My take on the ECB decision (thread). First, the link to a thread I made during the press conference Q&A (a bit confused at times. Live tweeting is not my thing!):
Then, my first impression.
a) There is an attempt to discharge on governments most of the reaction to a shock that will be "significant even if temporary". Lagarde said clearly that what she fears most is insufficient fiscal response at the Eurogroup on Monday.
a) There is an attempt to discharge on governments most of the reaction to a shock that will be "significant even if temporary". Lagarde said clearly that what she fears most is insufficient fiscal response at the Eurogroup on Monday.
It is hard to disagree. To target firms' liquidity problems one cannot count on banks alone (especially where they are weak). I welcome the provisions contained in the Italian 25bn euros) package, such as lifting payment obligations (VAT, contributions, taxes) on businesses
b) On what the ECB commits to do, I have mixed feelings. Besides technicalities that I did not study yet, there will be two sets of measures.
The first set concerns cheap liquidity to banks, in order to ensure continuing supply of credit. A new long term refinancing scheme (LTRO) and better terms (in terms of allowance and rates) in the existing ones amount to a subsidy to banks.
Lagarde insisted that the ECB has in mind Small and Medium Enterprises; to be honest, it is unclear how can monetary policy reach them specifically.
But overall, my sentiment is that on cheap and easy financing to banks and (hopefully) to firms, there is little more ECB could do
But overall, my sentiment is that on cheap and easy financing to banks and (hopefully) to firms, there is little more ECB could do
The second set of measure is a ramping up of QE, with additional 120€bn (until the end of the year). Lagarde seemed to suggest that the ECB could use flexibility to overcome issuer quotas, meaning that maybe more help will be given to countries like Italy.
Private bonds purchases will be part of the enhanced QE.
While she was probably on purpose ambiguous on issuer quotas, Lagarde was very clear in stating that the ECB will not keep the spreads in check
This was a huge mistake. And this is what countries like Italy would need most. Fiscal policy is the tool that can be better targeted towards supporting the supply side of the economy and preventing liquidity problems from evolving into bankruptcies.
So governments should be put in the conditions not to worry, at least for a while, of markets. The ECB should have said the exact opposite: "we commit to freezing the spreads for n months so that governments can focus on supporting their productive sector".
Lagarde said the opposite. Here are Italian rates. Is this surprising? 
To conclude, my assessment is: as good as it gets on financing the banking sector, and cross finger that this is enough to keep credit flowing, but
disappointing on support of expansionary fiscal policies, which contradicts the emphasis on the need for a fiscal response "first and foremost". My only hope is that that was just lip service, and that spreads will be kept under control
end
end
unroll @threadreaderapp
It is all put, a bit more structured, and with a couple of factual mistakes, on my blog fsaraceno.wordpress.com/2020/03/12/lag…
