The US government has caught up, but the ECB still has some way to go

The US government has caught up, but the ECB still has some way to go

Gilles Moec, Group Chief Economist at AXA Investment Managers, comments on the global COVID-19 crisis and latest fiscal policy announcements from the US Fed and ECB:

The Fed is still “plugging the holes” they had in their stimulus programme. They have received from the Treasury the authorisation to add commercial paper to the list of assets they can purchase, while the re-activation of the Primary Dealers facility will further support this segment of the market, incentivising the major credit institutions operating in the US to hold those securities for refinancing at the NY Fed. This is likely to add to the pressure on the ECB to add (non-financial) commercial paper to its corporate sector purchase programme (CSPP) universe very quickly. There is one last “hole” that remains at the Fed: corporate bonds.

Mnuchin’s announcements on fiscal policy lack details at this stage, but the overall quantum (c5% of GDP) looks impressive. The most spectacular part is the direct cash handouts directed at households. This is not entirely new in the US – Obama did something similar in 2009, although it was more targeted than what Mnuchin seems to have in mind here – but it will probably trigger some “envy” in Europe.

The conditions are different. The handout is a way to offset the weakness of “automatic stabilisers” in the US, while in Europe social transfers can fairly quickly replace lost labour income. We also need to see if the US government is as generous as the European ones in terms of guarantees offered on corporate debt. These do not sit on the deficits for accounting reasons but they are central to providing the private sector with a “bridge” while it is dealing with the lockdown.

In my opinion, the cash handouts are not “helicopter money”. Helicopter money would be currency “printed” by the central bank and issued to households without any counterparty on the central bank’s balance sheet (basically the CB would be in “negative equity”). Here, because of QE a large part of the programme will be funded by the Fed, but in exchange for government securities. It may seem to be a subtle difference but it actually matters.

I think proper helicopter money is next to impossible in the Euro area. Conversely, direct government cash handouts to households partly funded by the ECB through QE is possible, even if the limit on this would be lower than in the US – as long as the ECB sticks to its limits on public debt holding.

At the end of last week the US and the Euro area were mirror images: the US Fed went further than the ECB, but the US government had been more hesitant than its European counterparts. Now the US government has caught up, but the ECB still has some way to go.

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