The carnage in the stock market and the economy from the rapid spread of the coronavirus into a pandemic will be used in the history books. Going from an all-time high in the stock market to a bear market with losses averaging 25% to 30% in even the greatest companies is far from the norm. This all points to what was expected to be another year of growth on top of an 11-year-old bull market and an almost unavoidable recession. In times like this, governments take action with stimulus and rescue packages to stabilize their economies and to save companies and jobs.
24/7 Wall St. has offered multiple alternative ways, beyond rate cuts and bond buying, that the U.S. Federal Reserve, the government and other agencies to stabilize and stimulate the economy. Germany just took its own major steps, and the United States may want to follow suit. Thursday’s $1-trillion-plus package from the Federal Reserve Bank of New York was actually more of a facility for liquidity in bonds rather than an economic package.
Germany is the most powerful country in the European Union. It was the first to signal deep and bold action, and it has offered the reason for market stability on Friday. European stocks were hit hard, with Germany’s DAX index falling almost 22% from last Friday through Thursday’s closing price.
Olaf Scholz, Germany’s finance minister, is effectively taking the gloves off, with no limits on the money needed to stabilize its economy. The initial amount is €550 billion. That was stated to shore up Germany’s companies and effectively to offer unlimited credit to keep its businesses operating. The finance minister also said Germany can continue if the current situation lasts longer, implying that there is more to come if needed.
Germany is even willing to take on new debt to help finance the package. While that pledge is admirable, investors need to consider that even the mighty Germany has been under a negative interest rate policy for some time. The 20-year bund yield was last seen at −0.95%, followed by a yield of −0.59% for the 10-year bund and −0.25% for its 30-year bund.
Among the plans to stabilize the economy are loan guarantees for companies affected by the coronavirus. Germany even has indicated that it would not rule out taking “temporary equity stakes” in some companies, if needed.
Central banks and politicians alike know that this virus is a global story. After all, a COVID-19 pandemic, and what is obviously a silly oil price war between Russia and Saudi Arabia after a failed OPEC+ meeting, cannot be limited to one or even a few countries. It’s a mess we are all in together.
Germany reportedly prepared a stimulus plan last summer as a contingency in case what was a slowing economy were to turn into a deep recession. If this move is taken, it effectively means that Germany will go beyond worrying about its balanced-budget operations, and the move would exceed the €500 billion package that Germany offered during the 2008 financial crisis.
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