An overview of worldwide rescue packages after a catastrophic stock market week

DM

Administrator
Staff member
Last week was brutal for the international financial markets. The MSCI World index closed 2.5% lower on Friday, losing over 12% for the second consecutive week. The broad Dow Jones Industrial Average was hit even harder with a weekly loss of 17%. The losses were modest in Europe, where all nations introduced new measures and codes of conduct for their citizens and new bailout packages, both from the central bank and national governments. Thanks to great promises of help and the prospect of a hopefully slower spread of COVID-19 through social distancing and self-isolation, the European stock index Euro Stoxx 50 was able to close only 1.5% lower than the previous week. The German index DAX registered a minus of 3.3% at last, whereby it must be said that the week before had turned out extremely catastrophic with minus 20%.

The US dollar has continued its gains. The most traded currency pair, the EUR/USD, closed at $1.0688, almost 3.8% lower than a week ago, when the exchange rate was above $1.11.

Of course, rescue packages were announced not only in Europe. I would like to give a brief overview of the individual measures here:

United States:

It is planned to launch a stimulus package that will run between $750 billion and $1 trillion. The adoption of the programme should take place in the next few days, because the details still need to be negotiated. It is already certain, however, that there will be a so-called "helicopter money" in America, i.e. cheques of about $1,200 for each citizen. Particularly affected sectors of industry are to be helped by means of cheap loans.

Meanwhile, the US Federal Reserve has already taken decisive action and lowered the reference rate to 0-0.25%. In addition, the Fed has activated swap lines with other central banks in order to make US dollars available as quickly as possible and thus relieve the stress in the swap market, which also has an impact on the hedging costs of institutional investors. In addition, the Fed is once again buying up bonds on a large scale and granting aid loans to banks.

China:

The Chinese government is relatively cautious. The government around Xi Jinping has announced investments in infrastructure projects. However, in view of the high level of government debt, no other major measures have yet been decided. After the quarantine of the area around Wuhan showed success in the form of declining infection figures, the isolation of society is slowly being reduced. In view of the enormous economic damage caused by the standstill, economic activity is apparently to be restarted. Observers fear a second wave of infections.

United Kingdom:

After schools and universities were closed earlier, restaurants and the much-loved British pubs are now also being affected: they must all be closed from now on to slow down the spread of the virus. The Bank of England has lowered its key interest rate to 0.1% and is also buying more bonds again. The BoE's purchase programme amounts to nearly GBP 700 billion. The government is supporting these measures by providing financial aid to workers who have suffered wage losses and ailing companies whose sales are falling off. The measures include tax breaks, cheap loans of over GBP 300 billion, and one-time payments of up to GBP 25,000 to small businesses, such as restaurants and sole proprietors.

Euro zone and European Union:

The European Central Bank recently passed a major aid package called the "Pandemic Emergency Purchase Programme" (PEPP). This includes 750 billion euros in bond purchases. Both government and corporate bonds are to be purchased. Together with the current bond purchase programme, this could increase the ECB's monthly purchase volume from 20 to over 100 billion euros. That would be more than during the euro crisis almost ten years ago. The measure has already led in a first step to a narrowing of the spreads of Greek and Italian bond interest rates to those of German Bunds; a narrowing of the spread is generally seen as a sign of a lower risk of a European financial crisis.

In addition to the ECB, the EU also took action: In order to support the individual nations, aid is also to be made available at EU level. For example, an expansion of the "European Stability Mechanism" (ESM) is on the agenda, as are new aid loans worth billions for companies in need.

Germany:

Germany, the economic driving force in Europe, is currently benefiting from its budgetary discipline of recent years. Since the national debt is comparatively low at 60% of GDP, particularly large aid measures can currently be decided here. The Federal Ministry of Finance and the Federal Ministry of Economics and Technology spoke of loans and guarantees "without limits", although this may be seen in a similar light to the announcement made by Angela Merkel and Peer Steinbrück during the financial crisis in 2008 that all German deposits were safe. Certainly a promise of this dimension is not tenable. Nevertheless: As a first step, an aid package of 40 billion euros for small entrepreneurs is to be passed on Monday. It will probably be a combination of interest-free loans and subsidies. More flexibility for companies on the subject of short-time work is to be achieved by adjusting the available "short-time work allowance" ("Kurzarbeitergeld") by 10 billion euros. This will allow companies to cut working hours and thus their wage costs without having to resort to dismissals immediately. 60% of the loss of wages on the employees' side will be covered by the state. The bigger hammer, however, will be a nearly 500 billion euro federal aid fund. This is currently under discussion and could also be used for a partial nationalization of ailing companies to avoid a buyout by foreign financial investors. Candidates for a state participation by the federal government are Lufthansa or even a company like Daimler, which is currently valued extremely low on the stock markets despite its well-running activities. The model for this rescue fund for the real economy is likely to be the "Sonderfonds Finanzmarktstabilisierung" (SoFFin) rescue fund for banks in the financial crisis. The fund currently being planned could even surpass it in terms of volume.

In addition, the freedoms of citizens in Germany are currently being gradually reduced: Following the decision to close schools and restaurants throughout the state, strict initial restrictions on the movement of citizens have already been imposed in Bavaria. It can be expected that such restrictions, including a curfew, will also be imposed nationwide next week.

Italy:

Italy, currently the most affected country in the EU, has launched a 25 billion euro aid package. Here too, short-time work is to be made easier. The deadlines for filing tax returns have been extended and there are to be one-off payments to the unemployed. New dismissals are even prohibited in the short term. Italy is relatively restricted by its high national debt. Nevertheless, there are to be state guarantees for aid loans from banks and companies amounting to 300-350 billion euros. Italy has already nationalized the ailing airline Alitalia. This has cost half a billion euros.

France:

Similar to Italy, France also has a state guarantee for bank loans to companies of 300 billion euros. An aid package of 45 billion euros was also approved. It includes money for short-time work and support for small businesses.

This list could be continued for almost every affected country in the world, but for the time being this overview should suffice. It is quite possible that the financial aid provided by central banks and governments can even exceed that provided during the financial crisis. The generation living today has never before experienced current events in this way. There are severe cuts in personal freedom, which are particularly difficult to cope with in democracies, and the existence of many family businesses is being threatened. Unemployment rates will undoubtedly rise worldwide. As a consequence, after production stops on the supply side, the demand side will also collapse considerably. A recession seems inevitable. It will be all the more important that all governments, which are now reacting frantically, develop a plan to restart their economies when the infections subside, without immediately causing a new wave of infections.

These uncertainties naturally also affect the financial market. After painfully record-low volatilities in 2019 and early 2020, there has now been an equally painful explosion of volatility. Times have changed. Even in a low-interest environment, liquidity is suddenly in demand. Long-term success will be decided by those who now react calmly and drive on sight, without losing sight of the big picture. Because this crisis will also come to an end.
 

DM

Administrator
Staff member
Update:

Germany has issued a ban on contact. Although this rule is not a curfew, it prohibits groups of more than two people. Family members are excluded from the rule.

Italy, however, has further restricted freedom of movement within the country, as the number of fatalities continues to rise. Greece is considering a curfew. Spain has extended the already existing state of emergency.
 
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