- The Coronavirus spreading globally and the shutdown of large swathes of the economy will result in a sharp decline in Euro Area output and an equally sharp increase in debt levels. That’s because governments are trying to prop up demand with borrowings in order to prevent a total collapse of demand and output.
- At the same time, companies see revenues collapse while many of the costs are fixed. With companies borrowing for emergency purposes, corporate debt levels are rising too. The same reasoning also applies to households. Cash-strapped households will tap credit cards or personal bank loans to pay for consumption essentials and what not. Thus, total debt levels are set to rise, and most of it – in particular public debt – will be permanent (i.e. not reversed when output is back online).
- With borrowing needs rising in every sector of the economy, the ECB has had no choice but to ease monetary policy. Since policy rates where already at levels that the ECB believes are too painful for the banking system, the Governing Council settled on the only other option available: expanding the balance sheet.
- QE asset purchases for this year, which will include public sector bonds, corporate bonds, covered bonds and commercial paper, will be around 1.1 trillion euros. The ECB also loosened the collateral requirements for the TLTRO program, increasing the potential uptake to 3 trillion euros from 1.8 trillion euros. Current uptake has been moderate at about 600 billion euros.
- Below we put the Eurozone financial asset universe in perspective. Familiarize yourself with the numbers. Except for nominal GDP, they will show very, very large increases in the next 24 months: