The rapid action of central banks to the Covid-19 crisis, which came upon us all too quickly, is essential, but inadequate. This crisis looks to have been the one to find the limits of what monetary policy can do.
A fiscal response is required and there are signs of the cash starting to flow from the public purse. Even Germany, which has been among the most resistant to loosening its purse strings, seems to no longer be thinking so frugally.
As part of Germany’s multibillion euro package announced last Friday in response to the coronavirus, it said it could increase the guarantee framework and expand the lending capacity of its development bank, KfW, to make it easier for companies facing economic difficulties to access its loans.
As a result, KfW says it stands ready to increase the size of its funding programme for 2020, should demand prove great enough for the loans it makes.
It is likely that other SSAs will follow suit in expanding their borrowing programmes — and so they should.
This is not the time for thinking about asset liability management or worrying about paying up more than usual. Rather it is about a collective public sector effort to pump a lot of money into ailing parts of the economy.
In times of crisis, SSAs are best positioned not only to provide much needed financing but to convene it from the capital markets as investor cash in need of a high credit rating is coalesced and distributed under the promise of a government-backed guarantee.
One example is Société de Financement de l’Economie Française (SFEF), an agency which was set up during the 2008 financial crisis with the sole mission to raise money in the bond market to support France’s banks and financial sector.
A government guarantee and top notch ratings allowed it do just that and it went on to raise around €70bn during its first year before closing down once French banks could access the market for funding again.
On a European level, eurozone periphery states were bailed out only when the EU assembled, in the teeth of the sovereign debt crisis, two supranational bailout vehicles — the European Financial Stability Facility and then the European Stability Mechanism.
Many expect the ESM to be called to the rescue again to help the eurozone deal with the coronavirus crisis with a recession all but inevitable.
There is even speculation that the ESM could adapt its mandate to become a "KfW for the eurozone" by guaranteeing loans across the eurozone, according to analysts at Rabobank.
If this does happen, the expectation is that ESM’s current funding programme of €11bn for 2020 – of which it has raised €5bn already – will soar.
But the ESM has so far been reluctant to respond in such a way.
At a press conference following a Eurogroup meeting on Monday, Klaus Regling, ESM’s managing director, said there was no need for “expanding the role of the ESM”.
That's a shame because it is the perfect borrower for the task of distributing cash raised in the markets to eurozone member states.
The missions of supranational institutions, from the World Bank, the International Finance Facility for Immunisation and the European Investment Bank to the smallest government agency borrowers, all have something to offer as the world fights back against the pandemic. And all can offer a haven to investors looking for somewhere safe to park money in these most volatile of times. In short, there should be a need for borrowing requirements to go up and investor demand to fund them.
“At times like this, the scalability of SSA funding may be of paramount importance,” a senior SSA debt capital markets banker told GlobalCapital this week. “This isn’t the time for caution, [the response is] going to have to be big.”
A big response from SSA — we’ve had one before and we need it again.