FRANKFURT MAIN: The European Central Bank scrambled on Friday to ease eurozone jitters a day after President Christine Lagarde spectacularly failed to convince financial markets with big-bang measures against the coronavirus shock.

In the first major test since she took office in November, Lagarde detailed a battery of interventions to cushion the impact of the virus on the economy.

But unlike the US Federal Reserve and the Bank of England, ECB policymakers stopped short of a headline interest rate cut.

Lagarde also raised eyebrows with her sometimes brusque tone — notably loading crisis-fighting tasks “first and foremost” onto governments — which seemed to mark a departure from predecessor Mario Draghi.

During the Italian’s eight-year term, markets looked above all to the central bank for reassurance through events like the eurozone sovereign debt crisis and Brexit.

Harshest of all was her declaration that the ECB is “not here to close spreads”, or minimise the difference in yield between debt issued by highly-indebted eurozone nations like Italy and Germany’s benchmark bonds.

The measure shot up in the wake of her news conference, although it had retreated by Friday morning.

‘Mishap’, or worse

“I’ll restrain myself to calling (Lagarde’s) words a ‘mishap’, I’d use a different word if I weren’t a minister,” Italian economic development minister Stefano Patuanelli told Rete4 television.

While Lagarde’s answer was technically correct — the ECB is above all mandated to pursue price stability as measured by inflation — the scale of the misstep was clear from Lagarde’s unprecedented choice to speak with broadcaster CNBC immediately after her press conference.

“The package approved today can be used flexibly to avoid dislocations in bond markets,” she said — meaning the ECB could target purchases of Italian debt to calm markets, as long as it respects overall limits on sovereign holdings.

“We can concentrate on particular jurisdictions according to the circumstances,” Bank of Italy governor Ignazio Visco told Bloomberg TV.

In fact, central bank governors agreed to beef up their existing 20 billion euros ($22.3 billion) per month asset purchase programme with an additional 120 billion, spread as they see fit across 2020.

Those purchases could be front-loaded in the coming weeks to deal with the heaviest blows to the economy from the coronavirus and measures to control it, ECB sources said on Friday.

But some damage to the weight of the ECB’s word on markets and its relationship with governments had already been done in Lagarde’s appearance.

“Clearly, the objective was to put maximum pressure on national governments to act, but this resulted in maximum pressure on markets instead,” judged Pictet Wealth Management strategist Frederik Ducrozet.

“The European Central Bank has announced its initial decisions. Will they be enough? I don’t believe so,” French President Emmanuel Macron said Thursday evening.

She knows

“Madame Lagarde knows very well that she made a mistake,” former Italian prime minister Matteo Renzi told France’s Europe 1 radio.

“We have to give families and small- and medium-sized firms liquidity, not yesterday’s bureaucratic responses.” In fact, ECB chief economist Philip Lane used a first-ever blog post on the central bank’s website to pick up the pieces and hammer home exactly such a targeted response early on Friday.

The central bank will offer a new round of massive lending operations to banks and easier conditions on an existing scheme known as TLTRO for lenders passing credit on to smaller firms.

That showed the ECB was “safeguarding liquidity conditions in the banking system” and “protecting the continued flow of credit to the real economy,” Lane wrote.

ECB officials said Friday that the changes to the lending scheme offered more effective, targeted support than a symbolic cut to the already-negative interest rate on banks’ deposits in Frankfurt would have.

From markets, “criticism of the ECB was not in the composition of the policy package, but in some of the messaging from President Lagarde. This amounted to an important — if unfortunate — communication failure,” Deutsche Bank chief economist Mark Wall commented.

A former high-flying corporate lawyer, French finance minister and International Monetary Fund chief, Lagarde is the first-ever ECB head without a deep formal economics training, promising in December to bring “my own style” to central bank communications.

Published in Dawn, March 14th, 2020