By Bartia Cooper, World Organization Analyst
Summary
As the global economy enters a major downturn due to the spread of COVID-19 (also known as the coronavirus), the US, EU, individual EU members, G7, G20 and the IMF have mobilized resources in response. The global health emergency caused by COVID-19 will not end with the recovery of infected individuals. The global economy also has to recover, as the virus has disrupted growth in the world’s major economies. The IMF has warned that even if the virus is rapidly contained, economic growth will be negatively impacted in nearly every country.[1] A “V-shaped, rapid recovery” is possible, but the economic outcome could be significantly worse depending on the spread of the virus.[2] World leaders and organizations have taken large steps to financially back small, medium and large businesses; develop new programs and strengthen pre-existing ones aimed at protecting individuals; and either increase lending to or freeze the debt of poorer countries that are expected to suffer the most from the pandemic’s consequences.
The US
In March, the Federal Reserve announced the establishment of temporary US dollar liquidity arrangements with foreign central banks, also known as swap lines.[3] The countries’ central banks included in this agreement are Australia, Brazil, Denmark, South Korea, Mexico, Norway, New Zealand, Singapore and Sweden, all of which will be added to the existing swap lines with the central banks of Canada, England, Japan, the EU and Switzerland. They are designed to provide foreign central banks with the capacity to continue using US dollars to fund institutions despite economic hardship.[4] The Federal Reserve also announced that it is prepared to purchase unlimited Treasury securities and mortgage-backed securities to support smooth market functioning, and announced the establishment of new programs to provide $300 billion in new financing to consumers and businesses.[5]
Also in March, President Trump signed into law a $2.2 trillion emergency spending bill meant to provide urgent relief to businesses, workers and families. The IRS has sent payments of $1,200 to most Americans and provided $1 trillion in business loans through newly-created programs.[6]
In April, the Fed announced support for the US government’s Paycheck Protection Program (PPP) to incentivize businesses not to lay off employees.[7] It also eased an asset restriction to allow Wells Fargo to participate in business lending programs before enacting a $2.3 trillion lending program which includes credit to PPP-loaning banks, $600 billion in loans to medium-sized firms, and efforts to buy downgraded corporate bonds as well as bonds issued by state and municipal governments.[8]
The EU
In March, the European Union allocated €37 billion from its budget to its Coronavirus Response Investment Initiative as well as small and medium-sized enterprises and labor markets.[9] In April, the European Central Bank (ECB) committed €750 billion to purchase assets that will maintain liquidity and reduce volatility in Eurozone financial markets.[10] Additionally, the ECB took steps to ensure the reliability of European banks and offer them liquidity over longer time horizons without conditions.[11] The overall purpose is to ease the financing conditions of firms and households to maintain the economy at large.
EU Members
The EU’s largest economies also implemented independent economic responses in March. Germany’s €750 billion package includes funds for taking equity stakes in companies, redistributing credit toward struggling businesses, and loan guarantees to prevent corporate defaults on debt.[12] Spain announced a €200 billion package like that of Germany to provide state-backed credits to companies, as well as a €700 million aid package to prevent the eviction of vulnerable people for six months after the end of the emergency.[13] France guaranteed up to €300 billion of corporate borrowing from commercial banks and devoted €45 billion to helping companies and workers.[14] Italy, the country hit the hardest in Europe by the spread of the virus, approved a €25 billion package to suspend loan and mortgage payments for companies and families, and to help firms pay workers temporarily laid off.[15]
The G7
Members of the G7 (Canada, France, Germany, Italy, Japan, the UK, and the US) unanimously committed to minimizing the effects of the emerging global economic crisis. A joint statement was issued on March 16th with a commitment to “work to resolve the health and economic risks caused by the COVID-19 pandemic and set the stage for a strong recovery of strong, sustainable economic growth and prosperity.”[16] The G7 statement emphasizes a reliance on international organizations and central banks to implement financial assistance on a global scale. Finance ministers are expected to coordinate on a weekly basis to implement these measures, and G7 leaders were scheduled to meet in April, May and June as well.[17] G7 finance ministers met with central bank governors virtually in April, when they called for more contributions to funds aimed at catastrophe relief and poverty reduction, and announced a readiness to provide suspension on debt service payments if G20 creditors join.[18] Soon after, leaders of the G7 met virtually and reached a new consensus regarding the need to provide aid to African, Southeast Asian, and island countries.[19]
The G20
G20 members are also facing pressure to respond. Saudi Arabia, which holds the presidency of the G20, hosted a virtual summit in late March[20] when plans were revealed to inject $5 trillion into the global economy, regularly coordinate to develop a G20 action plan, strengthen efforts to keep trade markets open, and increase cooperation with international organizations.[21] The G20 called on its trade ministers, the International Labor Organization, the Organization for Economic Cooperation and Development, the World Health Organization, the IMF, the World Bank Group, and other international and regional development banks to commit to a united front against the coronavirus.
In April, the G20 froze debt payments (both principal and interest) for the world’s poorest and least-developed countries for the rest of the year, calling on hundreds of private creditors to do the same and freeing more than $20 billion for these countries to use.[22] The freeze may roll into next year as well.
The IMF
The IMF has made resources available to developing countries that are vulnerable to economic devastation as a result of the pandemic. With about $100 billion (recently doubled from $50 billion in March[23]) ready for rapid loan disbursement starting in April under the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI), low income countries can take these loans with a zero percent (through RCF) or low interest rate (through RFI).[24] In March, the IMF also issued a joint statement[25] with the World Bank Group calling for a suspension of debt payments from countries of the International Development Association (IDA) so they may use their resources to tackle the coronavirus outbreak, which the G20 agreed to in April. Also in April, the IMF approved immediate debt relief for 25 countries, the tripling of the Catastrophe Containment and Relief Trust to $1.4 billion, and short-term liquidity as a backstop for member countries.[26]
[1] Gita Gopinath, “The Great Lockdown: Worst Economic Downturn Since the Great Depression,” IMF Blog, April 14, 2020, https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/. [2] AFP, “Coronavirus puts global recovery at risk,” February 23, 2020, https://www.bangkokpost.com/business/1864004/coronavirus-puts-global-recovery-at-risk-imf-to-g20. [3] Board of Governors of the Federal Reserve System, “Federal Reserve announces the establishment of temporary U.S. dollar liquidity arrangements with other central banks,” March 19, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200319b.htm. [4] Stephanie Segal, “Dollar Swap Lines: Welcome Support but Only Part of the Solution,” Center for Strategic and International Studies, March 19, 2020, https://www.csis.org/analysis/dollar-swap-lines-welcome-support-only-part-solution. [5] Board of Governors of the Federal Reserve System, “Federal Reserve announces extensive new measures to support to economy,” March 23, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm. [6] Erica Werner, Paul Kane, and Mike DeBonis, “Trump signs $2 trillion coronavirus bill into law as companies and households brace for more economic pain,” Washington Post, March 27, 2020, https://www.washingtonpost.com/us-policy/2020/03/27/congress-coronavirus-house-vote/. [7] Jeff Cox, “Here is everything the Fed has done to save the economy,” CNBC, April 13, 2020, https://www.cnbc.com/2020/04/13/coronavirus-update-here-is-everything-the-fed-has-done-to-save-the-economy.html. [8] Ibid. [9] “COVID-19 coronavirus outbreak,” European Council and Council of the European Union, March 27, 2020, https://www.consilium.europa.eu/en/policies/covid-19-coronavirus-outbreak/. [10] Isabel Schnabel, “The ECB’s response to the COVID-19 pandemic,” European Central Bank, April 16, 2020, https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200416~4d6bd9b9c0.en.html. [11] Ibid. [12] “Factbox: Global economic policy response to coronavirus crisis,” Reuters, April 14, 2020, https://www.reuters.com/article/us-health-coronavirus-economy-factbox/factbox-global-economic-policy-response-to-coronavirus-crisis-idUSKCN21W2AJ. [13] Ibid. [14] Ibid. [15] Ibid. [16] Patrick Wintour, “New vaccines must not be monopolised, G7 tells Donald Trump,” Guardian, March 16, 2020, https://www.theguardian.com/world/2020/mar/16/g7-leaders-to-hold-emergency-coronavirus-video-summit. See also The White House, “G7 Leaders’ Statement,” March 16, 2020, https://www.whitehouse.gov/briefings-statements/g7-leaders-statement/. [17] Jeff Mason, “Exclusive: Trump cancels G7 at Camp David over coronavirus, to video-conference instead,” Reuters, March 19, 2020, https://www.reuters.com/article/us-health-coronavirus-g7-exclusive/exclusive-trump-cancels-g7-at-camp-david-over-coronavirus-to-hold-video-conference-instead-idUSKBN21642Y. [18] G7 Information Centre, “Chair’s Summary: G7 Finance Ministers and Central Bank Governors Virtual Meeting,” April 14, 2020, http://www.g7.utoronto.ca/finance/200414-statement.html. [19] Ministry of Foreign Affairs of Japan, “G7 Summit Video Teleconference Meeting,” April 16, 2020, https://www.mofa.go.jp/ecm/ec/page4e_001061.html. [20] Aljazeera, “Saudi Arabia urges G20 virtual talk on coronavirus, shuts mosques,” March 17, 2020, https://www.aljazeera.com/news/2020/03/saudi-arabia-urges-g20-virtual-talk-coronavirus-shuts-mosques-200318031540587.html. [21] G20 Information Centre, “Extraordinary G20 Leaders’ Summit: Statement on COVID-19,” March 26, 2020, http://www.g20.utoronto.ca/2020/2020-g20-statement-0326.html. [22] Davide Barbuscia, Marwa Rashad, and Andrea Shalal, “G20 countries agree debt freeze for world’s poorest countries,” Reuters, April 15, 2020, https://www.reuters.com/article/us-health-coronavirus-g20-statement/g20-countries-agree-debt-freeze-for-worlds-poorest-countries-idUSKCN21X29A. [23] International Monetary Fund, “Questions and Answers on the IMF’s $50 Billion Rapid-Disbursing Emergency Financing Facilities,” March 19, 2020, https://www.imf.org/en/About/FAQ/50-billion-rapid-disbursing-emergency-financing-facilities. [24] International Monetary Fund, “The IMF’s Response to COVID-19,” April 17, 2020, https://www.imf.org/en/About/FAQ/imf-response-to-covid-19#Q4. [25] International Monetary Fund, “Joint Statement World Bank Group and IMF Call to Action on Debt of IDA countries,” March 25, 2020, https://www.imf.org/en/News/Articles/2020/03/25/pr20103-joint-statement-world-bank-group-and-imf-call-to-action-on-debt-of-ida-countries. [26] International Monetary Fund, “The IMF’s Response to COVID-19.”