1. Japan has opened the bazooka with perhaps the biggest stimulus package of any country. The government unveiled a 108.2 trillion yen ($992 bn) stimulus package, amounting to a headline figure of 20% of GDP. The economy is expected to shrink by 20% this quarter as the lockdown gets extended by the rising number of cases.
2. Hong Kong, one of the freest economies and a bastion of free markets, appears to have gone the farthest with supporting business sector. The government has said that it will fund 50% of the affected workers' salaries for 6 months, capped at $1160 a month. HK's duration of support is what stands out, since others too have announced such measures,
Singapore is doling out 75% of salaries capped at the equivalent of $3,231 for the month of April. The U.K. is covering 80% of wages for three months with a ceiling of $3,107, starting at the end of April. The U.S., meanwhile, is giving out enhanced unemployment benefits and a one-time check of $1,200 as part of its $2 trillion stimulus bill. It isn’t aiming directly to keep people in work. Australia is one exception: The government there will pay wage subsidies of about $948 every two weeks per employee for six months.
3. Germany has gone the farthest in offering to take public equity in struggling companies. Other countries have stopped with focusing business support in terms of ensuring liquidity. But as the pandemic persists, these businesses will run down their equity and the liquidity support will increase their leverage and thereby default risk. Equity infusions therefore become essential.
But among the major economies, especially in Europe, Germany is perhaps the only country which can afford such equity infusions. This in turn would allow German companies to emerge from the crisis stronger and be in a position to buy up distressed foreign competitors and capture markets. In other words, the state aid would have created an unbalanced playing field across industries.
In this context, a group of economists have suggested the establishment of a pan-European equity fund, financed by the EIB. They write,
This fund, which would underwrite the issue of new equity capital in companies across Europe, would also be open to participation from long-term investors such as global asset management firms, pension funds and sovereign wealth funds. It could be accompanied by the issuance of very long-term bonds.
It’s crucial to establish strict rules to determine how this fund should choose which companies to invest in. First, it would have to finance businesses that were hitherto profitable and growing before being hit by the COVID-19 crisis, not those that were already financially stressed. Second, the fund would only have to finance companies that hadn’t already received state aid, because its purpose would be to rebalance capital injections between firms supported by governments and firms that aren’t. Third, the funded companies would be required not to distribute dividends or repurchase their own shares for some time, to prevent the injection of capital from benefiting existing shareholders rather than enabling new investment. Fourth, the compensation of the top management of these companies would be frozen at pre-crisis levels, say for three years. Fifth, the fund would be governed by managers, independent of the national governments, and wouldn’t acquire controlling stakes in the companies in which it invests, so as not to become a source of disruption itself.
The economic rationale for creating such a fund is that it would allow European companies to invest and compete only based on their profitability, regardless of the fiscal capacity of their respective states.
4. Amidst all these stimulus measures, African economies face a debt reckoning. The continent's debt service payments to bilateral creditors in 2020 amounts to $14 bn, with the Chinese topping the list of creditors. It will be interesting to see how this will get restructured. But it is the large sovereign bond and corporate debt exposure that will be a challenge to restructure in a sustainable manner.
5. Very informative set of graphics on income and wealth inequality in the US on the eve of the pandemic.
6. A tab of the costs being incurred by European governments from wage-subsidy programs,
The French government said Friday that it was helping 785,000 businesses pay the wages of 9.6 million workers, almost half the workers in the private sector. In Italy, 250,000 businesses employing four million workers had applied for help by April 7. In Germany, the Federal Labor Agency had received requests from 725,000 companies to use its Kurzarbeit program, as of April 15. The metalworkers industry association, which includes automobile makers, estimates 1.2 million workers in the industry are covered, with another million expected to join shortly. Ireland's... government said Monday that while 46,000 businesses had applied for help in paying wages, 584,000 were receiving a supplementary coronavirus unemployment benefit. That means 40% of Ireland’s workforce—either jobless or in state-backed short-time programs—is being helped by the government... Through its Covid-19 Pandemic Unemployment Payment, the government pays €350 a week, well above the usual unemployment benefit... According to the U.K’s Office for Budget Responsibility, if 8.3 million workers are supported by the government for three months, the cost will total £42 billion ($52.22 billion). That isn’t far short of government borrowing in a normal year.
7. The US has passed a fourth stimulus package amounting to $484 bn. It includes a $320 bn for the fund created under the Paycheck Protection Program (PPP), a small business lending programs, $75 bn for hospitals, and $25 bn for expanded corona testing. The stimulus was necessitated by the original $349 bn funding for the PPP program running out within less than two weeks.
The PPP program has been dogged by controversies over larger and publicly listed companies getting loans from the fund. The government has claimed that these companies will be asked to return their loans, and that more than 1 million companies with less than 10 workers received these loans in the first round.
8. Stephen Roach thinks that inflation may not be far away given the stimulus and the re-shoring of global value chains.
Consumer retrenchment will persist only until a Covid-19 vaccine arrives. If this takes another 12 to 18 months, as scientists believe, pent-up demand will build as never before. Assuming that governments continue to support worker incomes in the meantime, the release of this pent-up demand could spark an inflationary spiral that markets are not expecting.
The seeds for such an outcome are also being sown by the disruption of global supply chains... Before Covid-19 hit, the Bank for International Settlements estimated that global inflation would have been about one percentage point higher were it not for the supply-chain enabled efficiencies of global production. Therein lies the inflationary risk for the post-coronavirus world. As part of a growing backlash against globalisation in general, and China in particular, nations are threatening to bring their offshore platforms back home... Reshoring may well increase the security of supplies. But it will also involve higher-cost domestic producers. Moreover, the anti-China weaponisation of supply chains promises to riddle global production systems with bottlenecks. Inflation will not return while the recession deepens. But as recovery takes hold, a new world of fragmented, more expensive supply chains may tell a different story.
9. The German constitutional court has waded into the ECB's bond buying program.
The court on Tuesday ordered the German government and parliament to ensure the ECB carried out a “proportionality assessment” of its vast purchases of government debt to ensure their “economic and fiscal policy effects” did not outweigh its policy objectives, and threatened to block new bond-buying unless the ECB did so within three months. In recent weeks the central bank has vastly expanded its quantitative easing programme of bond-buying to mitigate the economic consequences of coronavirus. It has bought more than €2.2tn of public sector debt since launching quantitative easing in 2014 in an attempt to halt a slide in inflation.
The bond-buying programme has long been controversial in Germany, where critics argue the central bank has exceeded its mandate by illegally financing governments and exposing taxpayers to potential losses. Ruling in a long-running case about the legality of the bond-buying, the court in Karlsruhe said the German government and parliament had “a duty to take active steps against” QE “in its current form”. The complainants — a group of about 1,750 people, led by German economists and law professors — first brought their case in 2015. They argued the ECB was straying into monetary financing of governments, which is illegal under the EU treaty. The case was referred to the European Court of Justice, which ruled in favour of the ECB in 2018, but it went back to the German constitutional court, which on Tuesday rebuffed part of the ECJ’s earlier ruling, calling it “untenable from a methodological perspective”.
This will be an interesting area to follow in the days ahead. The intensity of the reaction to this decision is surprising. The German court is after all only urging prudence and caution at a time when the monetary policy decisions are creating several moral hazards and other distortions.
10. Robert Armstrong in FT writes about the alarming rise of global corporate debt, and offers some suggestions,
Containing corporate debt by regulating lenders is also unlikely to work. After the financial crisis, bank capital requirements were made stiffer. The leverage merely slithered off of bank balance sheets and re-emerged in the shadow banking system. A more promising step would be to end the tax deductibility of interest. Privileging one set of capital providers (lenders) over another (shareholders) never made sense and it encourages debt. The time for reform may finally have come. The 2017 US tax law limited the deductibility of corporate debt to 30 per cent of income. The deduction should be scrapped altogether with a decrease in corporate tax rates to compensate, so the net effect on bottom lines is zero.
Next, executive bonuses should be tied to pre-leverage return measures, such as return on assets or on total capital, rather than after-leverage measures such as return on equity or earnings per share. Debt can increase EPS, but not the value of a business. Bosses should not be paid more for borrowing more. These changes may not be enough. As the economist Andrew Smithers points out, if companies are going to deploy more equity, someone has to want to buy it — even as an ageing population pushes portfolios towards debt. Investors’ preferences will have to change; this may mean a rethink of the way public and private pensions are structured.
11. Government of India announces its stimulus spending amounting in the aggregate to 10% of the GDP, including the liquidity support measures from the RBI. It includes packages for MSMEs, migrant labour and farmer, agriculture and marketing, natural resources and FDI. This is an examination of the numbers, and this and this explains the MSME package. This is an assessment of the implementation challenges with these measures.
How do the various financial institutions assess the on-budget share of the Rs 20 trillion stimulus?
How do the various financial institutions assess the on-budget share of the Rs 20 trillion stimulus?
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