Fallen Angels, the Frugal Four and Christine Lagarde. How the ECB may have saved your job today

Christine Lagarde

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4 June 2020

What did the European Central Bank do today?

The ECB, under its newish boss Christine Lagarde, took a blunderbuss approach to protecting Europe’s economy in the face of the covid-19 economic crisis to come. It decided to launch a far bigger programme of bond buying “quantitative easing” than anybody had expected, opening the way to snap up a further e600 billion, taking the total to e1.35 trillion.

Not only that, but it said the plan could last to the middle of next year rather than the end of 2020.

“Quantitative easing”: remind me?

This is the strategy, forged in the last financial meltdown, where central banks offer to buy up bonds at times of crisis from investors such as banks and pension funds.

The idea is, if a central bank makes it clear that it is ready and willing to buy them, the interest rate they command will fall as they are deemed to be less risky assets to hold. Equally importantly, it pumps new money into the financial system and stops it getting gummed up as investors fear to buy or sell.

The ECB has several different pots of QE. Today’s announcement was about the programme called the Pandemic Emergency Purchase Programme, launched in March to buy European government and company bonds. It was created to stem a looming crisis where the markets for these bonds were freezing up as investors feared holding countries’ debt. In mid-March, investors didn’t even want to hold UK government bonds.

PEPP was hoped to keep down borrowing costs for governments – particularly Italy, which had been hardest hit by covid - and companies.

But it also eased the feeling of panic that was stopping banks and pension funds from investing anywhere.

How does it affect me?

In several ways. If you work for a European company, your job is probably safer now than it was this morning.

The expansion to the PEPP programme makes it easier and probably cheaper for your employer to borrow money at a time when pretty much every business has been suffering severe cashflow problems due to covid-19.

Because the ECB pledged to buy so much more than anyone had expected, it had a big impact on the interest rates, known as yields, on bonds.

Greek and Italian yields fell to their lowest levels in three months.

The programme should boost the economic prospects for the Eurozone as a whole, most economists reckon.

All good news, then?

Not exactly. the whole package is being done because the global economy is in such a mess.

Lagarde said the ECB now expects the eurozone economy to crash 8.7% this year before rebounding to 5.2% growth in 2021 and 3.3% in 2022.

Are all European companies going to benefit?

No, the PEPP scheme is only allowed to invest in “investment grade” debt. That means the bonds issued by companies and governments which have the highest level credit rating score.

Many have lost their investment grade status due to the impact on their finances of covid.

They’re known as “fallen angels” in the jargon.

Economists had expected them to be included in the PEPP scheme today but Lagarde made no mention of returning them to paradise.

Will it stem the rise of extremist politics on the continent?

It certainly won’t do any harm.

This kind of stimulus is designed to help weak companies survive without having to fire people, and it’s poverty and disenfranchisement that seems to fuel the extremists.

Such thinking was a factor behind a European move last month to create a e750 billion covid recovery fund. This was aimed at helping those areas such as Italy most affected by the economic impact of the disease.

In truth, with no major elections looming any time soon, extremism wasn’t looking like a really imminent threat.

When is the recovery fund going to happen?

Hard to tell.

Unlike the QE plans, the money in this pot has to be filled by the taxpayers of the eurozone’s nation states.

And, given that there is no centralisation of eurozone countries' tax and spending, the contributions have to be approved by each country individually.

While France and Germany are up for it, four holdouts – Sweden, Holland, Denmark and Austria - aren't. These Northern countries have earned themselves the name the Frugal Four.

And Greece thought Germany was bad.

How did Lagarde do?

Hmm. Jury’s out. At today’s press conference, her replies were faltering and – to the annoyance of some – she appeared to be reading from a script.

Lagarde is not a central banker by training, unlike her brilliant predecessor Mario Draghi. As a former Bank of Italy governor, he knew how to fight fires.

Former IMF chief Lagarde has plenty of ropes to learn.

That said, Ben Bernanke was a bit wobbly when he started at the US Federal Reserve, so give her time.

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