World leaders rush in to shore up global markets

Dealers at KB Kookmin Bank, where an electronic signboard showed the benchmark Korea Composite Stock Price Index dropping for the sixth consecutive session on Wednesday. South Korea has warned of a global credit crunch and said it was setting up cris
Dealers at KB Kookmin Bank, where an electronic signboard showed the benchmark Korea Composite Stock Price Index dropping for the sixth consecutive session on Wednesday. South Korea has warned of a global credit crunch and said it was setting up crisis funds to stabilise its financial markets. Elsewhere in the world, policymakers are scrambling to activate emergency measures.PHOTO: EPA-EFE

They take emergency action as pandemic cripples economies, disables services, severs supplies

HONG KONG • World leaders raced to bolster panic-stricken global markets yesterday, pouring liquidity into the financial system as investors everywhere dumped assets, switching to dollars in cash amid the escalating coronavirus pandemic.

Policymakers in the United States, Europe and Asia resorted to emergency action as the pandemic left their economies virtually comatose, with quarantined consumers, broken supply chains, paralysed transportation and depleted shops.

There were over 227,000 cases of coronavirus reported globally, including over 9,300 deaths linked to the virus. Governments across the world have pledged over US$1.9 trillion (S$2.7 trillion) in fiscal support.

The European Central Bank launched new bond purchases worth €750 billion (S$1.17 trillion) at an emergency meeting late on Wednesday, in a bid to prevent a deep recession that threatened to outdo the 2008-09 global financial crisis. "Extraordinary times require extraordinary action," ECB president Christine Lagarde said, amid concerns that the strains from burgeoning crisis could eventually tear apart the euro zone as a single currency bloc.

In the United States, the Federal Reserve rolled out its third emergency credit programme in two days, aimed at keeping the US$3.8 trillion money market mutual fund industry functioning if investors made rapid withdrawals.

The Money Market Mutual Fund Liquidity Facility unveiled on Wednesday will make up to one-year loans to financial institutions that pledge as collateral high-quality assets like US Treasury bonds that they have purchased from money market mutual funds. The Fed is in effect encouraging banks to buy assets from those mutual funds, insulating the funds from having to sell assets at a discount if they come under pressure from households or firms wanting to withdraw money.

On Sunday, the Fed slashed interest rates to near zero and pledged hundreds of billions of dollars in asset purchases, while President Donald Trump's administration drew up a US$1 trillion stimulus and rescue proposal. The desperate state of industry was writ large in Detroit, where the big three carmakers - Ford Motor, General Motors and Fiat Chrysler Automobiles - confirmed they would be shutting US plants, as well as factories in Canada and Mexico.

The British pound plunged to its lowest level against the dollar since 1985, as Bank of England Governor Andrew Bailey said he would not rule anything out when asked about printing money to give to individuals. Britain ordered all schools to close from today as the number of confirmed coronavirus cases rose 48 per cent on Wednesday.

Australia made a historic foray into quantitative easing after an out-of-schedule meeting yesterday and cut interest rates for the second time in a month.

South Korea warned of a global credit crunch and said it was setting up crisis funds to stabilise its financial markets. Its President Moon Jae-in yesterday pledged 50 trillion won (S$57.5 billion) in emergency financing for small businesses, along with other measures including relaxing loan terms for small businesses and offering low interest loans. The government also promised to guarantee loans for those hit by the virus impact.

Despite those moves, which together with other liquidity injections and stimulus announced in recent weeks, reached levels unseen since World War Two, nearly every stock market in Asia was in the red, with Seoul, Jakarta and Manila hitting daily loss limits that trigger the suspension of trade.

Malaysia unexpectedly eased its reserve ratio as part of moves to release RM30 billion (S$9.9 billion) of liquidity into the banking system. Bank Negara Malaysia cut the statutory reserve requirement ratio by 100 basis points to 2 per cent, effective today. It will allow principal dealers to use government bonds and Islamic notes of up to RM1 billion as part of reserve requirement compliance for next year.

The Philippine central bank delivered a larger-than-expected cut in its benchmark interest rate yesterday when it slashed the rate on its overnight reverse repurchase facility by 50 basis points.

Central banks in emerging countries from Brazil to India have stepped in this week to buy government bonds to prevent a jump in borrowing costs that would put more pressure on their economies.

Despite those moves, which together with other liquidity injections and stimulus announced in recent weeks, reached levels unseen since World War Two, nearly every stock market in Asia was in the red, with Seoul, Jakarta and Manila hitting daily loss limits that trigger the suspension of trade.

Almost every currency, except the euro and safe-haven yen, collapsed against the dollar.

J.P. Morgan economists forecast the US economy will shrink 14 per cent in the next quarter, and the Chinese economy will drop more than 40 per cent in the current one, one of the most dire calls yet on the potential scale of the fallout.

"We're in this phase where investors are just looking to liquidate," said senior interest rate strategist Prashant Newnaha at TD Securities in Singapore.

It was not just the dire state of the economy that panicked investors. Tensions between the world's two biggest superpowers reached some of their most elevated levels and other powers were locking heads over their reactions to the outbreak.

US President Donald Trump on Wednesday ratcheted up his rhetoric against China over the coronavirus, saying Beijing should have acted faster to warn the world and dismissing criticism that his labelling it the "Chinese virus" was racist. His tougher language marked an escalation in a bitter war of words between the world's top two economies.

REUTERS, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on March 20, 2020, with the headline 'World leaders rush in to shore up global markets'. Print Edition | Subscribe