Europe risks economic shock similar to financial crisis - Lagarde

Christine Lagarde said Europe risks a major economic shock similar to the financial crisis unless leaders act urgently on the coronavirus, and indicated the European Central Bank will take steps as soon as this week.

The ECB president told European Union leaders on a conference call late on Tuesday that without coordinated action Europe "will see a scenario that will remind many of us of the 2008 Great Financial Crisis," according to a person familiar with her comments. With the right response, the shock will likely prove temporary, she added.

Ms Lagarde said ECB policy makers are looking at all tools for their meeting this week, particularly ones to provide “super-cheap” funding and ensure liquidity and credit don’t dry up, said the person, who declined to be identified because the call was private.

But Ms Lagarde added that measures can only work if governments throw their weight behind them too, with steps to ensure banks keep lending to businesses in affected areas, said the person.

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The dramatic intervention suggests Ms Lagarde will push the ECB governing council to act fast with monetary stimulus. Many economists expect the ECB to cut interest rates on Thursday and possibly expand its quantitative easing program. It could also retool its operations that offer banks cheap funding.

Recession

The message on the call serves as both a dire warning and a dramatic plea for authorities to step up efforts to prevent the virus dragging Europe into a recession. Even before the outbreak, ECB officials had repeatedly called for governments to raise public spending as monetary policy reaches its limits.

Italy, where a national lockdown has been imposed, is hardest hit so far by the spread of the virus, and is facing a crippling slump.

Ms Lagarde warned that the damage will likely spread to other countries. She praised actions taken so far in some areas, but demanded more, the person said.

Failure to act boldly now would raise the risk of “the collapse of part of your economies,” Ms Lagarde told leaders. – Bloomberg