for massive state support with no strings attached just to keep the U.S. economy on life support.

St. Louis Federal Reserve President James Bullard told Reuters that governments should match any lost wages and lost business, no questions asked.

In the week before last, the number of Americans filing for unemployment benefits surged by the most since 2012 to a 2-1/2-year high as companies in service sectors laid off workers.

Chris Rupkey, chief economist at MUFG in New York, said the data provided confirmation, if it was needed, that the economy had already "fallen over the cliff".

The U.S. Senate was working on Monday to overcome differences over the coronavirus rescue package. At the weekend, Democrats were holding out for more money to help state and local governments and hospitals while Republicans wanted quick action to give financial markets a sign of encouragement.

Eurasia U.S. Director Todd Mariano said the politicking over giveaways was only likely to delay the bill by a day or two.

Both sides said on Monday they were now close to a deal on the massive bill, which Treasury Secretary Steven Mnuchin said carried a $2 trillion price tag. But they remained at odds over provisions to help businesses and the amount of money to give to hospitals and state and local governments.

"The daily freezing of economic activity due to the pandemic's spread will subsume those concerns for now in the face of the overriding need to protect the U.S. economy," said Eurasia's Mariano.

(Editing by Carmel Crimmins and David Clarke)

This story has not been edited by Firstpost staff and is generated by auto-feed.

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