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$10 Trillion to Fight the Pandemic – Is It Working?

June 10, 2020 By Mircea Vasiu

The monetary and fiscal stimulus in response to the coronavirus pandemic has reached $10 trillion globally. Despite the staggering amount, the question is – it is enough, or will governments and central banks have to come up with more?

The issue, it seems, is not the unwillingness of fiscal and monetary authorities to do more, but the repercussions of such actions. What if the virus is here to stay for longer than expected? What if a second outbreak comes?

Economic-Assistance Packages of all Sizes

The economic-assistance packages and the stimulus actions taken by 54 countries differ in size, depending on the level of the outbreak and each country’s possibilities. In some cases, some countries commit to spending as much as 40% of the GDP to fight the COVID-19 crisis.

One thing is for sure, and a common thing among all countries – the size of the economic packages far exceeds the economic effort needed to offset the damages of the 2008 financial crisis.

The economic-assistance packages taken by governments and central banks focus on three pillars – maintain financial stability, maintain household economic welfare, and help companies survive the crisis. The first to step in were central banks that immediately provided liquidity to the financial system.

In particular, the Fed opened USD-based swap lines with other major central banks in the world, to provide a liquidity injection on a global scale. When possible, central banks reduce the interest rates further (some countries/regions that already had negative interest rates had a hard time doing that).

When it comes to supporting the household economic welfare, the main challenge was/still is, to keep the disposable income intact. Also, it meant providing a buffer for the potential loss of employment.

As for companies, the first ones to receive support were the small and medium-sized businesses. Companies were allowed to restructure debt and defer loans while the government-guaranteed funds, postponed fees, and receivables, and accelerated government payables.

The crisis had a particularly strong impact on emerging markets. To start with, the USD appreciation is more acute against emerging markets currencies than developed ones. Most debt in that part of the world is denominated in USD, and thus the governments have less funds to dedicate to fighting the crisis. Egypt, for instance, spent almost 10% of its GDP only to service its debt – rising debt due to the USD appreciation.

All in all, challenging times ahead remain. As the world enters Q2 2020 and economies reopen, the focus shifts to how the virus copes with social distancing and other measures to prevent its further spread. Any second-wave outbreak will require even more actions from governments and central banks.