Breakingviews - Christine Lagarde will need an even bigger bazooka

European Central Bank President Christine Lagarde testifies before the European Parliament's Economic and Monetary Affairs Committee in Brussels, Belgium February 6, 2020.

LONDON (Reuters Breakingviews) - A woman’s work is never done, the adage goes. European Central Bank President Christine Lagarde has taken a series of steps to help euro zone economies cope with the coronavirus, including the launch of a 750 billion euro asset-purchase programme less than two months ago. Euro zone politicians’ failure to act as forcefully means she will have to do yet more.

True, Lagarde’s efforts have helped banks’ liquidity and market financing conditions, according to an ECB survey on Tuesday. Her asset buying is also containing southern euro zone countries’ borrowing costs. 10-year Italian government debt is yielding 1.80%, 1.22 percentage points less than March peaks and below levels that prevailed for the first half of 2019. Also, while the gap between 10-year Italian and German bond yields has grown this year, it’s narrower than it was for more than half of last year.

It’s taken a lot to achieve even this much. The average daily pace of buying for the ECB’s pandemic purchase scheme has varied between 5 billion euros and 6 billion euros in the three weeks to April 15, Pictet calculates, adding that this particular programme would be exhausted by mid-October at this rate. Slowing down may not be an option.

Politicians have yet to agree details of how to help highly indebted countries, notably Italy, with little clarity over how big a so-called recovery fund will be or how it will work. That means investors would likely push up weaker countries’ bond yields if the ECB were to step back. Meanwhile, the three-month Euribor benchmark, which tracks the average interest rate at which a group of European banks borrow from one another, last week rose to its highest in more than four years, in a sign that lenders in countries like Italy and Spain are having to pay more to borrow from peers.

Lagarde can help by increasing the size of the pandemic purchase programme, perhaps by another 500 billion euros, to remove any doubt it might run out this year. She can also push the rate at which lenders tap longer-term lending facilities even further into negative territory, or buy some junk-rated bonds. All this may not happen at Thursday’s policy meeting. But the problem is, like her predecessor Mario Draghi, the more Lagarde does, the more likely European Union leaders are to squabble and procrastinate.


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