Christine Lagarde under fire for ECB coronavirus response

Comments from central bank’s chief labelled a ‘catastrophic failure’ by eurozone economist

European Central Bank boss, Christine Lagarde, has come under fire after she refused to echo her predecessor and say the bank would do whatever it takes to protect the eurozone from a recession triggered by the coronavirus outbreak.

The normally sure-footed Lagarde, speaking after the ECB put in place measures to support commercial bank lending, suggested it was the responsibility of governments to protect highly indebted eurozone countries rather than the central bank.

Referring to calls for the ECB to go further and cut interest rates to ease borrowing costs for highly indebted eurozone countries, Lagarde said: “We are not here to close [bond] spreads, there are other tools and other actors to deal with these issues.”

Going on the offensive, Lagarde said it was the responsibility of governments to act to support growth.

“An ambitious and coordinated fiscal stance is now needed in view of the weakened outlook and to safeguard against the further materialisation of downside risks,” she said.

Within minutes of her comments, the spread between what investors will buy and sell Italian bonds for widened, sparking fears of a repeat of the 2012 eurozone debt crisis when the then ECB boss, Mario Draghi, declared he would do “whatever it takes” to preserve the euro.

The interest rate on 10-year Italian bonds jumped from 1.3% to 1.8% as concerns quickly escalated that the bonds issued by Europe’s most indebted country posed a greater risk to investors without the full protection of the ECB.

The FTSE 100 tumbled more than 60 points adding further to a near-record breaking drop of 10.87% to 5,237 points. The German Dax index dropped 12.2% to 9,161, while the Madrid Ibex slumped 14.% to 6,390.

Lagarde later attempted to backtrack in TV interviews, telling CNBC: “I am fully committed to avoid any fragmentation in a difficult moment for the euro area. High spreads due to the coronavirus impair the transmission of monetary policy.”

But her comments failed to prevent analysts describing the package of ECB measures and Lagarde’s comments as inadequate or worse.

Claus Vistesen, the chief eurozone economist at Pantheon Macroeconomics, said Lagarde’s comments “will go down as a catastrophic failure”.

He said: “It is one of the world’s largest central banks, and today markets were crying out for a backstop; they got anything but.

“The ECB has grossly underestimated the severity of the situation, and failed to exploit its position as lender and liquidity provider of last resort. Redemption is possible, but it won’t be easy,.”

Earlier this week, the Bank of England provided a package of measures to boost bank lending in a synchronised move with the Treasury, including a 0.5 percentage point cut in the bank’s base interest rate. The US Federal Reserve has also cut interest rates by 0.5 percentage points to support households and businesses through the worst of the virus epidemic.

Andrea Enria, the chair of the ECB supervisory board, said: “The coronavirus is proving to be a significant shock to our economies. Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties.

“The supervisory measures agreed today aim to support banks in serving the economy and addressing operational challenges, including the pressure on their staff.”

The ECB said it will conduct a new kind of targeted longer-term refinancing operation (TLTRO) aimed at banks lending to small- and medium-sized businesses (SMEs). These TLTROs will be conducted under even more favourable conditions than previous ones, it said, penalising banks if they fail to expand their lending to SMEs.

It also announced an additional “envelope” of €120bn (£107bn) of net asset purchases until the end of the year, effectively expanding its already vast quantitative easing programme.

Marchel Alexandrovich, a senior European economist at investment firm Jefferies, said: “This is an underwhelming package from the ECB. There are better TLTRO terms, but no rate cut, and only €120bn of extra QE to be added until the end of the year.

“On the ECB’s own forecasts, the euro area in now likely entering a recession. So, one obvious question is: ‘What will the ECB do next if the crisis escalates?’”

The European Banking Authority, an industry regulator, added that it would delay its EU-wide stress test by a year so that banks can focus on the challenges posed by the coronavirus outbreak.

Instead, the EBA said it would launch a transparency exercise to determine how much risk they hold on their balance sheets.

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Phillip Inman

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