Anchors away! Structural change in energy economics with Russia/Saudi Arabia aiming at US shale oil and expansion of renewables. Deep temporary economic shock from the coronavirus. Markets mistrust of central banks’ firepower and fiscal authorities. Both anchors needed. /1
The is not like 2008 because it’s an economic shock that didn’t start in the financial sector. Money markets not frozen,no concerns with banks’ solvency.Look though to the spread between interbank unsecured rates and the OIS rates as sign of mistrust within the financial system/2
That spread has increased but not really spiked.The main responsibility of central banks now is to avoid the economic shock translating into a financial crisis. Meaningful liquidity provision needed, both general and specialised, including various forms of credit easing. /3
Increased QE buying private and public debt instruments. Unconditional longer maturity liquidity to banks. Specific subsidised liquidity lines directed to SMEs lending by banks. Supervisors should condone some temporary forbearance regarding evergreening loans to viable firms /4
A significant fiscal stimulus is essential for Europe to avoid a recession.Increased public expenditure, not tax cuts that in the present environment would be mostly saved, not spent. Sovereign bond yields lower and lower should facilitate decisions /5
The panicky search for safety led to US 10y and 30y bonds below 1%. German 10y at -0.90% and 30y at -0.5% !!. Big shortage of safe assets. Will Germany finally understand all the benefits of a European safe asset? /end ( for now!)
