Two weapons against the virus: Fiscal and Monetary policies

Drastic times call for drastic measures. As this COVID-19 novel continues to unravel it is simmering a crisis for the world’s economy and financial markets. At the time of writing, this virus has already infected over 400,000 global cases. As stated by others in their articles, the World Health Organisation has declared this virus to be a global pandemic, meaning that it will have a sustained global impact. With many countries’ economies already slowing down before the pandemic, COVID-19 poses a serious risk of sending many countries into recession. In fact, it has sent the U.S. stock market, the largest in the world, into a bear market.

If we take the financial crises of 2008-2009, the global markets corrected by 60% in a period of 14 months whilst this virus, caused markets to plunge by around 30% in less than a month. Hence severe restrictions are being imposed on citizens everywhere in the hope of tackling the pandemic, and containing the human cost of the crisis. A wide range of countries and cities are going into lockdown, having a toll on top country income industries due to travel and shopping constraints. These measures will have extremely rigid consequences for the global economy in the short term. In response to this crisis, governments and central banks all over the world have enacted fiscal and monetary stimulus measures to counteract the disruption caused by the coronavirus.

Let us start off with the country where this pandemic started – China. The People’s Bank of China (PBOC) implemented several policy measures aimed at providing monetary stimulus. Up until recently the bank increased its reverse repurchase operations to $245 billion. A reverse repurchase agreement, or “reverse repo”, is the purchase of securities with the agreement to sell them at a higher price at a specific future date. These financial instruments are also called collateralized loans, buy/sell back loans, and sell/buy back loans. Reverse repos will be used by businesses, such as banks to loan out more capital or investors to lend short-term capital to other businesses suffering cash flow issues. In order to support this measure, the PBOC reduced its one year to medium term lending facility rate by 0.1% to 0.05% depending on the credit worth of the company. As a fiscal stimulus the country has announced a significant package as part of its 2020-2021 budget. This includes policies such as paying the sum of $1,200 cash to all adults who have a permanent residence, paying one-month rents for public housing and cutting taxes. China also put pressure to reduce interest loans both for personal and business use. They also increased old-age and disability benefits.

The European Central Bank (ECB) announced that it would spend €750 billion in bond purchases to calm down sovereign debt markets and corporate bonds, in the strongest signal in the euro area to date that it was ready to fight against the economic fallout of the coronavirus.

“Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate,” ECB president Christine Lagarde wrote on Twitter. The program will come on top of the €120 billion of additional asset purchases announced by the ECB. It will only be concluded once the bank “judges that the coronavirus COVID-19 crisis phase is over, but in any case, not before the end of the year,” the ECB said in a statement. The ECB also decided to ease some of its collateral standards to make it easier for banks to raise funds which in turn will allow them to accept more loans.

In the beginning of this virus, Italy started off with an injection of a little more than €3.5 billion. Today this stimulus has increased to €25 billion available through an emergency fund, with approximately €12 billion of this earmarked for immediate health care spending, bridge loans to small and medium-sized enterprises, postponing tax payments, and some broad protection for workers. France is offering guarantees to corporate debt to the tune of €300 billion, in addition to allowing companies to defer tax payments, while temporarily suspending households’ energy bills and rent. Germany is planning to increase borrowing by as much as €150 billion this year to pass a €156 billion supplementary budget. The government led by Chancellor Angela Merkel is also setting up a €500 billion bailout fund to take stakes in critical industries.

The newly divorcee, the UK, is guaranteeing up to £330 billion of corporate loans, in an effort to convince companies not to lay off workers in light of lower activity levels. Downing Street also announced £20 billion in tax and spending measures, in addition to the £12 billion support package to tackle the pandemic.

On the other side of the pond, the Trump administration proposed a stimulus package that could total more than $2 trillion to protect individuals and businesses. This comes on top of an $8 billion package announced a few weeks ago. Details of the third package are being ironed out and should be released imminently. The stimulus needs to be approved by Congress, but it seems to have broad bipartisan support.

Global equity prices slumped more than 30% since their February highs. As a result, clients are asking if it is the right time to buy. What history has thought us is that there is a light at the end of the tunnel. We are told that a vaccine will be created and distributed in the coming twelve to eighteen months – a glimmer of hope. In my opinion once the vaccine is in our hands, the market can start to form a U shape and bounce back.

While we expect that fiscal and monetary stimulus will fuel some cyclical upside when the COVID-19 crisis is over, risky assets are really being dragged around the tightening of financial conditions leading to tremendous economic uncertainty. The lack of liquidity is getting noticed, and anything done to address it matters. Recent measures have helped, particularly in the investment grade area. Circumstances like these show us the importance of diversification through different asset classes. Some investors might seek this period as an opportunity to invest given the low prices. It is difficult to pin point the perfect time to invest, however, drip feeding into the markets or adopting a cost averaging strategy could be suitable solutions at this point. All this adds up to the importance of having a good relationship with your investment advisor that knows your risk tolerance and needs, in order to guide you in this turmoil period.


Matthew Miceli Donnelly, ICIWM, B.Com Banking & Finance & Management (Melit.), B.Com (Hons.) Management, MBA (Melit.), is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]