Macro policy response: 1) It is reasonably clear that targeted support is required, which is likely to be needed for around three months, to sustain corporate cashflows, service all creditors, and maintain wages.
2) In most parts of the developed world this should be done by the fiscal authorities, with the assistance of central banks. CBs can offer technical assistance, particularly in regard to the financial sector. They can also make clear that there is *no* budget constraint.
3) Central banks should offer cover by saying ‘there is huge fiscal space, given where bond yields are, and furthermore we will buy any bonds the government needs to issue.’ Interest rate cuts are irrelevant at this point.
4) The exception is clearly the Eurozone. The ECB will probably have to act alone, as always. This also means it needs to do more, as always.
5) Fortunately there is lots it can do. It can target the real economy directly and do TLTROs for 12 mths at fixed negative rates, conditional on these being used to re-finance existing facilities with small and medium-sized businesses. Price these funds at -2%.
6) Obviously the fiscal rules should be suspended and Germany and France should launch a huge targeted fiscal programme. Italy is however is constrained by the market. Hence, the ECB should accelerate its QE, and target Italian bonds.
7) There is nothing to stop the ECB doing TLTROs targeted at key sectors which are affected. Again these should be priced at fixed negative rates if the funds are used to refinance existing loans.
8) The Eurozone’s deepest structural weakness is that Italian debt is treated by markets as a risk asset. The ECB must break this correlation with overwhelming financial force.
