The market sell-off due to the 2008 global financial crisis (GFC) lasted from 2007-2009, with the economic slowdown persisting for much longer. During this period, central banks and governments all around the globe implemented a great deal of economic stimulus, both monetary and fiscal in nature. On August 2007, there were early signs of a financial breakdown in the banking system. The global market took about a year (from September 2008) to recognize the meltdown, which was too late for any quantitative easing program to prevent the chain of bankruptcies. About 6 months later in April 2009, interest rates were cut to bones as an attempt to revive the economy. The economy only started to recover after 2011 when the stimulus programs are aimed towards the public instead of private.
This time around (for the current Cov-19 crisis), we can see that governments all around the world are taking action faster than before. Many countries have already reduced their interest rates and introduced unconventional economic rescue packages in hopes of cushioning the economic impact of the virus pandemic and help bridging a recovery.
Besides cutting interest rates to 0%, the Federal Reserve (Feds) announced several major stimulus packages in which majority would last until September 30, 2020, unless extended.
- March 15: The Feds restarted quantitative easing with the purchase of $500 billion in treasuries and $200 billion in mortgage-backed securities
- March 16: Increased reverse repo operations by another $500 billion.
- March 17: The Feds introduced two new programs to help preserve market liquidity.
- Commercial Paper Funding Facility (CPFF) – The Treasury authorized up to $10 billion to help cover loan losses
- Primary Dealer Credit Facility – offer short-term loans to banks secured by collateral such as municipal bonds or investment-grade corporate debt
- March 18: The Feds introduced the Money Market Mutual Fund Liquidity Facility (MMLF) – to lend money to banks which lending will not affect bank capital requirements.
- March 23: Expanding its asset purchases of both treasuries and mortgage-backed securities by an additional $625 billion. The Feds noted that they are “committed to continue purchasing however many assets are needed to support the smooth functioning of markets.”
The above suggests the US was and is focusing on stabilising the financial sector first before the public sector. The Feds providing liquidity to banks would ensure cyclical money movement in the economy, allowing loans to prevent any collapse. The Feds is also trying to prevent bond/ loan markets from collapsing by buying out as many assets. A collapse of the bond market would spark a financial crisis similar to the 2008 GFC.
On the other hand, fiscal policies are still in the midst of implementation. The public still demands more aid to households and small and medium business. As of 24 March, the Senate failed for the second time to pass about $2 trillion worth of aid to the workers. The people are also waiting for the ‘phase 3’ of the stimulus package, of which the draft was announced on 19 March. Fiscal policies are equally important as it would prevent a freefall of the private sector and consumer confidence.
Australia had announced two stages of stimulus packages. Interest rates are down to 0.25% and a total of $189 billion injected into the economy. This includes:
- $17.6 billion for the Government’s first economic stimulus package
- $90 billion from the RBA
- $15 billion from the Government to deliver easier access to finance
- $66.1 billion in today’s economic support package.
Unlike the US, Australia’s government, Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority have taken coordinated action to support the flow of credit in the Australian economy. In particular, RBA announced a package on 19 March 2020 that will put downward pressure on borrowing costs for households and businesses. On top of that, the SME Guarantee Scheme implemented on 22 March mainly allowed a 6-month deferment of all loan repayments and injected funds to SME businesses.
Other Measures implemented are also focused on keeping Australians in work, as well as support household income. By giving out a certain fixed amount to household individuals and early superannuation.
The temporary stimulus package solutions should stabilise business and consumer conditions/confidence, labour market, personal sector, the monetary and financial sector. With an immediate impact on business confidence, money supply, effective exchange rate and household saving ratios.
In addition to state lock-downs, it should slow down the rate of virus spread while buying time for the vaccine to be introduced to provide permanent solutions. Once the borders are open and business back in operations, then national accounts like GDP, export and import can be recovered.
The Rest of the World
Similarly, the rest of the world are funding banks, SME and household consumers with stimulus packages at different degrees. The following provides a summary list of some major announcements.
- Bank of England is buying $228 worth of U.K. government bonds and corporate bonds and cutting interest rates by 0.15% to 0.1%.
- UK pumped about $37 billion in fiscal stimulus on
- A tax cut for retailers
- Cash grants to small businesses
- A mandate to provide sick pay
- Expanded access to government benefits for the self-employed and unemployed
- $379 billion in business loan guarantees
- $23 billion in business tax cuts and grant funding to businesses hit worst by the virus, such as retail and hotel businesses.
European Central Bank
- Long term refinancing operations (TLTRO), a program of long-term loans to banks to keep liquidity steady.
- Pandemic Emergency Purchase Programme (PEPP) – Purchase roughly $800 billions of additional bonds throughout 2020.
- State bank lend $610 billion to companies
- 49 billion to aid tax cuts and unemployment benefits
- 327 billion bank loans to businesses
- 28billion to fund SME businesses and income to laid-off workers
- Total of $19.6 billion package to stimulate the economy
- $4 billion on programs including boosting mask production and stopping the virus from spreading to nursing homes.
With all these economic relief programs in place, one could only hope that it will be enough to prevent a global economic meltdown.
Blog article written by Cheryl Seah, Research Analyst, Maqro Capital