The world is watching in horror as COVID-19 spreads. The health emergency that first struck China is rapidly spreading everywhere. Hospital and healthcare systems around the world are under pressure, with a growing number of fatalities and patients requiring intensive or sub-intensive care.

Alongside these dramatic developments, in less than a month, stock markets have plummeted by 25% to 40% from their highs in early February. Slightly smaller declines have affected corporate debt, particularly in the high-yield category. Government yield curves have rapidly shifted upward, accompanied by increases in the spreads of bonds issued by governments with more fragile public finances.

As in 2008, economic policies must respond swiftly to events to try to limit severe damage to national incomes and employment, both in industrialized and emerging countries. Monetary policy responded quickly to the challenge almost everywhere. First, in early March, the Federal Reserve cut interest rates by 50 basis points and provided ample support to ensure the functioning of the secondary market for government bonds. A week later, the ECB, despite some glaring communication errors, approved a package of truly significant measures aimed at improving liquidity conditions and access to credit in the eurozone. Quantitative easing, which had already been reactivated with monthly purchases of 20 billion starting in November, was expanded by an additional 120 billion, available for the purchase of both public sector and corporate bonds. A series of weekly financing operations at negative rates for the banking sector (with full absorption of requests) was set up to ensure full support until June 24, 2020. On that date, a new wave of long-term financing operations will be launched, explicitly “targeted” at maintaining, if not increasing, the supply of bank credit to the real economy, potentially at rates even lower than the central bank’s deposit rate (-50 bps).

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