In this Wednesday, April 29, 2020 photo a man walks in front of the European Central Bank in Frankfurt, Germany. The European economy shrank by 3.8% in the first quarter, the most since records began, as business activity was frozen by shutdowns aimed at preventing the spread of the coronavirus. It was the biggest drop since statistics started in 1995 and bigger than the plunge in the midst of the global financial crisis in the first quarter of 2009 after the bankruptcy of U.S. investment bank Lehman Brothers. (AP Photo/Michael Probst)

European economy in record drop, central bank steps up aid

April 30, 2020 - 8:29 am

FRANKFURT, Germany (AP) — The European Central Bank is stepping up its measures to cushion the economy against a record downturn caused by the lockdowns on business due to the virus outbreak, offering large helpings of cheap credit to banks in hopes it will be passed on to struggling businesses.

The monetary authority for the 19 countries that use the euro currency on Thursday lowered the interest rate on the cheap, long term loans it provides to banks. It also offered a raft of new credit lines to banks at a quarter percentage point below its main interest benchmark, which is zero.

The idea is to support banks so they can keep lending to businesses, thereby supporting the economy, which suffered its biggest contraction in the first quarter since records began in 1995.

The ECB took the steps after official figures showed the eurozone economy contracted by a record 3.8% in the first three months of the year from the quarter before, the biggest drop since statistics started being kept in the mid 1990s and worse than the drop in 2009 during the Great Recession that followed the bankruptcy of US investment bank Lehman Brothers. The bank had already lowered its key interest rate benchmarks to record lows before the virus outbreak during a period of sub-par growth in Europe.

Unemployment rose only slightly, however, even amid the massive shutdowns that idled everything from florists to factories. The jobless figure rose to 7.4% in March from 7.3% in February, statistics agency Eurostat said Thursday. Millions of workers are being supported by temporary short-hours programs under which governments pay most of their salaries in return for companies agreeing not to lay people off.

U.S. unemployment rose to 4.4% in March from 3.5% in February, though the eventual picture is likely far worse. First-time claims for unemployment benefits have skyrocketed in the U.S. as 26 million people applied through the first three weeks of April.

The statistics in Europe likely understate the depth of the fall since shutdown measures were mostly put in place only in March, the last of the three months in the quarter.

Figures from France and Italy showed both countries fell into recession, defined as two quarters of economic contraction. The French economy shrank 5.8%, the most since the country's statistics agency began keeping the figures in 1949. The drop was particularly pronounced in services that involve face to face interaction, such as hotels and restaurants, retail stores, transportation and construction.

The new ECB measures come on top of already announced stimulus efforts that include an ongoing 750 billion euros ($825 billion) in bond purchases. Those purchases help drive down market borrowing rates for companies and governments. In particular, they have kept a lid on financing costs for heavily indebted Italy, one of the countries hardest hit by the outbreak. The bank did not cut its interest benchmarks, although the new credit offers amount to the same thing, since they lower the cost to banks of borrowing from the central bank.

The ECB did not change the amount of the bond purchases but said it was “fully prepared” to increase their size “by as much as necessary and for as long as needed.” ECB purchases of government bonds are a key stabilizer for the eurozone since governments will be borrowing heavily to pay for stimulus and because of falling tax receipts due to the virus outbreak.

The bank has also eased requirements for bank capital cushions, relief that means banks are not pressed to restrict lending in order to shore up their own finances. The central bank also made it easier for banks to tap cheap credit directly from the central bank by loosening collateral requirements.

Markets will now be looking for cues on the bank’s stance from ECB President Christine Lagarde at her post-decision news conference. Lagarde initially bobbled the bank’s response at its March 12 meeting by saying the bank was not involved in capping borrowing costs for indebted governments, a gaffe that was quickly withdrawn and followed by the pandemic emergency bond purchases that have helped keep borrowing markets relatively calm.

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