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Big central banks are buying assets from a growing range of government bonds, corporate debt and consumer loans to help businesses and people cope with the coronvitus pandemic, and no one knows if they will be able to stop, Reuters reports.
The most optimistic scenario is one in which the number of infected people declines, business returns, and people return to work this year.
In the extreme case that the return of the virus requires isolation measures, the United States Federal Reserve (Fed) and other central banks will buy everything they can: government bonds, corporate bonds, perhaps even finance mortgages and wages.
The social, political and economic implications of suspending economic activities for long periods of time, sustained by governments and with difficulty returning to normal, could be profound.
The prolonged absence from work erodes competition. Business bankruptcies destroy wealth and reduce investment. Cheap money and cash transfers risk feeding speculative bubbles with assets that widen the gap between rich and poor.
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The Bank of England announced in May that it would buy more government bonds, while the British Treasury said it would accumulate debt to pay the wages of the laid-off employees.
“The unprecedented coordinated measures are similar to what might have happened if we had been the central bank of the Weimar Republic or Zimbabwe, which are two disastrous examples of governments ordering central banks to do so.” The difference is that no one in the government told the Bank of England what to do, “said Jan Vlieghe, a central bank official.
In Japan, which has been struggling with deflation for decades, a chronic price drop that is holding back income and economic growth, the Bank of Japan has steadily increased its asset holdings. The Bank of Japan currently holds almost half of the country’s government bonds in its portfolio, and last week announced that it would buy everything it needs in times of crisis.
The Bank of Japan, which held 4.7 percent of Japan’s corporate bond market in February and about 10 percent of short-term corporate loans, known as commercial notes, expanded its acquisitions.
In Europe and the United States, “unconventional” policy instruments were used in 2008 to combat the financial crisis that has spread to the real economy.
The Fed bought around $ 4 trillion in government bonds to reduce borrowing costs and used other means to guarantee market liquidity and remove past due mortgages from banks’ portfolios.
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The unprecedented measures, considered exceptional, had the function of protecting employment and supporting development.
But the coronavirus crash pushes the limits even further.
The repercussions for some European economies, especially for Italy, are so severe that analysts expect the European Central Bank (ECB) to use its prerogatives for a rescue plan.
One solution would be for politicians to include Italy or perhaps the entire eurozone in a bailout program that would allow the ECB to finance its national debt under a program called Absolute Monetary Transactions (OMT).
“It just came to our attention then. Once OMT is activated, it will be a perpetual situation,” said Salman Ahmed, chief investment officer at Lombard Odier Investment Managers.
ECB President Christine Lagarde said Thursday that the flexible pandemic emergency procurement program is a better tool for the current situation than UNWTO, which is an unused relic of the previous crisis.
The Fed closed a series of emergency and rescue programs launched to resolve the 2007-2009 crisis, and the Treasury made a profit. Currently, the Fed hopes that it will not have to make long-term commitments.
The central bank of EE. USA It has increased its portfolio of assets by around $ 2.5 trillion since the onset of the coronavirus crisis to a total of $ 6.7 trillion last week.
Cornerstone Macro analyst Roberto Perli expects the total to rise to around $ 9 trillion and fall later this year as conditions stabilize and loans are repaid.
But in the absence of a vaccine or clear treatment, central bank acquisitions may be just beginning.
The Fed already buys corporate bonds, lends to state and local governments, and agrees to finance up to 95 percent of bank loans for thousands of companies.
The debt of the private sector of the EE. USA It amounted to approximately $ 32 trillion at the end of last year, and the federal government debt is approximately $ 24 trillion, compared to the 2019 GDP level of $ 21.7 trillion.
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