Monetary Response to and Financial Implications of Covid-19

Abstract

Chapter 3, entitled “Monetary Response to and Financial Implications of Covid-19” of the book titled “Covid-19 and Capitalism - Success and Failure of the Legal Methods for Dealing with a Pandemic”, aims to map out the monetary response of a number of monetary policy institutions—in particular the ECB, the Federal Reserve and the IMF—to the economic crisis caused by the Covid-19 pandemic. Methodologically, this study relies mainly on information that said monetary institutions themselves make available in abundance and to which extensive reference has been made, supplemented by the opinions on this subject of various leading academic researchers. These have also been referred to, each time under the explicit acknowledgment that the institutions and authors to whom reference has been made, have in many cases been the original authors of the relevant, thus cited positions and opinions. This exercise of mapping the monetary response to the Covid-19 pandemic in a detailed manner has been deemed necessary with a view to evaluating the impact of the monetary policy pursued in the period 2020 to H1 2021, as characterized by its neoliberal policy design, whereby this policy has also been checked against the author’s own research findings in several of his earlier works (to which reference has been made each time). It thus appears that, once again in the monetary history of the past half century, the aforementioned monetary institutions have mainly tried to combat the crisis created by Covid-19 by resorting to the classic neo-liberal recipes, including, on the one hand, an increase in money creation (leading to more public and private debt) and, on the other, an announcement that after the crisis, there will again be a need for a strict austerity policy. This immediately shows the fundamental weakness of neoliberal monetary policy, namely that it fights the malady with remedies that are essentially the same as the causes of the malady, which makes the monetary foundations of the Western world more problematic with each new crisis. By way of conclusion, this chapter therefore closes with the question of whether there is not a need for an alternative approach to the monetary system in line with proposals that the author has already put forward in some of his earlier work. For this, reference is also made to Chap. 11 of the present book “Covid-19 and Capitalism”.

3.1 Monetary Response to Covid-19 in General

In the decade leading up to the outbreak of the Covid-19 pandemic, largely as a result of the severe financial crisis of 2007–2008 and the way countries and their monetary authorities responded to it, the major advanced economies were exposed to disinflationary pressures that had paved the way for an extended period of persistently low inflation. This had in many jurisdictions led central banks to keep their key interest rates close to zero, or even negative in some cases.¹

As a result of these low interest rates, the scope for further interest rate cuts had gradually diminished, which then had led many central banks to resort to a range of so-called “unconventional” monetary tools. These include “forward guidance”, as well as various “balance sheet expansion measures” (usually referred to as “quantitative easing”), which aim to increase the degree of monetary expansion,² but which at the same time come very close to monetary financing.

Both the monetary authorities and a number of academics studying their behaviour believe that these unconventional measures have proven to be effective in responding to situations where conventional monetary policy had seen interest rates approaching their lower bound, implying that the margin for conducting an interest based monetary policy had become as good as inexistent (except for applying negative interests which central banks were not keen in doing). As a result, following the financial crisis of 2007–2008, the abovementioned unconventional monetary measures had become part of the monetary policy toolbox in what has been called the “new normal” for monetary policy,³ particularly at the level of the US Federal Reserve, the ESCB (EU) and the Bank of England.

In some economies, such as the United Kingdom and the United States, there had already been some degree of interest rate normalisation prior to the Covid-19 epidemic. In the euro area, on the other hand, interest rates were by then still at historically low levels.⁴ This latter fact can be explained by the fact that, following the severe financial crisis of 2008, several EU Member States, including Greece, Italy, Spain … had been faced with severe financial difficulties that had put enormous pressure on the European Monetary System and the European System of Central Banks (ESCB), while these countries were themselves subject to severe austerity policies (cf. also Chap. 4.).

While monetary policy can help societies cope with temporary liquidity constraints—as happened during the 2008–2009 financial crisis, which Stiglitz referred to as the “Great Recession”—it cannot solve solvency problems, nor can it stimulate the economy further when interest rates are already close to zero.⁵ This could only happen if the monetary systems started to finance government activities directly, which in the EU they have been unwilling to do so far (because of a set of rules that are referred to as a “ban on monetary financing”). We shall come back to this issue later (cf. Chap. 11).

However, as a result of the Covid-19 pandemic, and in particular the severe containment measures that many countries around the world resorted to, many of these countries began their struggle with the economic consequences of Covid-19. Because of Covid-19, both advanced and developing economies fell back into recession which had not happened since the financial crisis of 2007–2008. According to Benmelech and Tzur-Ilan, already by April 2020, the world economy was projected to have contracted sharply by −3% in 2020, which implied a 6.3% decline from a pre-Covid-19 projection.⁶

Both governments (based upon fiscal policy measures to be further dealt with in Chap. 4.) and central banks (based upon monetary policy measures) responded to the Covid-19 pandemic and the economic crisis it brought along. This led to a deployment of fiscal and monetary tools on a scale that the world had never seen before. These policies were, moreover, advocated by global economic institutions such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD).⁷

However, from the outset of the Covid-19 pandemic, countries have been limited in their use of these fiscal and monetary tools. As noted, many high-income countries entered the Covid-19 crisis with interest rates that were already historically low. Similarly, their public debt levels were already very high (and in some countries extremely high), which had gotten even worse in the aftermath of the financial crisis of 2008.⁸

In this context, monetary institutions were faced with the challenge of assisting the economies of their countries which, by February 2020, had begun to suffer severely from the Covid-19 pandemic.

The monetary authorities in a wide variety of countries—in particular the ECB and the US FED—have done this by deploying special central bank programmes of “temporary debt assumption”. According to Blakeley, it is even more important to understand what these imply for the economy than to understand the legal and/or technical details of each of these programmes which are extensive. The economic meaning of these programmes basically comes down to the fact that the governments of the jurisdictions concerned (in the United States through the US FED, and in the euro area through the ECB) demonstrated their willingness to support the debts of American, respectively European, consumers, companies and states, in order to prevent bankruptcies and/or to place a floor under falling asset prices (amongst which especially the market prices of financial assets). According to Blakely, this may at first glance seem like a positive sequence of short-term measures, as few would argue that the US FED, respectively the ECB, should simply have allowed consumer, corporate, state and municipal bankruptcies to happen. But according to the same author, this “new monetary (and fiscal) approach” at the same time revealed something profound about the nature of modern capitalism. As more corporate bankruptcies lie ahead, particularly in vulnerable sectors such as retail, the state is signalling that whatever debt has been accumulated during a period of upswing—and whatever use it this has been put to in the past—when a crisis hits, the corporate world will be bailed out.⁹ The implications of this message—which had already been sent by many central banks around the world during and in the aftermath of the financial crisis of 2008—are profound. The message sent out in 2020–2021 has, moreover, remained consistent with the message that had been sent during the 2008 financial crisis, albeit with a much broader scope. The message was that the risks of running a good business have been “socialised”, while the gains still remain private. As of March 2020, virtually all private companies in the United States and the EU thus became public(ly financed) companies, with shareholders and corporate executives protected, while the taxpaying public pays the price.¹⁰ According to Blakeley, the result of such a policy of infinite quantitative easing can only have been to continuously drive up (financial) asset prices at the expense of tax money, thus further exacerbating wealth inequality.¹¹ But in truth, piling new debt on top of old unpayable debt—the same recipe that has been used during and after the 2008 financial crisis—will most likely only postpone the inevitable accountability.¹²

3.2 Monetary Response by the European Monetary Union

3.2.1 General

3.2.1.1 Background of the ECB Monetary Policy from 2008 Until 2020

The Covid-19 epidemic in the euro area has caused a double-dip crisis, more in particular a health crisis and an economic crisis. Both crises were, moreover, unprecedented in recent history. In response, the European economic authorities reacted strongly. According to Aguilar et al., the ECB in particular played a crucial role in the initial tightening of the financial conditions triggered by the Covid-19 pandemic in order to prevent the crisis from having a more serious impact on the real economy.¹³

Prior to the Covid-19 pandemic, the prospect of continuing a monetary policy based on persistently low interest and inflation rates had already implied a significant challenge to the conduct of monetary policy.¹⁴ Nevertheless, based on information from pre-pandemic yield curves, European financial markets expected the prevailing short-term interest rates to remain at levels significantly below their pre-2008 financial crisis-average values for some more years to come,¹⁵ especially given the high borrowing needs of various EU Member States that had suffered severely from the impact of the 2008 financial crisis.

The emergence of the Covid-19 virus in the euro area thus occurred against a backdrop of low inflation, and significant monetary stimulus, in particular (1) “quantitative easing” measures, with (2) key interest rates at historically low levels, (3) substantial new net asset purchases under the APP programme, and (4) a fixed schedule for long-term liquidity tenders under the TLTRO III programme.¹⁶

Notwithstanding this monetary climate, the ECB still responded quickly to the Covid-19 crisis, notably by resorting even more to “non-market conform” measures.¹⁷

As a result, a trend in EU monetary policy which had already started during and after the 2008 financial crisis, has been perpetuated, implying that for more than 12 years in a row, the EMU has been pursuing a monetary policy that may no longer be entirely in line with the neoliberal premises that the founding fathers of the 1992 Maastricht Treaty had in mind at the time. One of the most striking measures, which has not been entirely consistent with neoliberal monetary policy, was undoubtedly the prolonged maintenance of low, zero and/or negative interest rates, although the continued easing of the conditions under which financial institutions—and thus indirectly their various client-borrowers—had access to such “cheap” ECB credit may at the same time provide some indication that the EMU appears to have opened the door to a slightly more social monetary policy (albeit through the back door of monetary emergency measures and mainly to the benefit of the rich class of entrepreneurs).

Shortly after the first wave of the Covid-19 epidemic had reached the European continent, the ECB Governing Council, once more in its recent history, resorted to a broad arsenal of (new) monetary policy measures to deal with the economic fallout that resulted from this “first wave” of the Covid-19 pandemic. This occurred at several regular meetings of the ECB Governing Council that took place on 12 March 2020, 30 April 2020, and 4 June 2020, as well as at an extraordinary meeting that took place on 18 March 2020.¹⁸

As explained earlier (cf. Sects. 2.3 and 2.4.), in the fall and winter of 2020, countries of the euro area, moreover, experienced a severe second wave of the Covid-19 pandemic, with many countries again resorting to strict lockdown and other containment measures. On 10 December 2020, the Governing Council of the CBE recalibrated the ECB’s monetary policy instruments in order to deal with the economic fallout from this second wave of the Covid-19 pandemic. The so-called “December 2020 Eurosystem staff macroeconomic projections for the euro area” at the time projected a headline inflation at 0.2% for 2020, at 1% for 2021, at 1.1% for 2022, and at 1.4% for 2023.¹⁹

As a result of these Covid-19 response monetary measures the ECB resorted to between 6 March 2020 and 29 January 2021, the Eurosystem’s balance sheet increased by no less than 50% (i.e., by EUR 2300 billion).²⁰

The severity of the Covid-19 crisis also forced the ECB to shift to temporarily put its reform plans to be contained in a “monetary policy strategy review” on hold. This monetary policy review had initially been announced for the end of 2020. However, because of Covid-19, the ECB Governing Council decided to postpone this review until mid-2021.²¹

3.2.1.2 A Legal Discussion

On the road to implementing a monetary policy for dealing with the Covid-19 crisis, there was also a notable legal setback caused by the German Federal Constitutional Court, which touched on the question of whether or not some of the (“new”) monetary policy instruments that had been deployed by the ESCB in recent years, contradicted the prohibition on monetary financing contained in EU law.

On 5 May 2020, this Court handed down a judgement which rejected a complaint that the “Public Sector Purchase Programme” (PSPP) effectively circumvents Article 123 of the Treaty on the Functioning of the European Union, which is the main instrument that prohibits monetary financing.

However, departing from an assessment by the EU Court of Justice, the German Constitutional Court had initially found that the Governing Council’s decisions on the PSPP “lacked sufficient considerations of proportionality” and “amounted to an overreach of the ECB’s powers”.²² After a transitional period of up to 3 months, and in the absence of a decision by the ECB Governing Council demonstrating “in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP [were] not disproportionate to the economic and fiscal policy effects resulting from the programme”, the Bundesbank would have been unable to further participate in the PSPP as a result of this court decision. The Bundesbank would, moreover, have been required to sell the bonds it already had purchased and held in its portfolio. Although this initial decision of Germany’s constitutional court did not directly concern the monetary policy measures taken in response to the Covid-19 crisis itself, there could nevertheless have been implications for the PSPP section of the ECB’s Covid-19 asset purchase programme, as well as with regard to other Covid-19 monetary measures. More legal challenges were feared, either in Germany or in other euro area countries.²³

Immediately after the publication of this initial court decision, the Governing Council of the ECB publicly stated that it had taken note of the German Constitutional Court’s ruling, and in particular that²⁴:

The Governing Council remains fully committed to doing everything necessary within its mandate to ensure that inflation rises to levels consistent with its medium-term aim and that the monetary policy action taken in pursuit of the objective of maintaining price stability is transmitted to all parts of the economy and to all jurisdictions of the euro area.

The reaction of the ECB Governing Council was followed shortly afterwards by a statement of the President of the European Commission, Ursula von der Leyen,²⁵ and by a press release stemming from the EU Court of Justice. The ECB Governing Council then decided to comply with a disclosure request regarding several non-public documents relating to the PSPP, which were handed over to the Bundesbank. These documents were then made available to the German “Bundestag”, which eventually reached the conclusion that the requirements which had been pointed out by the German Federal Constitutional Court had actually been met.²⁶

It is not easy to assess to what extent the final decision of the German Bundestag was not rather taken on the basis of political considerations, in particular an unwillingness to further endanger the stability of the euro area in the midst of a huge health crisis, rather than on the basis of a thorough legal assessment of the issue that was at hand (and which we shall readdress in Chap. 11.). In the end, Germany may not have wanted to take the risk of provoking a euro crisis, especially after the EU had just been faced with the Brexit debacle, and at a time when it was barely (or not at all) able to cope with the worst global health crisis in its existence.

3.2.2 Interest Rate Policy

As the ECB’s key interest rates were already close to zero before the Covid-19 outbreak, there was not much room for the European monetary institutions to use this policy tool during the Covid-19 pandemic. With an economic recession looming, it was, furthermore, difficult to imagine what could still have been done in this area, unless key interest rates would have been positioned at negative rates. Faced with a serious health crisis, with all the negative economic consequences that this implied, the European monetary institutions clearly did not dare to make the latter choice. However, this did not prevent them from making extensive use of their other monetary arsenal (which we shall examine in the following subsections).

The meetings of the CBE Governing Council between March and December 2020, therefore, left the key interest rates for the euro area unchanged. These were as follows²⁷:

• (1) Main refinancing operations (MROs): 0.00% (as of March 2016).

• (2) Marginal lending facility: 0.25% (as of March 2016); and

• (3) Deposit facility: −0.50% (as of September 2019).

The ECB’s forward guidance with regard to its key interest rates also remained unchanged (as articulated in the ECB Governing Council’s decision of September 2019).²⁸

3.2.3 Deploying Monetary Tools in Response to the Covid-19 Outbreak

3.2.3.1 Refinancing Operations

3.2.3.1.1 General

The main measures the ECB resorted to as of early March 2020 in response to the Covid-19 crisis, focused on its “asset purchase programmes” (namely “APP” and “PEPP”) and its “longer-term refinancing operations” (namely “LTROs”, “TLTRO IIIs” and “PELTROs”). According to Aguilar et al., the measures the ECB resorted to had a threefold objective²⁹:

• (1) to ensure that the ECB’s overall monetary policy stance would remain sufficiently accommodative;

• (2) to support the stabilisation of the financial markets in order to preserve the monetary policy transmission mechanism; and

• (3) to provide ample liquidity, in particular to maintain the flow of bank lending.

3.2.3.1.2 Longer-Term Refinancing Operations (LTROs)

The abbreviation “LTRO” refers to “Longer-Term Refinancing Operations”.

It concerns a monetary instrument that is used by the European Central Bank (ECB) to lend money, at very low interest rates, to banks operating in the euro area.

Such longer-term refinancing operations generally show the following characteristics: (1) they involve injecting low-interest funds into euro area banks; (2) sovereign debt serves as collateral for the loans; (3) the loans are offered on a monthly basis, and (4) the loans are usually repaid in a time frame of 3 months, 6 months or 1 year.

In some cases, the ECB has also used longer-term refinancing operations with an even longer repayment duration, such as a 3-year refinancing operation that was launched in December 2011.³⁰

Long-term refinancing operations have basically been designed to have a dual impact: (1) increased bank liquidity and (2) lower sovereign debt yields.

These Longer-term refinancing operations are, on a legal-technical level, initiated via a standard auction mechanism. Upon announcing such an auction, the ECB itself determines the amount of liquidity that will be auctioned. The ECB at the same time asks commercial banks to express both their interest and conditions. The interest rates under which the loans will then be handed out, may be determined either in a “fixed rate tender” or in a “variable rate tender”. Basically, the mechanism triggers commercial banks bidding against each other to access the (somehow “limited” amount of) liquidity made available by the ECB.³¹

LTROs have, in particular, become popular since the financial crisis of 2008. Before the financial crisis of 2008, the longest running such LTRO tender that had been offered by the ECB, had been for only 3 months. These former LTROs had, moreover, amounted to only EUR 45 billion (or about 20% of the total liquidity at the time provided by the ECB). As the financial crisis of 2008 further evolved, LTROs were handed out for both longer periods and larger amounts.³²

On 12 March 2020, in its initial response to the outbreak of the Covid-19 crisis, the Governing Council of the ECB made the decision to issue supplementary LTROs, on a temporary basis, in a full allotment procedure and at a fixed rate. The reason for this decision was to immediately provide additional liquidity to commercial banks, which could, moreover, act as a safety net in the event of further deteriorating money market conditions.³³

In total thirteen such supplementary LTROs have been held between 18 March 2020 and 10 June 2020. These all matured on 24 June 2020, and together provided EUR 388.9 billion of additional liquidity to the euro area financial system.³⁴

3.2.3.1.3 Targeted Longer-Term Refinancing Operations (TLTROs)

Since 2014, the ECB has announced so-called “Targeted Longer Term Refinancing Operations”—or TLTROs, TLTROs II and TLTROs III—with as overall purpose to further stimulate market liquidity.³⁵ TLTROs are considered as unconventional monetary measures.³⁶

Within the Eurosystem, “Targeted Longer Term Refinancing Operations” or “TLTROs” are basically operations that provide long-term funding to credit institutions. They are based on the following logic: (1) By providing banks with long-term funding at attractive conditions, (2) they ensure favourable borrowing conditions to commercial banks, (3) thus stimulating the latter themselves to lend to the real economy. As a result, TLTROs are deemed instrumental in reinforcing the transmission of the monetary policy. TLTROs are in this way seen as an “accommodative monetary policy stance” which was resorted to by the ECB in order to reinforce the transmission of the monetary policy, by increasing both the capability and the incentive for commercial banks to lend to the real economy.³⁷ The mechanism was especially designed in light of the fact that commercial banks had become more reluctant to lend out money to third parties themselves, given the deteriorated economic climate and the credit risk such loans to third parties brought along.

In recent monetary history, a first round of TLTROs (comprising a total of eight operations) was announced on 5 June 2014, a second round (= referred to as “TLTROs II”) on 10 March 2016, and a third round (= referred to as “TLTROs III”) on 7 March 2019.³⁸

Under the first sequence of TLTROs—or TLTROs (I)—commercial banks that had met the lending targets of preceding operations, were allowed to borrow more in the subsequent operations, while those that had not done so, were asked to repay their TLTRO I loans earlier.³⁹ Through this, it was ensured that commercial banks were sufficiently incentivized to actually participate in the transmission of the monetary policy to the real economy by effectively granting loans to other economic agents.

In 2016, the second round of TLTROs—or TLTROs II—were launched. TLTROs II consisted of (only) four operations. This time, the incentives to make actual use of the financial means that were provided through the TLTROs II, were rather designed as “rewards” than as “penalties”. This implied that lower interest rates were applicable to commercial banks whose net lending managed to exceed the agreed upon benchmark.⁴⁰

The TLTROs III were decided upon during the ECB Governing Council meeting of 7 March 2019, to be announced shortly afterwards.⁴¹ At that time, it was announced that a new series of TLTROs III would be launched, starting in September 2019 and ending in March 2021. Each of the operations under TLTROs III would have a maturity of 2 years and would be aimed at ensuring favourable bank lending conditions with regard to loans of commercial banks to third parties and, through this, at contributing to a smooth transmission of monetary policy.⁴²

The further operational details on TLTROs III were then unveiled on 6 June 2019.⁴³

The TLTROs III showed the following characteristics:

• (1) TLROs III consisted of a series of seven operations.

• (2) Each operation had a maturity of 3 years, starting in September 2019 at a quarterly frequency.

• (3) The borrowing rates of each of the operations were to be 50 basis points below the average interest rate of the deposit facility over the period from 24 June 2020 to 23 June 2022, and in each case as low as the average interest rate of the deposit facility over the remaining life of the respective TLTRO III.⁴⁴

• (4) Eligible loans to third parties were those granted to non-financial corporations and households in the euro area (including non-profit institutions serving households), however with the exclusion of mortgage loans to households.

• (5) In order to determine the baseline, commercial banks were assessed on the basis of the net eligible loans they had handed out during the period from 1 April 2018 to 31 March 2019. When eligible, net lending was positive or zero, and the benchmark was set to zero. Where it was negative, the benchmark was set at the level of the net eligible loan during that period.⁴⁵

As part of a further monetary policy package that was adopted on 12 September 2019, the terms of the TLTRO III were even more relaxed, with interest rates being further reduced. These changes were then applied to a first TLTRO III operation that was to settle on 25 September 2019, as well as to a second operation that was to settle on 18 December 2019.⁴⁶

In response to the Covid-19 crisis, during the latter part of Q1 2020, the ECB felt the need to adopt a first set of expansionary measures on 12 March 2020.⁴⁷ In accordance with this decision, the terms and conditions of TLTROs III were eased, including a temporary reduction in the applicable interest rates (which were lowered to −0.75%). These more flexible term and conditions applied to all outstanding operations during the period from June 2020 to June 2021.⁴⁸ However, in response to the gradual deterioration of the economic situation due to the Covid-19 pandemic, the terms and conditions of the TLTROs III were further improved at the ECB’s General Council meeting on 30 April 2020,⁴⁹ and again on 10 December 2020.⁵⁰

Already in its decision of 12 March 2020, the ECB decided to apply significantly more favourable terms and conditions to all TLTRO III operations between June 2020 and June 2021. This decision was specifically intended to encourage bank lending to the groups of economic agents most affected by the spread of Covid-19, in particular, on one side, small and medium-sized enterprises (SMEs) and, on the other side, the self-employed. A further consideration was that both these categories of economic players are, even in normal times, more dependent on bank lending (while it is, traditionally, very difficult, if not impossible, for these to obtain financing on the financial markets).⁵¹

Second, the ECB, furthermore, decided to issue a new long-term instrument, namely the “Pandemic emergency longer-term refinancing operations” or “PELTROs”. The ECB hereby anticipated that additional operations would be needed for some commercial banks beyond June 2020. This insight made the ECB launch the new PELTROs⁵² on 30 April 2020, to afterwards extend them on 10 December 2020.⁵³ We shall deal with these PELTROs in the following subsection (cf. Sect. 3.2.3.1.4.)

During its meeting of 30 April 2020, the ECB General Council decided upon the relaxation of the operating terms and conditions with regard to the TLTROs III as well. One such relaxation measure implied the bringing forward of the start of the benchmark lending period by 1 month (to 1 March 2020). Another relaxation measure concerned reducing the applicable interest rates (to −1%), with regard to the period from June 2020 until June 2021.⁵⁴

In its further decision of 10 December 2020, as part of its further recalibration of the monetary policy instruments deployed to address the ongoing Covid-19 pandemic, the ECB Governing Council decided to extend the support granted through TLTROs III. One of the new elements that was decided upon implied that the period during which commercial banks meeting the lending benchmarks could obtain the maximum interest rate cut, was extended by one more year, until June 2022. Furthermore, the ECB decided to add three new TLTRO III operations, namely in June, September and December 2021, respectively.⁵⁵

Based on the extension that was decided upon on 10 December 2020, four additional PELTROs were to be offered on a quarterly basis during 2021. Each of these would have a duration of approximately 1 year. The first of these quarterly PELTROs of 2021 was announced for 23 March 2021.⁵⁶

3.2.3.1.4 Pandemic Emergency Longer-Term Refinancing Operations (PELTROs)

On 30 April 2020 the Governing Council of the ECB decided to conduct seven additional refinancing operations. These had the following characteristics: (1) they were against a fixed rate; (2) they were to be fully allocated; (3) they concerned non-targeted refinancing operations to be issued between May and December 2020; and (4) they had their maturity staggered between July and September 2021 (in line with the maturity of the applicable collateral easing measures).⁵⁷ Their applicable interest rate was then set at 25 basis points below the rate of the main refinancing operation.⁵⁸

These operations got known under the name “Pandemic emergency longer-term refinancing operations”, or abbreviated “PELTROs. These PELTROs were particularly intended to provide liquidity support to the euro area financial system and to help preserve the smooth functioning of money markets by providing an effective safety net after the expiry of the bridge longer-term refinancing operations (LTROs) that had been conducted in March 2020 by way of an immediate response to the outbreak of the Covid-19 pandemic.⁵⁹

One of the main further characteristics of the PELTROs was that their counterparties would be able to benefit from the collateral easing measures in place until the end of September 2021. This was announced by the ECB Governing Council on 7 April 2020 and on 23 April 2020. It was then also announced that the PELTROs would be conducted as fixed rate tenders and with full allotment, and that they would, moreover, be offered on very accommodating terms. The first of these PELTROs was ultimately announced for 19 May 2020, allotted on 20 May 2020 and settled on 21 May 2020.⁶⁰

On 10 December 2020, the Governing Council reached the decision to issue four additional PELTROs for 2021, each with a maturity of 1 year.⁶¹

3.2.3.2 Quantitative Easing

3.2.3.2.1 General

Previous decisions of the ECB Governing Council had provided substantial, additional monetary stimulus through the ECB’s so-called “asset purchase programmes”.

For instance, on 12 September 2019, the decision had been reached to conduct monthly net purchases of eligible assets for an amount of EUR 20 billion under the so-called “asset purchase programme” (abbreviated: “APP”). This measure was since then supplemented by an approval of purchases of assets for a further amount of EUR 120 billion which was to be used by the end of 2020. In addition, a new “Pandemic Emergency Purchasing Programme”, or abbreviated “PEPP” was introduced. This programme was then, subsequently, increased to EUR 1.85 trillion, while intended to extinguish by March 2022.⁶²

Both these measures aimed to improve financing conditions on the financial markets by allowing for the decrease of the interest rates on government and corporate bonds.⁶³

3.2.3.2.2 Asset Purchase Programme (APP)

The ECB’s basic “asset purchase programme” (APP)⁶⁴ is, in general, part of a set of unconventional monetary policy measures that include targeted longer-term refinancing operations. The APP was first launched in mid-2014, with as double purpose: (1) to support the monetary policy transmission mechanism, and (2) to provide an amount of policy accommodation needed to ensure price stability.⁶⁵

Between October 2014 and December 2018, the Eurosystem made several net purchases of financial instruments under one or more of these “asset purchase programmes”. Between January 2019 and October 2019, the Eurosystem, moreover, reinvested in full the principal payments it had received with regard to maturing securities already held in its APP portfolios.⁶⁶

On 12 September 2019, the ECB Governing Council made the decision that net purchases were to be restarted under the asset purchase programme (APP) at a monthly rate of EUR 20 billion, and starting on 1 November 2019.⁶⁷

3.2.3.2.3 Use of the APP During the Covid-19 Pandemic

Already on 12 March 2020, the ECB Governing Council took a Covid-19 early response measure of increasing the existing envelope for net purchases under the APP, with an amount of EUR 120 billion to be used by the end of 2020.⁶⁸ As with the PEPP (cf. Sect. 3.2.3.2.4.), an emphasis was put on flexibility, based on “temporary fluctuations in the distribution of purchase flows both across asset classes and across countries”. All purchases continued to be guided by the so-called ECB’s long-term capital key.⁶⁹

In the period from March 2020 until January 2021, the Eurosystem made net purchases for an amount of EUR 333.2 billion under the APP.⁷⁰

3.2.3.2.4 Pandemic Emergency Purchasing Programme (PEPP)

By 18 March 2020, the outlook of the euro area economy had deteriorated considerably. This was partly due to the announcement of severe lockdowns and other containment measures in several countries. A further factor of importance was a sharp rise in interest rates on sovereign and corporate debt. This rise was, moreover, very uneven across countries. It was, e.g., much more pronounced in countries such as Italy and Spain, as these countries had been the hardest hit by the Covid-19 pandemic, and because their fiscal position had already been less comfortable at the beginning of the Covid-19 crisis.⁷¹

According to Aguilar et al., within the euro area, the sovereign yields—i.e., the interest rates against which governments can borrow—of each of the EU Member States play a central role in the transmission of monetary policy to the real economy. Obviously, sovereign yields are of great importance for the financing costs of countries and their governments themselves. However, sovereign yields are also considered to be a key benchmark for determining the capital market financing costs of financial institutions: when e.g., the interest rates on government bonds increase, the financing cost for financial institutions borrowing on the financial markets also increases. In their own turn, such increased costs of funding raised by commercial banks themselves are reflected in the costs of bank lending towards third parties. This implies that sovereign yields, ultimately, may affect the interest rates on bank loans in an indirect manner. As explained before, especially SMEs, the self-employed and households are heavily dependent on such bank loans, implying that all of these may be severely affected by rising sovereign yields.⁷²

In view of this situation, on its extraordinary meeting of 18 March 2020, the Governing Council the ECB announced the so-called “Pandemic Emergency Purchase Programme” (in short “PEPP”) with as aim to support the issuers of a variety of financial instruments by help keeping the interest rates on these low.

In essence, the same categories of both public sector and corporate sector financial assets were to be purchased under this PEPP as under the pre-existing, more traditional APP. One of the main differences between the APP and the PEPP has, however, been that, under the PEPP, purchases were to be made in a much more flexible manner. This, e.g., concerned the fact that fluctuations in their allocation were allowed, not only over time, but also between jurisdictions, as well as between asset classes. In this way, the ECB intended to avoid financial fragmentation, to the extent that the latter could impede or hamper the transmission of its monetary policy to the financial conditions of further loans in some euro area countries.⁷³

The planned asset purchases, also known as “quantitative easing” or, in short “QE”, were specifically intended to support economic growth across the euro area, and, moreover, to help return inflation to levels below, but close to, 2%.⁷⁴

The PEPP was initially implemented with an envelope amounting to EUR 750 billion, set until the end of 2020.⁷⁵ However, already on 4 June 2020, it was decided to increase this initial envelope to EUR 1350 billion until at least the end of June 2021. It was, furthermore, at the same time announced that, as had been the case under the APP itself, maturing principal payments on financial instruments that had in the past been purchased under the PEPP, would be reinvested until at least the end of 2022.⁷⁶

On 10 December 2020, the Governing Council of the ECB took a decision to further increase the PEPP envelope by an additional amount of EUR 500 billion, to a new total of EUR 1850 billion. Moreover, the horizon for net purchases under the PEPP was, similarly, extended to at least the end of March 2022. The reinvestment period for maturing principal repayments under the PEPP was also extended to at least the end of 2023. The Governing Council also made the announcement that it would continue to make net purchases under the PEPP, until it would be of the opinion that the Covid-19 crisis was over.⁷⁷

Both the PEPP, as well as new purchases under the more traditional APP, were intended to significantly increase the portfolio of the Eurosystem’s financial assets acquired under its purchase programmes.⁷⁸ The PEPP, more in particular, significantly eased the conditions for such financial assets purchases, in this manner also easing the overall financial conditions in the euro area. As had been the intention, especially sovereign debt yields significantly decreased upon the announcement of the PEPP.⁷⁹

Already by early September 2020, net purchases of both public sector and corporate sector financial assets under the PEPP had reached a total amount of EUR 497 billion since it had been first launched at the end of March 2020. This amounted to 37% of the total amount planned. On said date, Spanish public sector bond purchases accounted for around 12.9% (or around EUR 46 billion) of the total public sector bond purchases under PEPP of all euro area countries considered together. This was slightly more than the corresponding capital key (of 11.92%) (according to preliminary ECB data of the end of July 2020).⁸⁰

In the period from March 2020 until January 2021, the Eurosystem was said to have purchased EUR 810 billion of eligible financial assets under the PEPP.⁸¹

Figure 3.1 gives a representation of the PEPP net asset purchases by month, from March 2020 until January 2021 (in EUR billion).

Fig. 3.1

PEPP: net asset purchases by month, March 2020–January 2021 (EUR billion) [Source: Rakic (2021), p. 3]

It is no surprise that the public sector component of the PEPP purchases was by far the most important: during the abovementioned period from March 2020 until January 2021, it was, more precisely, reported to amount to EUR 768 billion (or 94.8% of total purchases). By January 2021, the most significant deviations from the capital key were reported with regard to Italy (for +2.1%) and France (for −1.7%). However, dating back to the beginning of PEPP purchases in March 2020, this kind of deviations from the capital key were reported to have been gradually decreasing across the board.⁸²

The private sector component of PEPP net purchases was considerably less important and amounted to only EUR 42 billion during the abovementioned period from March 2020 until January 2021.⁸³

According to the ECB’s so-called “fifth bi-monthly breakdown of holdings under the Pandemic Emergency Purchase Programme (PEPP)” which more specifically covered the period from December 2020 through January 2021, the ECB made net purchases of EUR 110.2 billion (book value) of bonds under the PEPP, taking the total by the end of January 2021, to the already mentioned figure of EUR 810 billion (i.e., the sum of EUR 768 billion in government bond assets and EUR 42 billion in private sector assets), which accounted for 60% of the total envelope of EUR 1350 billion of purchases targeted under the Programme. January 2021 had accounted for the lowest full-monthly purchase rate since the PEPP had launched (with an amount of “only” EUR 53 billion). Purchases of public sector bonds accounted for EUR 116.3 billion with regard to the period between December 2020 and January 2021, compared to EUR 140.2 billion for the period October–November 2020, EUR 126.8 billion for the period August–September 2020, EUR 198.2 billion for the period June–July 2020, and EUR 186.6 billion for the period March–May 2020, taking the total cumulative net purchases to the already above-mentioned amount of EUR 768.1 billion. Purchases remained heavily concentrated in government bonds issued by Germany (EUR 28.1 billion), France (EUR 21.8billion), and Italy (EUR 18.1 billion).⁸⁴

3.2.3.3 Corporate Sector Purchase Programme (CSPP)

At the above-mentioned extraordinary meeting of the Governing Council of the ECB on 18 March 2020, it was decided to include so-called “non-financial commercial paper” in the range of assets eligible under the “Corporate Sector Purchase Programme” (CSPP). At the same time, this CSPP was intended to apply to purchases made under the PEPP.⁸⁵

The aim of this measure was to ease tensions in the money market (targeted at enterprises with no access to the financial markets).⁸⁶

Such (non-financial) commercial paper may be defined as short-term debt security which is commonly used by (smaller) enterprises (in order to meet short-term liabilities).⁸⁷

Already before, certain specific types of commercial paper had been eligible for purchases under the CSPP since its launch in March 2016.⁸⁸ However, until March 2020, only commercial paper with a remaining maturity exceeding 6 months was eligible for such CSPP purchases. This was to be changed as part of the ECB Governing Council decision of 18 March 2020, when it was decided to extend the maturity range of such non-financial commercial paper eligible for purchases under the CSPP.⁸⁹

The Eurosystem started the purchases of this wider range of CSPP-eligible non-financial commercial paper on 27 March 2020.⁹⁰

By January 2021, the total net cumulative purchases of such non-financial commercial paper under the CSPP amounted to EUR 255.3 billion. Of these, EUR 54.8 billion, or 21%, had been “primary market” purchases, while EUR 200.6 billion, or 79%, had been secondary market purchases. Including the EUR 22.3 billion purchases of (eligible) corporate bonds under the PEPP (cf. Sect. 3.2.3.2.4.), this took the total net cumulative purchases of bonds issued by “enterprises” to EUR 277.6 billion.⁹¹

According to Hill, the ICMA estimated the presence of a universe of CSPP eligible bonds by the end of January 2021 amounting to a nominal value of EUR 1091 billion. If this figure is correct, this implies that 25% of all eligible bonds were being held under the ECB purchase programs (which then was indirectly financing a quarter of all loans made available in the euro area). Based on the 70% upper limit for purchases of individual ISINs, this also implied that purchases were at 36% of capacity, leaving an available pool of slightly less than EUR 500 billion for further purchases.⁹²

3.2.4 EMU Collateral Framework

3.2.4.1 Origin and Original Scope

The so-called “Eurosystem Collateral Framework” (abbreviated: “ESCF”) is said to play a crucial role in the implementation of the monetary policy in the euro area.⁹³

Article 18 of the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB) stipulates as follows:

18.1. In order to achieve the objectives of the ESCB and to carry out its tasks, the ECB and the national central banks may:

- operate in the financial markets by buying and selling outright (spot and forward) or under repurchase agreement and by lending or borrowing claims and marketable instruments, whether in euro or other currencies, as well as precious metals;

- conduct credit operations with credit institutions and other market participants, with lending being based on adequate collateral.

18.2. The ECB shall establish general principles for open market and credit operations carried out by itself or the national central banks, including for the announcement of conditions under which they stand ready to enter into such transactions.

This implies that credit accorded to credit institutions may, in principle, only be granted against adequate collateral. The way the Eurosystem deals with this collateral is based on a so-called “general” and “temporary” framework.⁹⁴ One of the basic legal documents in this regard is the Guideline (EU) 2015/510 of the European Central Bank of 19 December 2014, and more specifically the Part 4 of this Guideline, with Article 58.2. of the Guideline stating in general that:

[i]n order to participate in Eurosystem credit operations, counterparties shall provide the Eurosystem with assets that are eligible as collateral for such operations. Given that Eurosystem credit operations include intraday credit, collateral provided by counterparties in respect of intraday credit shall also comply with the eligibility criteria laid down in this Guideline, as outlined in Guideline ECB/2012/27.

The ESCB itself had already been conceived before 1 January 1999, when the euro was introduced.⁹⁵

According to Bindseil et al., the ESCB then evolved over the following years through a series of ongoing adaptations implemented in 2005, 2009–2010 and 2011–2012.⁹⁶

When the ESCB had initially been conceived, it was considered that the ECB would implement the euro area monetary policy mainly through credit operations. These credit operations would basically be offered, on a regular basis, to a wide range of counterparties, especially credit institutions, and would also be rather large.⁹⁷ However, following the financial crisis of 2008, the monetary instruments resorted to by the ESCB, and hence also its collateral framework, had to undergo drastic changes.⁹⁸ This was reflected in the adaptations of the ESCB in 2008 and in 2011–2012. These adaptations resulted in an expansion of the collateral framework in order ensure that sufficient collateral for the monetary framework still to function, remained available. This expansion took several forms, including⁹⁹:

• (1) A relaxation of the “minimum credit quality requirements”.

  This relaxation was intended to include the full investment-grade credit quality, instead of only the top end. This was said to reflect the weakening of the average rating of euro area issuers.

• (2) A relaxation of requirements and risk control measures for so-called “simpler ABS”, i.e., asset-backed securities.

  This relaxation was reported to be made with a view of increasing transparency in the form of ABS loan data.

• (3) The acceptance of “additional types of credit claims” (ACCs) in some euro area countries.

The most specific element of this easing down of the EMU collateral framework is believed to concern the so-called “additional credit claims” (ACCs). More precisely, in December 2011, the Governing Council of the ECB announced that the national central banks of the euro area countries would, henceforth, albeit on a temporary basis only, be allowed to accept such ACCs as collateral. The eligible ACCs were, furthermore, subjected to specific national credit claim eligibility criteria and risk control measures that differed from the general collateral framework. The national eligibility criteria for these ACCs were then first approved on 9 February 2012. On 7 June 2019, the ACCs frameworks were extended until the maturity date of the last TLTRO III operation in March 2024.¹⁰⁰

3.2.4.2 Adaptation to the EMU Collateral Framework due to Covid-19

As one of the early response measures to the Covid-19 crisis, on 18 March 2020, the Governing Council of the ECB announced its decision to include claims related to the financing of the corporate sector in the ACC framework.¹⁰¹ The scope of eligible ACCs was thereto expanded to include claims related to the financing of the corporate sector. This decision was made in order to ensure that the counterparties to such claims would still be able to continue to make full use of the Eurosystem’s refinancing operations.¹⁰²

On 7 April 2020, the Governing Council of the ECB, subsequently, adopted a so-called “temporary collateral easing package”. This measure was especially aimed at facilitating the availability of eligible collateral for Eurosystem counterparties, in order to lower the threshold for participating in certain liquidity-providing operations, such as TLTROs III.¹⁰³ This package was, moreover, intended to complement other refinancing measures that had already before been announced by the ECB as part of its efforts for fighting the economic effects of Covid-19, such as LTROs and PEPP-operations. Together, these measures were aimed at supporting the supply of bank loans to households and enterprises, in particular by easing the conditions under which these credits were to be accepted as collateral under monetary refinancing operations. At the same time, the Eurosystem increased its risk tolerance in order to support lending under its refinancing operation programmes even further, in particular by consistently lowering the so-called “haircuts on collateral” (referring to the difference between the (perceived) value of the collateral, and the amount for which it is accepted by the refinancing party) for all assets concerned.¹⁰⁴

The main objective of these measures was, obviously, to increase the ability of commercial banks to apply for funds under the Eurosystem’s refinancing operations (more precisely MROs, LTROs, TLTROs III, and PELTROs). This in turn led to supporting commercial banks’ own lending to enterprises and households, inter alia, by easing the conditions under which credit claims were to be accepted as collateral for the purposes of said refinancing operations.¹⁰⁵

From a more technical perspective, the ECB first reduced the “haircuts on collateral” by a fixed factor amounting to 20%.¹⁰⁶ This adjustment was an important part of the “collateral relaxation measures”. It was at the same time aimed at maintaining a sufficient and consistent level of protection for all types of eligible collateral, albeit at a temporarily lowered level.¹⁰⁷

Second, the Governing Council adopted the following temporary easing-down measures¹⁰⁸:

• (1) A lowering of the level of the “non-uniform minimum size threshold” for domestic credit claims to EUR 0 (from EUR 25,000 before).

  This measure was taken in order to facilitate the mobilisation of loans to small legal entities as eligible collateral.

• (2) An increase from 2.5% to 10% with regard to the maximum share of unsecured debt securities, issued by a single other banking group, as part of a credit institution’s collateral pool.

  This measure was intended to allow counterparties to benefit from a larger share of these assets.

• (3) A waiver of the minimum credit standard for marketable debt instruments issued by Greece and intended to be accepted as collateral in Eurosystem credit operations.¹⁰⁹

Third, the Governing Council of the ECB decided on a package of measures aimed at increased bank financing by the ECB against collateral consisting of loans to enterprises and households. This was, as mentioned above, to be achieved by expanding the use of credit claims as collateral, in particular through the potential extension of ACC-facilities.¹¹⁰

In this respect, the Governing Council of the ECB temporarily extended the ACC frameworks by¹¹¹:

• (1) Adapting the collateral requirements to include state and public sector guaranteed loans to enterprises, SMEs, the self-employed and households under the ACC frameworks. This measure was at the same time intended to provide liquidity for loans benefiting from the new guarantee schemes adopted in the euro area Member States in response to the Covid-19 pandemic.

• (2) Broadening the scope of acceptable credit assessment systems to be used within the context of ACC frameworks, e.g., by facilitating the acceptance of bank credit assessments from supervisor-approved internal rating systems.

• (3) Reducing reporting requirements under the ACC framework, in order to allow counterparties to benefit from the softened ACC frameworks even before the necessary reporting infrastructure was put in place.

All of these measures, to the extent that they were issued on a so-called “temporary basis” only, were intended to remain in force “for the duration of the Covid-19 crisis” and were linked to the duration of the underlying refinancing operations.¹¹²

It was, moreover, announced that the temporary measures would be reassessed before the end of 2020. At the latter time, it would, furthermore, be evaluated whether it would be necessary to extend some of these measures, all of this in light of the overall aim of ensuring that the participation of the Eurosystem’s counterparties in the ECB’s liquidity-providing programmes would not be affected.¹¹³

On 22 April 2020, the Governing Council of the ECB, furthermore, adopted one more easing measure. In light of the uncertain economic climate, this measure concerned the insulation of the availability of eligible collateral from possible downgrades. It was, more precisely, decided that assets that complied with the “minimum credit quality requirements” in order to be eligible as collateral on the date of 7 April 2020 (which at least implied equivalency to BBB-, with the exception of ABSs-collateral) would continue to remain eligible in the event of a later downgrade, provided that their rating would at least remain at, or above, BB. ABS eligibility under the general framework (implying a rating equivalent to A-) was to be similarly grandfathered as long as their rating would remain at, or above, a rating equivalent to BB+.¹¹⁴

On 10 December 2020 the ECB Governing Council effectively decided to extend the duration of the collateral easing package that it had adopted in April 2020. This was still justified in light of the overall purpose to allow commercial banks to make full use of the Eurosystem’s liquidity and/or refinancing operations.¹¹⁵

3.2.5 Currency Repo and Swap Lines

Swap lines may be defined as agreements between central banks in which they agree upon the exchange of currencies in order to maintain the liquidity of foreign currencies when markets are distorted.¹¹⁶

As regards the dollar-euro relationship, the need for such agreements became particularly pronounced following the 2008 global financial crisis. In that period, the ECB first entered into several bilateral swap arrangements with the central banks of a number of other jurisdictions. Furthermore, by October 2013, the Bank of Canada, the Bank of England, the Bank of Japan, the ECB, the US Federal Reserve and the Swiss National Bank reached a multilateral agreement to replace the pre-existing temporary bilateral liquidity swap lines by so-called (mutual) “standing arrangements”.¹¹⁷ The new standing arrangements were aimed at forming a network of bilateral swap lines between said six central banks. These arrangement were to provide liquidity to each of the concerned jurisdictions in either one of the five other currencies outside of that jurisdiction, provided that the two central banks involved (the one in need of the foreign currency, and the other the issuer of that currency) would be of the opinion that market conditions warranted such an exchange action of their currencies. The standing arrangements were also intended to serve as a prudent liquidity backstop.¹¹⁸

On 15 March 2020, in light of the Covid-19 crisis, the same six central banks jointly decided to improve the provision of USD liquidity at a global level through their existing standing arrangements, by resorting to the following measures: (a) lowering the price of USD swap transactions (at the USD overnight index swap rate + 25 basis points), and (b) adding weekly USD transactions with a maturity of 84 days (in addition to the existing weekly transactions, with a maturity of 1 week only).¹¹⁹ On 20 March 2020, these arrangements were further reinforced by changing the frequency of the existing 1-week maturity operations from a weekly basis, to a daily basis. At the same time, the new 84-day maturity operations were continued.¹²⁰ Said daily operations started on Monday, 23 March 2020, to be continued until at least the end of April 2020.¹²¹ As of 1 July 2020, the frequency of the 1-week trades was decreased from daily, to three times a week.¹²² From 1 September 2020 on, the frequency was again further reduced from three times a week, to only once a week.¹²³

In turn, the ECB committed to provide euro liquidity to a number of central banks in its geographical vicinity, by means of both temporary bilateral repo lines and swaps.¹²⁴

On 25 June 2020, the ECB established the so-called “Eurosystem repo facility” for central banks (abbreviated as: “EUREP”). EUREP was established in order to complement the existing swap and reverse repo lines. Under this facility, the ECB could provide euro liquidity to non-euro area central banks against collateral. This collateral was to consist of marketable euro-denominated debt instruments, issued by either euro area governments or supranational institutions.¹²⁵ This facility was announced to be available until June 2021. While this facility was made available to a wide range of non-euro area central banks, it was compared to a traditional, bi-lateral repo line, more expensive, with moreover the range of the collateral involved being more limited.¹²⁶

On 10 December 2020, in view of the economic fallout from the so-called second wave of the Covid-19 pandemic, the Governing Council of the ECB decided to extend EUREP, as well as all other temporary swap and repo lines until March 2022.¹²⁷

3.2.6 Evaluation

According to calculations made by Hans-Werner Sinn, professor of economics at the University of Munich and president of the IFO Institute for Economic Research, from the start of the 2008 financial crisis until January of 2021, the net asset purchases of the ECB and the national central banks that form the eurozone system, have totalled the amazing sum of EUR 3.8 trillion. Of this amount, the lion’s share, estimated at over EUR 3 trillion, comprised financial instruments issued by state and quasi-governmental bodies.¹²⁸

According to Sinn, for obvious reasons, political resistance to any reversal of these asset purchases has become so great that it may be assumed that such a reversal is not likely to take place in the near future, if ever. Indeed, given the magnitude of the amounts of the portfolio of assets that the E(S)CB has acquired under its several asset purchase programmes, any such sales would most likely destroy the market value of these assets, thereby forcing banks, which still have many similar assets on their books as well, to book huge depreciation losses, and which could completely ruin the credit worth of the issuing entities.¹²⁹ Still according to Sinn, should such an unwinding begin, the bubbles created by the ECB’s zero-interest-rate policy (which account for a large share of banks’ equity capital today) would likely burst, triggering a wave of bankruptcies.¹³⁰

Moreover, the EU Mediterranean member countries, whose debt has reached exorbitant levels as a result of the subsequent crises of 2008 and of 2020–2021, would most likely face enormous difficulties in taking on new debt and rolling over their existing liabilities. From this point of view, the eurozone system would be exposed as lacking any real brake on inflation when it matters.¹³¹

According to Sinn, the huge hordes of base money that banks have started to hold under the new monetary climate in their central bank accounts (especially after having transferred other financial assets to the E(S)CB) are not even covered by M1 to M3 monetary aggregates anymore. In this respect, the latter aggregates themselves no longer adequately reflect the actual risk of inflation, which is already more than obvious from the monetary base itself.¹³²

Sinn thus made the assessment that if the euro area economy were finally to recover and fiscal stimulus turbocharges would eventually pent-up demand (implying that the huge accumulated savings from the recent past would be used for spending), a lot of bank credit could suddenly start emerging based upon this (implicit) central bank money. Price growth could then begin to accelerate, and the ECB would then have an extremely tough time curbing it, without still having a functioning inflation brake.¹³³

A further factor to take into consideration is that the cash-holding coefficient in the economy, amounted in January 2021 to an incredible 43% in the eurozone, almost double of 24% recorded in the United States (and there, even so, considered as being “high”). Since the financial crisis of 2008, the monetary base in the eurozone has risen to about 3.5 times the level that was once sufficient for transactional purposes; in the United States, it has risen to double its previous level. Accordingly, of the total central-bank monetary base of EUR 5 trillion recorded by the ECB in January 2021, close to three-quarters (72%), or EUR 3.6 trillion, was a mere overhang of money that was not really needed for transactions.¹³⁴

In any case very striking is the great multiplicity and variety of monetary instruments that the ESCB has developed to combat the Covid-19 crisis. The question here is whether the high degree of complexity has not at the same time created much intransparency.

Either way, European monetary policy is increasingly characterized by a number of shifts that the founding fathers of the EMU would probably have viewed with suspicion. Traditional monetary rigor has been replaced by a policy of quantitative easing, whereby the ESCB started to refinance, under very flexible conditions, an increasing number of categories of issuers of debt instruments, ranging from private market players—in addition to banks themselves, in an indirect manner also large corporations—next to states. To the extent that banks themselves can more easily discharge their third-party debt obligations to the ESCB in exchange for new liquidity, lending to all possible counterparties, and therefore (at least ultimately) money creation itself, has become increasingly easy.

It should be kept in mind that both this quantitative easing policy of lending at increasingly relaxed conditions has been going since before the Covid-19 pandemic itself, posing the underlying question whether this policy has indeed become the “new monetary reality”. This may, moreover, create two main monetary risks, namely on the one hand the risk of a new inflationary crisis (due to an excess of money creation, under the conditions described by Sinn, as referred to above), but on the other hand also the risk of monetary reality becoming increasingly disconnected from the underlying economic reality, to the extent that it is not only the financial markets themselves that may have facilitated a new bubble, but this time the monetary authorities as well (or at the very least have they actively cooperated in it). The elephant(s) in the room is what will happen if the underlying operations have to be scaled back without similar quantitative easing programmes remaining active and what will happen if the positions between the ECB and commercial banks will be actually used for granting further loans, or if consumers will start spending their savings.

A more fundamental question is whether such a prolonged quantitative easing policy does not come awfully close to a system of monetary financing, until now a doomsday scenario that Euro economists shudder to see. To the extent that this could be the case, the door is now further ajar than in the aftermath of the financial crisis of 2008 to an alternative money creation system in which money creation on behalf of states (but also on behalf of a variety of economic players) could start happening in a direct manner and without an intermediary role for credit institutions, in accordance with wat we have argued in some of our earlier writings.¹³⁵ We shall readdress this latter question in Chap. 11.

3.3 United States

3.3.1 General

In the United States, monetary policy rests with the (US) Federal Reserve—also known as the “FED”—which acts under a mandate from the American Congress to ensure (1) maximum employment, and (2) price stability.¹³⁶

In the words of Powell and Wessel, the Covid-19 crisis in the United States—with its resulting business closures, event cancellations and work-from-home policies triggered a “deep economic downturn of uncertain duration”.¹³⁷ Against a backdrop of significant uncertainty about both the trajectory and the duration of the Covid-19 pandemic and its to be expected impact on the global and American economies, empirical evidence soon suggested that the economic activity in the United States had already started to slow significantly by the end of Q1 2020. In addition to people that fell ill with Covid-19, many others had to undergo mandatory containment and social distancing measures that, inevitably, disrupted economic activity. These circumstances, in turn, led households and businesses to consume and spend less, particularly on non-essential goods and services.¹³⁸ Moreover, unemployment rose more than proportionately to the severity of these declines in both productivity and demand.¹³⁹

The FED soon responded by deploying a wide range of monetary measures aimed at limiting the economic damage of the Covid-19 pandemic, including up to USD 2.3 trillion in loans to support market players (both households and enterprises-employers), the financial markets, and governments, both on the federal and the state level.¹⁴⁰

On 27 August 2020, the FED issued an updated policy statement, entitled “Statement on Longer-Run Goals and Monetary Policy Strategy”.¹⁴¹ This statement was intended to give the American Congress, as well as the general public and the financial markets, an idea of how the FED would further interpret the mandate given to it by Congress “to pursue maximum employment and price stability”, and on the monetary framework it would deploy in making its monetary policy decisions in order to address the Covid-19 pandemic, both with regard to short-term interest rates, as with regard to the other monetary policy instruments at its disposal. The FED also announced its intention to review this policy statement every 5 years.¹⁴²

Earlier, the FED had stated that its definition of price stability was to aim for inflation of 2%, as indicated by the so-called “Personal Consumption Expenditures price index”.¹⁴³ The FED had, moreover, described this objective as “symmetric”. This implied that the FED was concerned about both inflation below and above this target.¹⁴⁴ In the 2020 updated policy statement, the FED, however, stated that¹⁴⁵:

[i]n order to anchor longer- term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.

According to Powell and Wessel, this strategy has been described as a “flexible form of average inflation targeting” to which FED officials also referred to as “FAIT”.¹⁴⁶

3.3.2 Interest Rate Policy and Forward Guidance

By way of an early response to the outbreak of the Covid-19 pandemic, the FED reduced its own target for the “federal funds rate“. The term “federal funds rate” in the United States refers to the rate that banks pay to borrow overnight from each other on the so-called interbank market. The FED’s target for these federal funds rate was reduced by a total of 1.5 percentage points as of 3 March 2020, bringing it down to a range of 0% to 0.25% by 15 March 2020.¹⁴⁷

On the same date, the FED started again to offer “forward guidance”, resorting to a monetary tool that had been perfected during the financial crisis of 2007–2008. This forward guidance especially concerned the future path of the FED’s key interest rate. It was thereby announced that this key interest rate would be kept low until labour market conditions would have returned to levels consistent with the FED’s assessment of maximum employment and inflation reaching 2% and being on track to be moderately above 2% during some time.¹⁴⁸

This forward guidance would later be updated again in September 2020, in order to reflect the FED’s new monetary policy.¹⁴⁹

In theory, the FED could have even gone a step further by lowering interest rates below zero. While the central banks of several other territories indeed moved to such negative rates, the FED stated that it was unlikely that it would do so itself.¹⁵⁰

3.3.3 Measures to Support Financial Markets

3.3.3.1 General

In response to the Covid-19 crisis, the FED resorted to one of the key tools it had also used in response to the financial crisis of 2007–2008 and that consisted of buying massive amounts of financial instruments of a wide variety of issuers.¹⁵¹

As a result of the Covid-19 crisis, the markets for treasury securities and mortgage-backed securities soon became dysfunctional. The FED aimed to restore the proper functioning of these markets by pumping massive amounts of USD into them, with the overall aim of ensuring that credit would start to flow again.¹⁵²

As early as 15 March 2020, the FED announced that, over the next few months, it would purchase at least USD 500 billion in treasury securities, and USD 200 billion in government-backed mortgage-backed securities. By 23 March 2020, the FED effectively started making “open-ended” purchases. This implied that the FED started buying securities in the quantities necessary to support, on one side, the smooth functioning of the markets and, on the other side, the effective transmission of its monetary policy to the general financial circumstances. As a result of these early purchases of both treasury and mortgage-backed securities, market functioning improved, with the FED already starting to reduce its purchases through the months of April and May 2020.¹⁵³ However, on 10 June 2020, the FED (department of New York) made a new announcement that it was about to end its tapering and that it would, start again to buy at least USD 80 billion per month in treasury securities and USD 40 billion in residential and commercial mortgage-backed securities.¹⁵⁴

In the period from mid-March until the beginning of December 2020, due to these purchases, the FED’s securities holdings increased from USD 3.9 trillion, to USD 6.6 trillion.¹⁵⁵

3.3.3.2 Primary Dealer Credit Facility (PDCF)

On 18 March 2020, the FED announced the implementation of the Primary Dealer Credit Facility” (abbreviated as “PDCF”). This (again) concerned a programme that had emerged from the global financial crisis of 2007–2008, and that was intended to support the credit needs of American households and enterprises.¹⁵⁶

This programme became again available on 20 March 2020 and was, more in particular, designed to provide low interest loans (with as last applied interest rate 0.25%), for up to 90 days, to 24 large financial institutions qualifying as “primary dealers”. The aim of these loans was to keep credit markets functioning at a time when, on one side, both institutions and individuals were inclined to avoid risky assets and hoard liquidity, and, on the other side, dealers themselves were facing obstacles in financing the growing stocks of securities they could accumulate by trading.¹⁵⁷

In order to rekindle the PDCF, the FED had first to obtain approval from the Secretary of the Treasury who, under section 13(3) of the Federal Reserve Act, could invoke emergency lending authority. At the time the PDCF reopened in March 2020, the FED announced that the facility would remain open “for at least six months, or longer if conditions warrant.” On November 28, 2020, the FED board reached the decision to extend the expiration date of the PDCF until March 31, 2021.¹⁵⁸

3.3.3.3 Money Market Mutual Fund Liquidity Facility (MMLF)

On 18 March 2020, the FED decided to rekindle yet another of the crisis-era facilities, namely the “Money Market Mutual Fund Liquidity Facility” (= abbreviated as “MMLF”).¹⁵⁹

At the beginning of the Covid-19 outbreak, investors had withdrawn in large amounts from so-called “money market funds”. In order to cope with these huge outflows, said funds had in turn started to sell securities from their own portfolios, but the turmoil in the financial markets made such selling difficult, even though the securities were considered of high quality and had very short maturity dates which, in normal circumstances, should have been an easy sell.¹⁶⁰

To address this situation, the FED decided to revive the MMFF. It was intended that the facility would help money market funds meet redemption requests by households and other investors, thereby improving the overall functioning of the markets, as well as the provision of credit to the economy in general. The FED again invoked section 13 (3) of the Federal Reserve Act, in order to obtain the necessary permission from the Treasury. The Treasury provided USD 10 billion from its “Exchange Stabilization Fund” to cover potential losses”.¹⁶¹

On 30 November 2020, the FED announced an extension of the MMFF until 31 March 2021.¹⁶²

3.3.3.4 Repo Market Policy

In response to Covid-18, the FED significantly expanded the scope of its so-called “repo-operations” with the intent to channel liquidity to the money markets. Since then, the FED has essentially been offering an unlimited amount of money through this mechanism.¹⁶³

The repo market allows firms to borrow and lend cash and securities on a short-term basis. Transactions on this market happen usually overnight. The repo market allows financial institutions owning a lot of securities (such as banks, broker-dealers, hedge funds …) to borrow cheaply, and market players holding on to a lot of cash (e.g., money market mutual funds) to earn a small return on that cash by lending it out to the former category of market players without much risk, as the securities owned by said former category of market players, often US Treasury securities, serve as collateral for the loans. The repo market is, in this manner, based on the principle that financial institutions do normally not want to hold on to cash as it does not generate interest, making it in turn an “expensive” investment.¹⁶⁴

Repurchase and reverse repurchase agreements in which one of the counterparties is the Federal Reserve itself, have long been an important component of the FED’s monetary policy.¹⁶⁵ When the FED itself buys securities from a seller who at the same time legally commits to repurchase them, the FED basically (temporarily) injects reserves¹⁶⁶ into the financial system. Conversely, when the FED sells securities under a repurchase obligation, it (temporarily) removes reserves from the system.¹⁶⁷

During and in the aftermath of the financial crisis of 2008, and again during the Covid-19 crisis, participating in such repo-operations has, as said, become an important monetary policy tool.¹⁶⁸ Because of Covid-19, the FED would again, by resorting to this monetary tool, greatly expand the scope of its “repo operations” with as main purpose the channelling of liquidity to the money markets. The FED’s repo facilities have, for instance, made vast sums of liquidity available to primary market dealers in exchange for Treasury and other government-backed securities. Moreover, before the Covid-19 pandemic hit the markets, the FED was offering repo-operations of a short-term nature, thus making USD 100 billion of cash available in overnight repo-operations, and USD 20 billion of cash in 2-week repo operations. In response to the Covid-19 outbreak, the FED stepped up these repo-operations on 9 March 2020, by starting to offer USD 175 billion in overnight repos, and USD 45 billion in 2-week repos.¹⁶⁹ Then, on 12 March 2020, the day on which the WHO proclaimed the Covid-19 crisis a pandemic (cf. Sect. 1.1.1.), the FED announced an even bigger expansion. It, more precisely, started offering, on a weekly basis, repo-operations at much longer terms: USD 500 billion for 1-month repos, and USD 500 billion for 3-month repos. On 17 March 2020, at least for a while, the FED also significantly increased the overnight repos it offered to an amount of USD 500 billion. The FED justified its expansion policy under the argument that the liquidity injections accomplished through these repo-operations were intended to respond to the very unusual disruptions in Treasury funding markets because of the Covid-19 outbreak.¹⁷⁰

As a result, according to Cheng and Wessel, the FED became willing to lend what was essentially an unlimited amount of money to the markets.¹⁷¹

The FED would, furthermore, extend this facility until 31 March 2021.¹⁷²

3.3.4 Loans to Banks

The American monetary policy has traditionally been less based upon a lending activity from the central bank to commercial banks, a practice that is far more common in Europe, where this is classically referred to as the “lender of last resort”-function of the central bank. In the United States, the technique is better known under the term (borrowing at the) “discount window” or “discount window loans”.

Central bank loans to commercial banks essentially serve to support the liquidity and stability of the commercial banking system, as well as the effective transmission of monetary policy to the commercial banking system. Central bank loans to commercial banks serve a range of functions, namely: (1) they provide easy access to funding; (2) they may help deposit-taking institutions (i.e., deposit banks) to manage their liquidity risks effectively, e.g., by ensuring that deposit holders can withdraw their deposits, when needed, and (3) they may assist commercial banks in avoiding to resort to actions that would have negative consequences for their customers, such as withholding credit in times of market stress. In this way, the “discount window” also supports the steady flow of sufficient credit to households and enterprises. Providing liquidity in this manner has, moreover, been indicated as one of the original objectives of the FED (besides of other central banks around the world).¹⁷³

By means of an early Covid-19 response measure, already on 15 March 2020, the FED announced changes to its discount window policy, hence to its policy on granting loans to commercial banks. Said changes included the following¹⁷⁴:

• (1) Reducing the gap between the “primary credit rate” and the general level of “overnight interest rates”, in order to encourage deposit-taking institutions to use the discount window more actively in order to meet unforeseen funding needs.

• (2) Providing discount window credit for periods of up to 90 days, repayable in advance and, if desired so by the borrowing institution, renewable on a daily basis.

These changes took effect on 16 March 2020 and were to remain in force until the FED’s Board of Directors would decide otherwise.¹⁷⁵

On the same date (15 March 2020), the FED, moreover, lowered the interest rate it charges banks for lending through its discount window by 2 percentage points, from 2.25% to 0.25%, a rate that was lower than the one that had been resorted to during the financial crisis of 2007–2008.¹⁷⁶

The rate cut (which, according to David Goldman, was decided upon much faster than expected) was especially intended to avoid the kind of “credit crunch” and financial market turmoil that had occurred on the last occasion that the FED had decided to cut interest rates “all the way to the bottom”, namely during the 2007–2008 global financial crisis.¹⁷⁷

While the loans affected by this measure are usually “overnight”—meaning that they are taken out at the end of a day and are repaid on the next morning—the FED decided to extend these conditions to loans up to 90 days.¹⁷⁸

In such lending operations, commercial banks, moreover, typically provide a wide selection of collateral (such as securities, claims resulting from other loans …) to the FED in exchange for cash. This, in combination with the usual short-term of the loans, per definition implies that the FED does not take much risk when granting such loans. Fort the borrowers, the cash allows to continue to operate without meeting liquidity problems. The most basic of the implications of window discount loans is, hence, that depositors can continue to withdraw deposits (in cash) and banks can keep on granting new loans to third parties.¹⁷⁹

Nevertheless, American commercial banks are far more reluctant to borrow at the discount window than, e.g., their European counterparts, mostly out of fear that if the news that they have borrowed at the window discount were to spread, markets and other market players could be inclined to consider this as an indication that they are in trouble.¹⁸⁰ In order to counter this stigma and to thus ensure the usefulness of resorting to such window discount loans in the fight against the economic effects of Covid-19, in mid-March 2020, eight major US banks agreed to borrow at the discount window “not out of panic but to remove the public stigma of doing so in case the economic fallout of the coronavirus gets worse”.¹⁸¹

By means of a further response to the Covid-19 crisis, the FED also encouraged commercial banks—both the “largest banks” (on 1 April 2020)¹⁸² as the “community banks” (on 6 April 2020)¹⁸³—to tap into their regulatory capital and liquidity buffers, in order to increase their lending during the period of crisis. To put this in perspective, one has to bear in mind that reforms that had been put in place after the 2008 financial crisis had required banks to hold extra capital in order to absorb losses and, in this manner, to avoid the need for future bailouts. But it was at the same time understood that these additional capital buffers could be used during an economic downturn to boost lending, which the FED started encouraging as a further means of dealing with the Covid-19 crisis. This implied technical changes to the FEDS TLAC (= “total loss-absorbing capacity”) requirements, also known as “TLAC buffer requirements”.¹⁸⁴

The FED also loosened its “bank reserve requirements”—referring to the percentage of deposits that a bank must hold as reserves to meet liquidity demands in case depositors make withdrawals—although this loosening was deemed largely unnecessary, as banks were holding to far more reserves than the reserve requirements prescribed anyhow.

On 8 April 2020, the FED even relaxed a set of specific growth restrictions that had been previously imposed on Wells Fargo. These growth restrictions had been part of an enforcement action by which the FED had responded to widespread consumer protection violations from the part of Wells Fargo. By relaxing these sanctions, Wells Fargo could start increasing its own participation in some of the FED’s lending programs for small and medium-sized businesses. The change was, however, intended only to allow Wells Fargo to make additional loans available to small businesses under the so-called “Federal Reserve’s Paycheck Protection Program”, or abbreviated: PPP, and the (at the time still forthcoming) “Main Street Lending Program”. By contrast, the changes did not otherwise alter the enforcement action resorted to by the FED Board in February 2018 against Wells Fargo.¹⁸⁵

3.3.5 Quantitative Easing

Before the global financial crisis of 2008, the FED operated in what has been referred to as a “scarce reserves” framework. Within such a framework, commercial banks try to hold on to just a minimum amount of (cash) reserves needed for meeting their financial obligations, and borrow on the federal funds market when they are a little short of cash and lend when they hold on to a little too much. The FED itself operates in such a scarce reserves framework by targeting the interest rate on such a market and by adding, or emptying, reserves when it wants to move these federal funds interest rates.¹⁸⁶

However, in the aftermath of the financial crisis of 2008, notably between 2008 and 2014, the FED started to engage in what is known as “quantitative easing” (abbreviated “QE”) in order to stimulate the economy.¹⁸⁷

Within the logic of “quantitative easing”, the FED basically injects reserves to the market by buying securities, thereby significantly increasing both its balance sheet’s holdings of assets, as well as the supply of reserves in the banking system.¹⁸⁸

There is some discussion of the reserves that QE injects in the markets consist of newly created money or are based on existing money (more precisely on a surplus of household savings that the commercial banks park on the deposit facility accounts they hold with the central bank). We shall readdress this question in Chap. 11.

Be this as it may, when the FED started resorting to QE, its pre-crisis monetary framework was basically no longer working. Instead the FED moved to a “plentiful reserves” framework, with the deployment of new tools, such as the Interest on Excess Reserves (IOER) and the (Interest on) Overnight Reverse Repos (ONRRP), two interest rates that the FED sets itself in order to help controlling its key short-term interest rate.¹⁸⁹

Quantitative easing in the period 2008–2014 significantly increased the asset side of the FED’s balance sheet, as the latter bought bonds, mortgages and other assets in quasi-unlimited quantities. The FED’s liabilities—mainly to commercial banks—which expressed the price of the QE purchase transactions, obviously, increased by the same amounts and by 2017 stood at over USD 4 trillion.¹⁹⁰

The basic purpose of the QE purchases during the period from 2008 until 2014 was for commercial banks to lend and invest those reserves to third parties and/or in financial instruments issued by such third parties, in order to stimulate overall economic growth. However, what has actually happened was that commercial banks kept much of the injected reserves for themselves as “excess reserves”. At its pre-Covid-19 peak, US commercial banks were reported to hold USD 2.7 trillion in such excess reserves, which was indicated as an unintended result of the FED’s quantitative easing programme.¹⁹¹

Yet, according to Cheng and Wessel, when the FED stopped its QE asset purchase programme in 2014, the supply of excess reserves in the banking system, obviously, began to shrink. When the FED then started to reduce its balance sheet as of 2017, these excess reserves fell even faster.¹⁹²

On 30 January 2019, the FED’s Board of Governments Federal released a press release in which it was said that the FED’s Open Market Committee (the FED’s main policy committee) had confirmed that it¹⁹³:

intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates, and in which active management of the supply of reserves is not required.

According to Brock, most economists are of the opinion that the FED’s QE programme helped save the economy of the United States (and potentially the global economy as well) after the 2008 financial crisis. However, the extent of its role in the subsequent recovery of the American economy has at the same time been indicated as “impossible to quantify”.¹⁹⁴

On 15 March 2020, the FED decided to rekindle its former QE policy, by announcing its intention to implement up to USD 700 billion in asset purchases as a Covid-19 emergency response measure aimed at providing additional liquidity to the American financial system. This decision was especially made in response to the massive economic and market turmoil caused by the rapid spread of the Covid-19 virus on the American territory, and the subsequent economic downturn this had entailed. Subsequent actions would, however, soon extend this initially limited QE action indefinitely.¹⁹⁵ Already on 23 March 2021, the QE policy was thus further extended, which will be explored hereafter in some more detail. (Cf. Sect. 3.3.6.)

3.3.6 Support Measures for Corporations and Businesses

3.3.6.1 Primary and Secondary Market Corporate Credit Facilities

In what has been considered an important step beyond its pre-Covid-19 crisis programmes that focused primarily on the functioning of financial markets, on 23 March 2020, the FED established two new facilities to directly support highly rated American companies without a securities or similar financial market listing.¹⁹⁶

On 23 March 2020, the FED created the “Primary Market Corporate Credit Facility” (PMCCF). This programme targeted primary market dealings, by allowing the FED to lend directly to companies by either purchasing new bond issues or by granting loans to them. Under these loans, borrowers were allowed to defer payment of both interest and principal during at least the first 6 months, which gave them access to cash that allowed for the payment of employees and suppliers. During these 6 months period, borrowers were, however, not allowed to pay dividends or buy back shares.¹⁹⁷

The programme was already terminated by the end of 2020: As of 31 December 2020, the PMCCF was no longer authorised to purchase eligible assets.¹⁹⁸

Also on 23 March 2020, the FED created the (new) Secondary Market Corporate Credit Facility (SMCCF). Under this programme, which targeted secondary market positions, the FED was authorised to purchase existing corporate bonds, as well as exchange-traded funds investing in such high-quality corporate bonds.¹⁹⁹ This programme was also terminated by 31 December 2020.

According to the FED, the two facilities together provided companies with access to credit, so that they would be better suited to maintain their business operations and capacity during the period of disruption caused by the Covid-19 pandemic.²⁰⁰

After initially supporting USD 100 billion of new financing through these facilities, the FED then announced a massive expansion of the programmes on 9 April 2020, the facilities since then being authorised to support up to USD 750 billion of corporate debt.²⁰¹

As had also been the case for some of the other monetary facilities and programmes developed in response to Covid-19, the FED invoked section 13 (3) of the Federal Reserve Act in order to have the two facilities installed. Both facilities got approval from the US Treasury, which, moreover, provided USD 75 billion from its “Exchange Stabilisation Fund” for covering potential losses.²⁰² However, despite the FED’s objections, Treasury Secretary Steven Mnuchin decided that the final purchases of bonds and loans under the corporate credit facilities would take place by 31 December 2020. The bonds and loans that were purchased before would still be funded by the FED beyond December 31, 2020, until they were sold or matured.²⁰³

3.3.6.2 Commercial Paper Funding Facility (CPFF)

At the beginning of 2021, “commercial paper” in the United States represented a USD 1.2 trillion market, on which companies issued unsecured short-term debt to money market funds, and others, in order to finance their daily operations.²⁰⁴

Commercial paper typically consists of short-term promissory notes that may be used to directly finance a wide range of economic activities, in this manner providing credit and funds for the operational needs of a wide variety of businesses and municipalities.²⁰⁵

As has already been explained before, the spread of Covid-19 disrupted economic activity throughout the United States. This also affected the commercial paper market. One of the main, immediate effects of Covid-19 on this market was that investors became reluctant to still invest in such commercial paper. Because of this, interest rates on longer-term commercial paper (e.g., those with a 3-month maturity) decreased to levels which had not been seen since the financial crisis of 2008. It was increasingly feared that companies would no longer be able to issue new commercial paper with a maturity of more than 1 week. This would severely impact their refinancing risk and reduce the ability of the commercial paper market to support their business operations.²⁰⁶

In response to these concerns, based on section 13(3) of the Federal Reserve Act, and after, moreover, having obtained the prior approval of the Secretary of the US Treasury, the Board of Governors of the FED gave the Federal Reserve Bank of New York the authorisation to establish the CPFF²⁰⁷ or, in its entirety, the “Commercial Paper Funding Facility”. The CPFF became effective on 30 November 2020.²⁰⁸ According to Verlaine, it was in essence another 2008 financial crisis era programme that was reinstated in times of Covid-19.²⁰⁹

The objective of the CPFF was, as noted, to improve the liquidity of the commercial paper market. This effect was to be accomplished, on one side, by increasing the availability of term commercial paper funding to issuers, and, on the other side, by providing greater assurance to both issuers and private investors that companies and municipalities would be able to roll over their maturing commercial paper. At the same time, the CPFF aimed to encourage investors to recommit to term loans in the commercial paper market. By ensuring that the commercial paper market would continue to function properly, especially in times of stress, the FED also reckoned that it could rekindle with the providing of credit to support families, businesses and employers throughout the economy.²¹⁰

On the basis of the CPFF, the FED was essentially allowed to buy commercial paper itself, or, in other words, to lend directly to companies for up to 3 months, at an interest rate between 1 and 2 percentage points above the prevailing overnight lending rates.²¹¹

According to the FED²¹²:

By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to engage in term lending once again in the commercial paper market. An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak.

As with the other monetary facilities that were not aimed at providing or supporting bank loans, the FED had to invoke section 13(3) in order to receive the prior approval from the US Treasury, which itself placed USD 10 billion in the CPFF to cover any losses. The Commercial Paper Funding Facility was (originally) due to expire on 31 March 2021.²¹³

3.3.7 Main Street Lending Program (and Similar Programs)

The FED’s “Main Street Lending Program” was announced on April 9, 2020. However, is has since then been expanded and extended to more potential borrowers. The Main Street Lending Program was initially intended to support businesses which were too large to get support under the “Small Business Administration’s Paycheck Protection Program” (PPP) while at the same time being too small to resort under the FED’s own two corporate credit facilities²¹⁴ (the latter having been explained before under Sect. 3.3.6.1.). The Main Street Lending Program has ended on 8 January 2021.²¹⁵

The programme was implemented through five facilities²¹⁶:

• (1) The New Main Street Loan Facility (MSNLF).

• (2) The Main Street Priority Loan Facility (MSPLF).

• (3) The Main Street Expanded Loan Facility (EMSLF).

• (4) The Nonprofit Organization New Loan Facility (NONLF), and

• (5) The Nonprofit Organization Expanded Loan Facility (NOELF).

Through three of these five programmes—namely the MSNLF,²¹⁷ the EMSLF²¹⁸ and the MSPLF²¹⁹—the FED aimed to finance up to USD 600 billion in loans over a period of 5 years.²²⁰

Companies with up to 15,000 employees, or with up to USD 5 billion in annual revenues, were eligible for participating under these programmes. As part of some further changes to the programmes announced in June 2020,²²¹ the FED decided to lower the minimum loan size for both MSNLF loans and MSPLF loans. The FED also decided to increase the maximum for all facilities and to extend the repayment periods. Lenders were, moreover, under an obligation to retain 5% of the loans.²²² Under said programmes, borrowers were, moreover, subjected to restrictions with regard to share buybacks, dividends and executive compensation.²²³

As has been the case for several of the other facilities, the FED invoked section 13 (3) of the Federal Reserve Act in order to obtain prior approval for establishing the facility. This approval from the US Treasury was granted, with the US Treasury moreover, through the CARES Act, placing USD 75 billion in the three abovementioned Main Street programmes in order to cover losses.²²⁴

On 17 July 2020, the FED decided to extend the Main Street Lending Program to non-profit organisations, such as hospitals, schools and social service organisations, under the condition that these had been in good financial health before the Covid-19 pandemic. By way of further conditions, these borrowers had to have at least ten employees and endowments of no more than USD 3 billion, amongst others. Loans were granted for 5 years, with principal payments deferred during the first 2 years. As with business loans accorded under the Main Street Lending Program, lenders had to retain 5% of the loans. This extension of the Main Street programme also lapsed, together with the rest of the facility, on 31 December 2020.²²⁵

3.3.8 Paycheck Protection Program Liquidity Facility

On 16 April 2020, the FED announced the “Paycheck Protection Program Liquidity Facility“. This facility was installed in order to facilitate PPP lending. Under this program, commercial banks (besides other eligible borrowers) granting loans to small businesses, were themselves allowed to borrow from said facility by using the PPP loans as collateral.²²⁶

Pursuant to the “Paycheck Protection Program Liquidity Facility Term Sheet” (in its version of 8 March 2021), the Paycheck Protection Program Liquidity Facility got authorised under section 13(3) of the Federal Reserve Act.²²⁷ The facility was afterwards extended until 31 March 2021.²²⁸

Table 3.1 gives an overview of the outstanding loans of the FED on 20 January 2021.

Table 3.1 Outstanding loans of the FED (Federal Reserve 13(3) Facilities) on 20 January 2021 [Source: Cheng et al. (2021)]

3.3.9 Further Support to Households and Consumers

On 23 March 2020, the FED re-launched another financial crisis of 2008-era facility, namely the “Term Asset-Backed Securities Loan Facility” (TALF).²²⁹ Through the TALF, the FED was able to support lending to households, consumers and small businesses. The mechanism worked by issuing loans to eligible borrowers, such as commercial banks, based upon using (re-existing) asset-backed securities (ABS) as collateral. The collateral for these securities could have been made up by a broad variety of loans, such as: auto loans, student loans, credit card loans, equipment loans, floor plan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration (SBA), residential mortgage servicing advances, or commercial mortgage loans.²³⁰

Surpassing the preceding 2008 financial crisis-era programme, the FED drastically expanded eligible collateral to include existing commercial mortgage-backed securities, as well as newly issued collateralised loan obligations of the highest quality. Similar to the corporate loan support programmes (cf. Sect. 3.3.6.1.), the TALF was initially intended to only support up to USD 100 billion of new credit. In order to revive the programme, the FED had to again invoke section 13 (3) of the Federal Reserve Act in order to get prior US Treasury approval. The US Treasury allocated USD 10 billion from the Exchange Stabilization Fund. Without obtaining a further extension, the facility had to stop making purchases on 31 December 2020, again on the orders of US Treasury Secretary Mnuchin.²³¹

3.3.10 Supporting State and Municipal Borrowing

During the financial crisis of 2007–2008, the FED had refused to grant monetary support to the benefit of municipal and state borrowing, believing at the time that supporting states and municipalities financially was the responsibility of the presidential administration and the US Congress.²³²

As an immediate impact of Covid-19, already by March 2020, the US municipal bond market was facing enormous stress, with state and local governments finding it increasingly difficult to borrow at a time when they were increasingly in need of money in their struggle against Covid-19.²³³

Investors reacted by withdrawing from various municipal mutual funds. According to Schüle and Sheiner, during the week ending on 18 March 2020, investors were reported to have withdrawn a record amount of USD 2 billion from said market, good for nearly 2.5% of all assets, with an additional amount of USD 13.7 billion withdrawn during the week to follow. Between 9 and 20 March 2020, state and local governments, moreover, managed to place only about USD 6 billion of the total amount of USD 16 billion of bonds they had wanted to issue during this period. These withdrawals and failed placements resulted in sharp increases in the interest rates that borrowers on this market had to pay for placing new loans. During the period from 9 March 2020 until 24 March 2020, the so-called “Municipal Market Data yield” (abbreviated “MMD yield”)—which is in essence a measure for municipal bond yields developed by “Thomson Reuters” and commonly used as one of the main price indicators for state and local bonds—was reported to have risen by about 2 percentage points, which obviously meant a significant increase for this market. As a result, at a time when the borrowers on this market (such as states, municipalities, and other local governments) were already under enormous stress because of the Covid-19 epidemic itself and, moreover, in need of huge additional financial resources in order to fight the Covid-19 pandemic, they now also started facing increasing difficulties borrowing on the market. But this was not the only problem for these borrowers. In addition, a decision which had been made by the US Treasury to extend the deadline for collecting federal taxes from 15 April 2020 to 15 July 2020, had as a result that state and local governments would have had to wait an additional 3 months for their share in the tax revenues. These combining factors threatened to create a huge cash shortage. This implied that municipalities (and other local governments) who were no longer able to borrow on the market, were under threat to have to cut on their service providing. The city of Cincinnati, e.g., at the time was forced to lay off 20% of its employees.²³⁴

Already on Friday 20 March 2020, the FED started accepting short-term municipal bonds purchased from mutual funds as collateral for loans to commercial banks under the newly re-launched “Money Market Mutual Fund” (abbreviated: MMLF). Three days later, on Monday 23 March 2020, the FED started accepting an even wider range of municipal bonds as collateral for loans under both the MMLF and the “Commercial Paper Funding Facility”.²³⁵

By accepting these short-term municipal bonds as collateral for loans granted to commercial banks, the FED made it easier for these banks to convert municipal bonds into cash. This made such municipal bonds more attractive to hold which added to the credit worthiness of the issuers of said bonds (namely states, municipalities and other local authorities). The FED’s emergency actions quickly attained the desired effect. Already in the period from 23 March 2020 until 30 March 2020, the MMD yield fell by about one percentage point.²³⁶

Shortly before, the so-called CARES Act²³⁷ had been passed by the 116th US Congress, then to be signed into law by US President Donald Trump on 27 March 2020. This Act was one of the main laws issued under Trump in order to deal with the economic fallout from the Covid-19 pandemic. (For further details, cf. Sect. 4.4.2.) Perceived as unprecedented in both its size and scope, the CARES Act (at the time) involved the largest economic stimulus package in the American history. It was said to amount to USD 2.2 trillion, or ±10% of the total American GDP, in federal support measures. With this incredible amount, the CARES Act had managed to break the record set by the USD 831 billion stimulus act that had been passed in 2009, as part of the Obama administration response to the Great Recession (that had originated from the financial crisis of 2007–2008).²³⁸

Amongst many other programmes and support measures, the CARES Act included an amount of USD 454 billion to cover the FED’s losses on loans to be made directly to businesses, states and municipalities, as well as an amount of USD 150 billion in direct federal financial support to states and municipalities.²³⁹

It is thought that, already by giving the FED the possibility to launch its monetary support programmes, amongst which a programme for supporting the municipal bond market (i.e., the market(s) for bonds issued by states, municipalities and other local authorities), the CARES Act may have attributed to calming the municipal bond market.²⁴⁰

Shortly thereafter, the so-called “Municipal Liquidity Facility” was effectively created on 9 April 2020 “to help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities”.²⁴¹

The FED again had to invoke section 13 (3) of the Federal Reserve Act in order to obtain the approval of the US Treasury. Based upon the CARES Act, the latter provided USD 35 billion to cover any potential losses made under the facility.

The facility was then effectively established to purchase up to USD 500 billion of short-term bonds directly from: (1) US states (including the District of Columbia), (2) US counties with populations of at least 500,000 inhabitants, and (3) US cities with populations of at least 250,000 inhabitants. Eligible state-level issuers were hereby allowed to make use of the proceeds from such bonds in order to support counties and cities.²⁴² In June 2020, Illinois became the first government entity to operate the facility. Since then, there has, strangely enough, not been much additional borrowing under the programme.²⁴³

On 27 April 2020 and 3 June 2020, the FED, furthermore, expanded the list of eligible borrowers.²⁴⁴ In addition, the FED expressed its intent to continue to closely monitor conditions on the primary and secondary markets for municipal bonds. The FED also made it clear that it would continue to assess whether additional monetary support measures would be needed in order to further help supporting the flow of credit and liquidity to state and local governments.²⁴⁵

In accordance with further changes announced in June 2020, the FED decided to allow governors of states with cities and counties which, considered on their own, fell below the population thresholds, to designate up to two localities to participate on a joint basis. Governors were also given the opportunity to designate two revenue bond issuers having another capacity—such as airports, toll facilities, utilities, public transport providers—to be eligible under the Municipal Liquidity Facility.²⁴⁶

The FED at the time intended to lend up to USD 500 billion to eligible government entities provided that these had investment grade credit ratings as of 8 April 2020, in exchange for bonds that would be directly linked to future tax revenues with maturities of less than 3 years.²⁴⁷

The New York Metropolitan Transportation Authority (MTA) was one of the few public authorities to have taken advantage of this expansion of the programme. In August 2020, the MTA, more precisely, borrowed USD 451 million from the facility.²⁴⁸ The New York MTA even obtained a second loan from the facility on 10 December 2020, then borrowing an additional USD 2.9 billion, before lending under the programme was stopped.²⁴⁹

The Municipal Liquidity Facility, ultimately, stopped making bonds purchases on 31 December 2020, when it lost US Treasury support on the decision of Secretary Mnuchin.²⁵⁰

Notwithstanding the above, the FED, moreover, used two of its others credit facilities for supporting the municipal bonds market. The FED thus expanded the eligible collateral for the “MMLF” (cf. Sect. 3.3.3.3.) to include highly rated municipal debt bonds, with maturities up to 12 months, as well as so-called “municipal variable-rate demand notes”. The FED, furthermore, expanded the eligible collateral under the CPFF (cf. Sect. 3.3.6.2.). The latter expansion meant to include high-quality commercial paper, backed by tax-exempt government and municipal securities, as eligible collateral. These measures were taken to allow commercial banks to inject liquidity into the municipal debt market, where tensions remained present because of a lack of liquidity.²⁵¹

In the meantime, it remained unlikely that the FED would start purchasing government debt directly from the (or “a”) government, as opposed to buying on the secondary market. Such a direct financing of the government, also referred to as “monetizing the debt”, was not something that the central bank of the leading capitalist country on the planet seemed to have wanted to take into consideration, which the Bank of England, in a statement of 2 April 2020, was less reluctant in doing, at least for a short period (through its so-called “Ways and Means facility”).²⁵²

3.3.11 US Money Markets Policy

Resorting to yet another tool that had been used during the Great Recession, the FED also began making US dollars available to other central banks, so that they could lend these to commercial banks in need of them. Under such “currency swap operations” the FED handed out US dollars to receive foreign currency in exchange, while charging interest on said swaps. As has already been explained before (cf. Sect. 3.2.5.), five foreign central banks in this regard entered into permanent swap line agreements with the FED. It concerned, more precisely, the central banks of Canada, England, the Eurozone, Japan and Switzerland. Under this joint agreement, the FED, moreover, demonstrated a willingness to reduce the rate it charges on these swaps, while at the same time having agreed to prolong the maturity of these swaps. (Cf. Sect. 3.2.5.) The FED also extended its temporary bilateral swap agreements with the central banks of some other countries, notably Australia, Brazil, Denmark, Korea, Mexico, New Zealand, Norway, Singapore and Sweden. On 29 July 2020, the FED extended the latter series of temporary swaps until 31 March 2021.²⁵³

The FED also offered US dollars to central banks with which there had not been an established swap line agreed upon. The latter happened through a new reverse repo facility entitled “FIMA” (short for “foreign and international monetary authorities”). The FED, more precisely, intended to lend US dollars overnight to these central banks, using US Treasury debt as collateral. This facility as well was later extended, along with the temporary swap lines itself, until 31 March 2021.²⁵⁴

3.3.12 Evaluation of the FED’s Covid-19 Policy

With its Covid-19 monetary response policy, the FED has, in essence, tried to ensure that, during the Covid-19 crisis, credit (and, hence, liquidity) would continue to flow to those in need, especially households and businesses. The FED, moreover, has wanted to prevent that the financial system would have further amplified the shock to the economy caused by the Covid-19 pandemic. The FED also aimed at containing the permanent damage to the economy, so that when the Covid-19 pandemic was finally to subside, the economy would be able to expand again and take up its role of providing goods and services in order to meet demand.²⁵⁵

Of particular importance for understanding the way the FED responded to the Covid-19 crisis, is that fact that, while in many countries outside the United States, most credit runs through commercial banks, in the United States, by contrast, much of the credit runs through the capital and financial markets. This fact, obviously, hemps explaining the great trouble the FED went through in its attempts to make capital and financial markets (as well as the parties active on these markets, besides the financial instruments issued or traded on these markets) function as smoothly as possible as well.²⁵⁶

As Don Kohn, former Vice Chairman of the Federal Reserve, has expressed this approach²⁵⁷:

The Treasury market in particular is the foundation for trading in many other securities markets in the US and around the world; if it’s disrupted, the functioning of every market will be impaired. The FED’s purchase of securities is explicitly aimed at improving the functioning of the Treasury and MBS markets, where market liquidity had been well below par in recent days.

Another matter of concern has been that, when financial markets get congested, companies may still tend to draw on commercial banks’ credit lines, which can lead commercial banks to either sell Treasury and other securities, or reduce other lending. The FED’s Covid-19 response policy has, therefore, also been to provide unlimited liquidity to commercial banks, so that they remained able to meet credit drawdowns, and to immediately relieve any stress on their balance sheets.²⁵⁸

3.4 IMF

3.4.1 IMF Policy in General

The policy of the International Monetary Fund (in short: IMF) has undergone considerable changes over the years.

The initial focus of the IMF in the period following its establishment until 15 August 1971 was threefold, namely: (1) ensuring exchange rate stability between the currencies of the participating member countries; (2) a far-reaching system of monetary assistance to support member countries in meeting their treaty obligations; and (3) a system of monitoring and reporting.

The exchange rate stability mechanism, which was the mainstay of the IMF’s existence during its first phase, involved Member States’ obligation to keep fluctuations in their exchange rates between agreed parameters (with the US dollar as the anchor currency), if necessary, through central bank interventions, based upon purchases or sales of either one’s own currency or of foreign exchange, on the exchange markets. The mechanism was, moreover, supported by a mutual convertibility of the currencies of the Member States, as well as by a convertibility of the dollar into gold (at least at the level of the central banks themselves). This IMF exchange rate stability mechanism worked very well for a long time, with as effect, among others, that during the period when the IMF exchange rate stability mechanism was in operation, countries managed to reduce their post-war debt burden significantly. This was also the period of the greatest wealth creation and of the most democratic wealth distribution that the (Western) world has ever known.²⁵⁹

When the United States began to experience disproportionate budgetary costs at the end of the 1960s, in particular due to the cost of financing the costly overseas war in Vietnam, it unilaterally decided on 15 August 1971 to terminate the exchange stability rate mechanism.

From then on, the IMF exchange rate treaty obligations were reduced to a limited number of general obligations of proper currency exchange rate behaviour, while the IMF’s focus shifted to its monetary assistance obligations and to its reporting and monitoring obligations. It was also during this period that the door was left ajar for an increasing neo-liberalisation of IMF policy itself and that, under neoliberal policy, global debt rose to astounding numbers.

All of this implied that, especially as of the 1980s, IMF policy in general, and its surveillance policy in particular, became increasingly subject to the doctrine(s) of economic neoliberalism (which has been captured by the notion “Washington consensus”). According to Stiglitz, this implied that the basic ideas of economic neoliberalism, such as the idea that free trade, open markets, privatisation, deregulation, free movement of both capital (= investment opportunities) and people (= (cheap) labour), as well as the reduction of public spending in order to increase the role of the private sector, are the best methods for conducting economic policy, increasingly appealed not only to the governments of many Western countries (especially those with the world’s largest economies), but also to those of developing countries. However (and even more regretfully), this approach at the same time also started to rule the thinking of major international organisations, such as the IMF and the World Bank themselves.²⁶⁰

In his book “Globalization and its Discontents”, Stiglitz has argued that IMF policies have since then to an increasing extent been based on “flawed neoliberal assumptions”, as follows²⁶¹:

Behind the free market ideology there is a model, often attributed to Adam Smith, which argues that market forces—the profit motive—drive the economy to efficient outcomes as if by an invisible hand. One of the great achievements of modern economics is to show the sense in which, and the conditions under which, Smith’s conclusion is correct. It turns out that these conditions are highly restrictive. Indeed, more recent advances in economic theory—ironically occurring precisely during the period of the most relentless pursuit of the Washington Consensus policies—have shown that whenever information is imperfect and markets incomplete, which is to say always, and especially in developing countries, then the invisible hand works most imperfectly. Significantly, there are desirable government interventions which, in principle, can improve upon the efficiency of the market. These restrictions on the conditions under which markets result in efficiency are important—many of the key activities of government can be understood as responses to the resulting market failures.

The Washington Consensus is, in essence, a set of ten, dogmatic economic policy prescriptions. These have at the same time been considered to be the best practices “standard” reform package promoted for developing countries in crisis and in need of monetary or financial support by the leading Washington, D.C.-based international organisations, such as the IMF itself and the World Bank, as well as by the US Treasury Department. The term “Washington consensus” is hereby believed to have been first used, in 1989, by the British economist John Williamson.²⁶² The ten best practices prescriptions concern economic policies in areas ranging from macroeconomic stabilisation, economic of free trade and investment, as well as the expansion of free market forces within domestic economies. These “ten” prescriptions are as follows²⁶³:

• (1) fiscal discipline;

• (2) reorientation of public spending priorities to areas that offer both high economic returns and the potential to improve income distribution, such as primary health care, primary education and infrastructure; such “reorientation” has, in essence, in most cases come down to downsizing public spending and subjecting public services to austerity;

• (3) tax reform (to reduce marginal rates and broaden the tax base, i.e., implying that the poor and middle classes got taxed more and the rich less);

• (4) interest rate liberalisation;

• (5) a competitive exchange rate;

• (6) trade liberalisation;

• (7) liberalisation of foreign direct investment flows;

• (8) privatisation;

• (9) deregulation (to remove barriers to entry and exit markets); and

• (10) guaranteeing and protecting property rights (especially intellectual property rights).

The specific policies of the IMF—and by extension the EMU—which have on many occasions been severely criticised by Stiglitz, include “fiscal austerity” (which is still one of the basic principles governing the fiscal policy of both the IMF and the EU, and hence of their member states that are unfortunate enough to have become dependent on financial support from the former), high interest rates (which, however, had to be largely abandoned in the aftermath of the 2008 financial crisis), trade and capital liberalisation, as well as the insistence on privatisation and commercialisation of entire sectors of economic life that were once part of the public sector. The latter aspect of EU and US fiscal policy has been one of the main reasons for the unfavourable outlook of the health care and nursing home sectors at the start of the Covid-19 pandemic. This will be explored in more detail in Chap. 5 (= hospitals) and Chap. 6 (= nursing homes) of this book. The emphasis on the free movement of capital and labour—not coincidentally two of the main principles contained in the European treaties²⁶⁴—has in its own turn been one of the factors that helped the spread of the Covid-19 virus (as will be illustrated in more detail in Sect. 7.11.1, with reference to the example of the meat processing market).

3.4.2 IMF Monitoring and Coordination

In the wake of the Covid-19 epidemic, countries around the world faced urgent and unprecedented balance of payments and financing needs, which, due to the fact that these elements are precisely the main conditions for obtaining IMF monetary support, created an immediate and, in the words of the IMF itself, “record demand” on IMF resources.²⁶⁵

In the beginning phase of the Covid-19 pandemic, the IMF responded to the Covid-19 outbreak by shifting work priorities to be able to address the most critical aspects of country needs, as efficiently as possible, amongst others by streamlining its procedures to speed up decision-making, and by assigning staff members to new missions where they were most needed.²⁶⁶

Based on its general lending capacity of USD 1 trillion at the time, between May 2019 and October 2020 (i.e., including a time period prior to the Covid-19 pandemic), the IMF approved about USD 165 billion in loans.

In further response to the Covid-19 crisis, the IMF—together with the World Bank and other partners, such as the Group of 20—also called on countries’ creditors to temporarily suspend debt repayments in order to make it possible to provide much-needed monetary and financial support to the poorest countries. This initiative ultimately resulted in an official “bilateral debt moratorium”, known as the “Debt Service Suspension Initiative”. The intent of this moratorium was to save the poorest countries billions of dollars in debt payments, so that these countries would be able to spend this money on their health systems and for protecting their citizens against the impact of Covid-19.²⁶⁷ The initiative, which was agreed on 15 April 2020, covered 73 International Development Association (IDA) and UN Least Developed Countries (LDCs) that were in arrears with their debt service payments to the IMF and World Bank. Under the initiative, creditors committed to suspend debt service payments due between 1 May 2020 and 31 December 2020. New repayments were to begin in June 2022 and were to be phased, in over 3 years, in semi-annual instalments. The initiative was, moreover, considered to be “net present value (NPV) neutral” in that there was no reduction in the nominal amount of principal or interest, and that the contractual interest rate would be paid on the deferred amounts. Under the DSSI, private creditors were approached, but not required, to participate on comparable terms. Despite calls from the official sector and a coordination attempt at the level of the IMF itself, private creditors refused to participate in the DSSI (according to available information).²⁶⁸

Immediately upon the outbreak of Covid-19, the IMF also started to provide much-needed debt relief through the “Catastrophe Containment and Relief Trust” (CCRT).²⁶⁹

The IMF and World Bank also took the initiative of bringing together African leaders, bilateral partners and multilateral institutions in what was initially meant to be a “spring meeting” taking place in April 2020, and to be continued in October 2020. The intent of this initiative was to accelerate action to tackle Covid-19 in African countries. Multilateral organisations, including the United Nations (UN), pledged continued support, with bilateral partners reaffirming their continued commitment to the above-mentioned debt moratorium as of 1 May 2020. This moratorium has, furthermore, later been extended to October 2020.²⁷⁰

The IMF and the WHO (short for “World Health Organisation”) also joined forces to explore how the two organisations could start cooperating in order to save both lives and the global economy. This had as a practical impact that, for the first time in the IMF’s history, epidemiologists started contributing to economic analysis and forecasts.²⁷¹ Similarly, the IMF and the WTO (short for the “World Trade Organisation”) jointly called for greater attention to the role of open trade policies—particularly with regard to food and medical supplies—in combating the Covid-19 virus, (re)ensuring employment, and boosting economic growth.²⁷²

The IMF also started coordinating with a number of “Regional Financing Arrangements”, such as the “European Stability Mechanism” and the “Arab Monetary Fund”.²⁷³ All of these supranational institutions, to a bigger or lesser extent, started to support their members by: (1) providing loans, (2) adjusting their policies and toolkits to accommodate the urgent nature of the Covid-19 crisis, and (3) providing policy and technical advice in order to help countries’ authorities through the difficult economic period caused by Covid-19.²⁷⁴

At a more internal level, in response to the Covid-19 crisis, IMF staff members also adapted to new ways of working on a daily basis. E.g., the IMF’s Board, management and staff were reported to move their activities from their boardrooms and their offices to their personal living rooms, kitchens, guest rooms and basements. All IMF work thus became virtual, from surveillance missions to loan negotiations, technical assistance and training.²⁷⁵

During the course of 2020, immediate and real-time policy advice and capacity building was reported of having been provided through means of virtual communication to over 160 countries, on topics ranging from cash and data management to economic policy and governance. The IMF has also pointed to the fact that more than 90% of countries that had been requesting pandemic-related emergency funding, at the same time were given capacity development support in the form of direct technical advice, practical tools and policy-oriented training.²⁷⁶

3.4.3 IMF’s General Debt Policy

As noted earlier, in the aftermath of the 2008 financial crisis, persistently low interest rates in many monetary territories (such as, e.g., the euro area and the United States) had contributed to a build-up of global financial risks and historically high levels of both public and private debt in most countries.²⁷⁷ These debt vulnerabilities were to be further exacerbated by the Covid-19 pandemic itself, and even further by the Covid-19 containment and social distancing measures that many countries resorted to (cf. Chap. 2.), which in turn led even more to a significant increase in government debt and deficits, even far beyond to what had been experienced during the 2008 global financial crisis.²⁷⁸

When countries began their fight against the Covid-19 pandemic, they pledged to spend whatever it took to save lives, protect people from job and income loss, and save businesses from bankruptcy, while at the same time, in as much as (already) possible, supporting recovery.²⁷⁹ In addition, many monetary authorities themselves also started helping countries to combat the Covid-19 pandemic, through a wide variety of monetary response measures, almost all of which relaxed lending conditions, besides resorting to unconventional monetary support measures, including interest or quantitative easing measures.²⁸⁰

However, it was also feared that low interest rates policies (which may add to more debt) make borrowers more vulnerable when interest rates rise, while they at the same time generally erode banks’ profits, which—under the logic of free market economies—may hamper commercial banks’ ability and willingness to lend money to businesses that need it to survive or to grow.²⁸¹

The Covid-19 pandemic particularly affected many vulnerable low-income countries: many of these countries were already before the outbreak of the Covid-19 pandemic at high risk of debt distress. Economic shocks, such as a pandemic, can cripple their economies even more, e.g., by reversing financing flows, which may in turn even further complicate their ability to manage their debt. This is why the IMF, along with other partner institutions, began to assist these low-income countries even more with regard to their debt management and transparency practices. This assistance included technical support, particularly in the development and the publishing of strategies of debt management and debt reports.²⁸²

In addition, in view of the financing needs to achieve the UN Sustainable Development Goals, the IMF and World Bank (monitored by the Group of 20) committed to the development of operational guidelines for more sustainable lending practices. The IMF and the World Bank, furthermore, resorted to an overall assessment of the debt vulnerability of low-income economies.²⁸³

3.4.4 IMF Support Through Loans

3.4.4.1 General

Provided certain conditions are met, the IMF provides financial support to its member countries under the form of loans. The basic conditions in order for member states to be eligible for such financial support are that: (1) the member state is faced with actual, potential, or prospective balance of payments problems; (2) the support is aimed to help the member state with rebuilding their international reserves and/or restoring the general conditions for strong economic growth, and (3) the member state has to commit itself to look for solutions (in line with IMF policy) for correcting underlying problems.²⁸⁴ It should be noted that the actual conditions applying to a given support measure, may differ according to the type of support, whereby support conditionality will in principle get more severe the more a type of loan is part of a more exceptional support mechanism, and/or the more a member state is in danger of becoming (chronically) dependent on the IMF support. In the best of neoliberal traditions, the underlying idea is that resorting to IMF financial support should as much as possible be avoided and, in case when it has to be asked, it should only be granted as briefly as possible, and moreover be aimed at getting the member country back on its feet as soon as possible (allowing it to again take care of itself as soon as possible).

The IMF may also provide emergency funding. Needless to say that, by means of response to the Covid-19 pandemic, the IMF was faced with a need for massively increasing such emergency financing in order to help member countries cope with the pandemic.²⁸⁵

The IMF does however not grant loans or support for specific projects. In terms of the IMF treaty (usually referred to as the IMF-articles of agreement), IMF financing is intended to help member countries: (1) with resolving balance of payments problems, (2) with stabilising their economies, and (3) with restoring sustainable economic growth. Under the IMF-articles of agreement, IMF financing can, however, also be provided in response to specific occurrences, such as natural disasters including pandemics. Finally, the IMF may also provide so-called “precautionary financing” which is aimed at preventing and insuring against future crises. The IMF has in this regard confirmed that it continues to improve on the tools available for such crisis prevention.²⁸⁶

Broadly speaking, the IMF provides two types of loans: (1) loans against so-called “non-concessional” interest rates, and (2) loans to low-income countries on “concessional” terms (especially with regard to interest rates, some of which may even be completely interest-free).²⁸⁷

On a more technical level, the IMF arsenal contains a wide variety of types of loans, which are purportedly tailored to different types of balance of payments problems or needs and, moreover, to the specific circumstances of the applying member country, as well as its particular needs for applying for a loan.²⁸⁸

The basic underlying policy approach is that any member country can access IMF resources under the “General Resources Account” (GRA) on non-concessional terms (as laid down, in principle, in Article 8 of the IMF-articles of agreement), but that the IMF may also provide financial support of a more concessional nature. During the Covid-19 pandemic, such concessional support, in principle, happened at zero interest rates until at least June 2021, under the so-called “Poverty Reduction and Growth Trust Fund” (PRGT). The latter had especially been tailored to meet the diversity and needs of so-called “low-income countries”. Historically, for both emerging and advanced market economies in crisis, most IMF assistance has been provided through “Stand-By Arrangements” designed to address short-term or even potential balance of payments problems.²⁸⁹

One of the main practical differences between the types of support is that, taking the different countries’ specific circumstances into consideration, under GRA-based support programmes, there is a general expectancy that the member country will be solving its BoP (= balance of payments) problems within the period foreseen in the programme, while under PRGT-programmes, the IMF usually shows a greater tolerance towards longer time frames for solving such BoP-problems.²⁹⁰

However, the IMF has many more specific programmes and facilities at its disposal. E.g., the “Stand-by Credit Facility” (SCF) serves a similar purpose for low-income countries. The “Extended Fund Facility” (EFF) and the corresponding “Extended Credit Facility” (ECF) for low-income countries have been developed as the IMF’ main tools for medium-term support to countries facing “protracted”—i.e., for a longer duration—balance of payments problems. The use of these facilities had already increased significantly during and after the 2008 global financial crisis, reflecting the structural nature of some members’ balance of payments problems that had resulted as a consequence of said financial crisis and its aftermath.²⁹¹

Furthermore, designed for helping to prevent, or mitigate, crises and build market confidence during periods of heightened risk, member countries with already strong economic policies in force, may also resort to the “Flexible Credit Line” (FCL), or to the “Precautionary and Liquidity Line” (PLL).²⁹²

Two other facilities have been designed for rapid assistance to countries with urgent balance of payments needs, e.g., such balance payment problems that have arisen because of (basic) commodity price shocks, natural disasters or domestic fragilities. In these cases, the member country may resort to the “Rapid Financing Instrument” (RFI), or, in case of a low-income country, to the corresponding “Rapid Credit Facility” (RCF).²⁹³

Through these programmes and facilities, the IMF responded to the Covid-19 pandemic based on its USD 1 trillion lending capacity. This led to the providing of loans under several of the lending instruments mentioned above.²⁹⁴

Between the (purported) “beginning” of the Covid-19 pandemic at the end of March 2020 and 15 September 2020, the IMF had already committed approximately USD 91 billion (or SDR 64 billion) to 80 member countries, including USD 30 billion in emergency financing (under the “RCF” and “RFI” facilities).²⁹⁵

By 4 March 2021, the total amount of IMF financial assistance to 85 countries amounted to USD 107.30723 billion (or SDR 77.66603 billion).²⁹⁶

The IMG’s lending actions have, more precisely, focused on five tracks²⁹⁷:

• (1) Emergency funding under the “RFI” and the “RCF”-facilities.

  Both the “Rapid Credit Facility’” (RCF) and the “Rapid Financing Facility” (RFF) make it possible to provide emergency assistance, without a need for the IMF member country to agree upon a so-called “full-fledged support programme”.

  Between March 2020 and 15 September 2020, the IMF responded to a record number of demands for emergency financing under the RFI and RCF, from in total 69 countries. The IMF thereby, temporarily, doubled the access limits to these emergency facilities, which allowed the IMF to meet immediate demands from this large number of member countries.

• (2) Strengthening existing lending mechanisms:

  In response to the Covid-19 outbreak, the IMF also decided to increase existing lending programmes, in order to meet new urgent needs because of Covid-19. This allowed for a response to the Covid-19 crisis in the context of an ongoing monetary and economic policy dialogue. As of 15 September 2020, the IMF had already approved requests for such increases by eight member countries.

• (3) New loan arrangements (including precautionary terms):

  Between March 2020 and 15 September 2020, the IMF granted its approval to demands for six new IMF-supported programmes originating from five countries. These were aimed at mitigating the socioeconomic impact of the Covid-19 crisis, while at the same time maintaining macroeconomic stability.

  Moreover, Flexible Credit Lines (FCLs) were made available to three additional member countries with already very strong policy frameworks and economic performance. In all three cases, the authorities of the member countries concerned intended their respective support arrangements to be of a precautionary nature.

• (4) Debt relief:

  In March 2020, the IMF decided to strengthen the “Catastrophe Containment and Relief Trust” (CCRT). This was aimed at strengthening the possibility for providing grant debt relief to the poorest IMF member countries that had been affected by the Covid-19 pandemic.

  Already by October 2020, there were 29 eligible member countries that had together received SDR 344 million in debt service relief in two six-month tranches. These had been approved by the Executive Board of the IMF during its meetings of 13 April 2020 and of 2 October 2020, respectively.

• (5) Improving liquidity:

  On 17 April 2020, in response to the Covid-19 outbreak, the IMF approved the creation of a “Short-Term Liquidity Line” (SLL). This SLL was aimed at further strengthening the global financial safety net. The SLL was thereto set up as a revolving safety net for IMF member countries with very strong socioeconomic policies and fundamentals that still required moderate short-term balance of payments support.

In response to the Covid-19 pandemic, the IMF also decided to temporarily streamline its internal decision-making processes in order to be able to respond more quickly to members’ requests for emergency assistance because of the Covid-19 pandemic. This measure has been a huge success: in many cases, the IMF managed to make funds available within but a few weeks upon having received the request for such emergency financing. In addition, the IMF also temporarily suspended the application of its more “high access procedures” for RCF requests.²⁹⁸

On 22 March 2021, the IMF Executive Board approved further extensions of the temporary adjustments to its lending frameworks made during the early months of the Covid-19 pandemic, which allowed for adequate access to IMF financing through emergency instruments, the General Resources Account (GRA), and the Poverty Reduction and Growth Trust (PRGT). The extension of these measures was believed to reflect the unique circumstances created by the Covid-19 pandemic and was intended to ensure that member countries would be able to continue to access IMF financing, both through IMF-supported programmes, and emergency financing for urgent balance of payments needs. As of 22 March 2021, 74 member countries, including 49 low-income countries, had received emergency financing through these instruments.²⁹⁹

The IMF Executive Board, furthermore, approved an extension of the increases in the annual and cumulative access limits that applied to the IMF’s emergency financing instruments until the end of 2021, which was first introduced in April 2020, and then extended in October 2020.³⁰⁰

The Executive Board of the IMF also approved the extension to end-2021 of the increase in the annual access limit to the IMF’s GRA, introduced in July 2020, as well as the increase in the annual and cumulative access limits for concessional lending under the PRGT until end-June 2021. The increase in access to PRGT financing, as an interim measure for a broader assessment of the IMF’s approach to concessional financing, was considered of being a recognition that many low-income countries (LICs) had been particularly affected by the Covid-19 pandemic and had already borrowed significantly from the IMF. It was, therefore, felt that higher limits would provide flexibility for the poorest countries in the following months to avoid having to request support through the Fund’s general resources on non-concessional terms.³⁰¹

Table 3.2 gives an overview of the IMF major non-concessional lending facilities (until 2020).

Table 3.2 Table showing the IMF major non-concessional lending facilities [Source: International Monetary Fund (2020a), p. 36]

3.4.4.2 (Eased Conditions of Borrowing Under the IMF) Stand-By Arrangement (SBA)

The IMF financial support is based upon the insight that in any economic crisis situation, countries may be in need for financial support to help them deal with balance of payments problems.³⁰²

Since its creation in June 1952, the “Stand-by Arrangement” (SBA) has become the main lending instrument for both emerging and advanced countries.³⁰³

The SBA has been for the last time fundamentally updated on 24 March 2009. This was accompanied by a modernization of some of the IMF’s other support tools, with as main purpose to make all of these support mechanisms more flexible and responsive for meeting the needs of the IMF member countries.³⁰⁴ As part of this 2009 modernisation, conditionality with regard to the IMF support systems was both streamlined and simplified; moreover, more funds were made available. The 2009 reforms also allowed for greater precautionary access.³⁰⁵

In principle, all IMF member countries are eligible for SBA-based support, provided that they face actual or potential external financing needs. Access to such SBA-support is, moreover, subject to IMF policies. It, however, at the same time appeared that SBA-support is more often demanded by middle-income countries (and, in the recent past, also by advanced member countries). The reason for this appears to be that “low-income (member) countries” (LICs) have access to a wide range of other support mechanisms on a concessional basis and tailored to their specific needs.³⁰⁶

SBA-based support allows for a flexible duration of actual support measures. The latter usually cover a period between 12 and 24 months, albeit the duration of the support measures may not exceed 36 months.³⁰⁷ Access to the financial resources of the IMF under the SBA is, moreover, guided by the following general conditions: (1) the member country’s need for financing, (2) the member country’s repayment capacity, and (3) the track record of the member country with regard to previous use of the IMF resources. Provided that these guidelines are respected, the IMF is flexible with regard to both the amounts to be lend, as well as the timing of disbursements.³⁰⁸

Loans under the SBA may be based on four different types of access³⁰⁹:

• (1) Normal SBA-access: The SBA is one of the several lending facilities under the IMF’s so-called “General Resources Account” (GRA). Access to these GRA resources, at any moment in time, is subject to two main limits: (i.) an annual limit of 145% of the member country’s quota being kept by the IMF in the member state’s own currency in any 12-month period, and (ii.) a cumulative limit over the life of the arrangement of up to 435% of the member state’s quota being kept in the member state’s own currency, net of repayments.

  Under Covid-19, said annual limit of 145% was raised to a limit of 245% of the member country’s quota being kept in its own currency, and this until 6 April 2021.

• (2) Exceptional SBA-access: Any access beyond the two abovementioned “normal” limits may be decided on a case-by-case basis under the IMF’s so-called Exceptional Access³¹⁰ policy.

• (3) Front-loaded SBA-access: financial support may be frontloaded when justified by the soundness of the country’s policies, as well as by the nature of the member country’s financing needs.

• (4) Rapid SBA-access: Approval of IMF loans under a SBA may be expedited through the “Emergency Financing Mechanism“. This possibility had been resorted to a couple of times during the 2008 financial crisis.

• (5) Precautionary SBA-access: “High Access Precautionary Arrangements” (HAPAs) are available for member countries that, while experiencing exceptionally large potential financing needs, have no intention to draw for all of the approved amounts, but still want to retain this possibility as option to do so, if needed.

Repayments of resources borrowed under the SBA are subject to the following rules:

• (1) Such repayments of SBA-drawings are due within 3¼ to 5 years of each of the actual disbursements of the ILF. This implies that each of the disbursements has to be repaid in eight equal quarterly instalments, starting 3¼ years after the date of each disbursement.

• (2) The SBA-lending rate consists of: (i.) the market-determined “Special Drawing Rights (SDR) interest rate”—which in normal times has a minimum floor of 5 basis points—and a margin. On 15 May 2021, this margin amounted to 100 basis points. Together, this minimum floor and margin are referred to as the “base load rate of charge”. And (ii.) surcharges, which are dependent upon the amount and the duration of the outstanding credit. A surcharge of 200 basis points is due on the amount of outstanding credit exceeding 187.5% of the quota. If the credit remains above 187.5% of the quota after 3 years, this surcharge increases to 300 basis points.

  The surcharge mechanism is, obviously, intended to discourage a large and prolonged use of IMF resources under the SBA.

• (3) Resources taken up under all SBAs are, in addition, subject to a “commitment fee”. This commitment fee is charged at the beginning of each 12-month-period. It is due on the amounts that could be drawn during the period of the arrangement (at a rate of 15 basis points for amounts committed up to 115% of quota, 30 basis points for amounts committed above 115% and up to 575% of quota, and 60 basis points for amounts above 575% of quota).

  These fees are reimbursed on a pro rata basis if the amounts are actually used during the relevant period. Therefore, if the country borrows the full amount committed under an SBA, the commitment fee will be fully reimbursed. However, no repayment will be made under a precautionary stand-by arrangement where countries decide not to draw.³¹¹

3.4.4.3 (Eased Conditions of Borrowing Under the IMF) Extended Fund Facility (EFF)

Assistance under an “Extended Fund Facility” (EFF) can be resorted to when a member country faces serious medium-term balance of payments problems due to structural weaknesses that take time to address. In comparison to support which is provided under the ‘“Stand-by Arrangement”, assistance provided under an EFF is characterised by the two following characteristics: (1) a longer commitment to the programme, and (2) a longer repayment period.³¹² These characteristics are intended to ensure that member countries applying to EFF support will use the support to implement medium-term structural reforms.³¹³ The severe payment imbalances which merit support under the EFF may be due to structural impediments or to slow growth, and to an inherently weak balance of payments position.³¹⁴

EFF-drawings are generally not resorted to by means of a precautionary measure, e.g., in anticipation of a future balance of payments problem.³¹⁵

As the intended structural reforms, meant to address deep-seated weaknesses, often take time to implement and to lead to actual results, both the commitment to an EFF programme, and the repayment schedule, will cover longer periods than most of the other IMF arrangements.³¹⁶ Because of this, EFF-support is typically approved for 3-year periods, but may even be approved for periods of up to 4 years in order to allow for the implementation of the intended deep and lasting structural reforms.³¹⁷

The repayment schedule follows a similar logic. This implies that amounts drawn under an EFF, are be repaid over a period of 4½ to 10 years, and to be made in twelve equal semi-annual instalments. By contrast, and as explained above (cf. Sect. 3.4.4.2.), credit taken under a SBA must be repaid over 3¼–5 years.³¹⁸

When a country borrows funds (in a currency other than its own) from the IMF, it will in general be required to commit to policies intended to overcome its economic and structural problems. Under an EFF-loan, these commitments, which usually include specific conditions, will have to focus on structural reforms. These reforms will, moreover, have to address institutional or economic weaknesses, in addition to containing policies to accomplish macroeconomic stability. Be this as it may, the Executive Board of the IMF is committed to regularly assess the performance of the EFF and may adjust it when needed to reflect economic developments.³¹⁹

As with other IMF loans, the extent of borrowing under the EFF depends on the country’s financing needs, its repayment capacity and its past use of IMF resources.³²⁰

There are several drawing methods possible with regard to the EFF³²¹:

• (1) Normal access: The EFF qualifies as one of the several lending facilities under the IMF’s “General Resources Account” (GRA). This implies that the normal GRA-drawing limits apply.³²²

• (2) Exceptional access: Access beyond these normal limits may be decided upon on a case-by-case basis under the IMF’s Exceptional Access Policy.

The resources made available under a EFF are, furthermore, subject to a commitment fee. This commitment fee is to be charged at the beginning of each 12 month-period, and is calculated on the amounts that could be drawn.³²³ As is the case with regard to the GRA in general, the commitment fees paid will be reimbursed if the amounts are effectively used during the period concerned, implying that if a country will draw the full amount available under an EFF, the commitment fees will be fully reimbursed as well.³²⁴

The cost of the actual borrowing is (under normal circumstances) linked to the IMF’s market-related interest rate, generally known as the “basic rate of charge”. The latter itself is linked to the IMF’s Special Drawing Rights (SDR) interest rate.³²⁵ Moreover, a further service charge of 50 basis points, or 0.5 percentage points, will be applied to each amount that is actually drawn.³²⁶

3.4.4.4 Rapid Credit Facility (RCF)

The RCF is aimed at providing (1) low-access, (2) rapid, (3) concessional, and (4) without-ex-post-conditionality, financial assistance to low-income countries (“LICs”) facing urgent balance of payments need.³²⁷

The RCF was designed to provide support to LICs in a wide variety of extraordinary circumstances. These extraordinary circumstances include: shocks, natural disasters and emergencies resulting from fragility. The RCF is based upon the principle of not only providing financial support, but also political support, as well as help to catalyse foreign aid.³²⁸

Eligible for support under the RCF are member states that are eligible for the “Poverty Reduction and Growth Trust” (PRGF).³²⁹ A further condition to be eligible for RCF support is that the member state concerned must face an urgent balance of payments need. It is, moreover, required that a full economic support programme is either not necessary (e.g., in case the shock the member state undergoes is transitory and of limited nature) or not feasible (e.g., in case there are capacity constraints or national fragilities at play).³³⁰

The financial assistance that the IMF provides under the RCF happens in the form of a single loan disbursement. The fact that RCF financing happens in in the form of a single disbursement, does not imply that the support is not to be granted repeatedly. Repeated use of the RCF is possible provided that the balance of payments need which make the member country eligible for the RCF support was mainly caused by a sudden, exogenous shock or in case the member country demonstrates a track record of adequate macroeconomic policies. However, even in case of such a repeated use, there can be at most two disbursements per year.³³¹

The IMF determines access to RCF financing on a case-by-case basis. The IMF thereby has to consider the following elements: (1) the member country’s balance of payments needs, (2) the soundness of the member country’s macroeconomic policies, (3) the member country’s capacity to reimburse the IMF, (4) the already pre-existing amount of outstanding IMF credit, and (5) the member country’s past track record in using IMF credit. Moreover, RCF financing requires that the IMF would examine the characteristics and the magnitude of the underlying shocks for which RCF support is requested.³³²

The member state’s access under both the regular and exogenous shocks windows is limited to 50% of the member country’s quota per year, and 100% of the member state’s quota on a cumulative basis, however with annual access under the regular window subject to a standard of 25% of the member state’s quota.³³³ However, because of increased financial needs of various member countries caused by Covid-19, access limits under the exogenous shocks window were, on a temporary basis, raised from 50 to 100% of the member country’s quota on a yearly basis, and from 100 to 150% of the member country’s quota on a cumulative basis in the period from 6 April 2020 until 6 April 2021. By contrast, under the RCF’s large-scale natural disaster window, access to financial support remained limited to 80% of the member country’s quota on a yearly basis, and to 133.33% of the member state’s quota on a cumulative basis. The latter form of access was, moreover, subject to an assessment that the disaster for which support was requested, had caused damage which represented at least 20% of the member country’s GDP.³³⁴

Fund support under the RCF is not subjected to ex post conditionality or review. This does not exclude that prior actions are sometimes applied. However, economic policies supported under the RCF should, in general, aim to address the member country’s underlying balance of payments difficulties, besides supporting the member country’s poverty reduction and growth objectives.³³⁵

Funding granted under the RCF happens at a zero-interest rate, a grace period of 5½ years and a final maturity of 10 years.³³⁶

3.4.4.5 Rapid Financing Instrument (RFI)

Unlike the RCF, which is only available to so-called lower-income countries (or, abbreviated, “LICs”), the Rapid Financing Instrument (RFI) aims to provide: (1) rapid financial assistance, which is (2) available to all IMF member countries, provided that (3) these face an urgent balance of payments need.³³⁷

The RFI has in the past been created as part of a broader reform which was aimed at making the IMF financial support more flexible for dealing with the IMF member countries’ diverse needs. The RFI, moreover, aimed at replacing a wide range of former “emergency assistance policy instruments”, which explains why the Instrument may be resorted to in a wide range of circumstances. The RFI was thus created as a single, flexible and broad-coverage mechanism, in order to replace former of the IMF’s policy instruments, such as the “Emergency Natural Disaster Assistance” (ENDA) and the “ Emergency Post-Conflict Assistance” (EPCA).³³⁸

Under the abovementioned general condition (namely: a balance of payments need of an urgent nature), the RFI-mechanism allows the IMF to provide rapid, low-access financial assistance to its member countries, with as a further advantage that this does pose a need for a full-fledged programme. These urgent needs include, e.g., needs resulting from (1) commodity price shocks, (2) natural disasters, (3) conflict and post-conflict situations, and (4) fragility.³³⁹

RFI-support is, in principle, available to all IMF member countries. However, member countries who are at the same time eligible for financial support under the “Poverty Reduction and Growth Trust” (PRGT) are believed to be more likely resorting to support under the similar, albeit concessional “Rapid Credit Facility” (RCF). Another distinguishing feature of the RFI is, moreover, that it has been designed for dealing with situations where the member country’s commitment to a full-fledged economic programme is neither necessary, nor feasible. Such a situation may occur when the shock that forms the reason for asking for RFI-support, is of a transitory and limited nature. This may, e.g., be the case when a member country’s policy design or implementation capacity is limited, which in its own turn may occur due to the needs and fragilities of the member country’s balance of payments.³⁴⁰

In order to meet the IMF member states’ large and urgent financial needs that arose form Covid-19, the IMF decided to temporarily increase the access limits under the regular window of the RFI-instrument from 50 to 100% of the member country’s quota on a yearly basis, and from 100 to 150% of the member country’s quota on a cumulative basis, net of scheduled buybacks. These higher access limits initially only applied for a brief period of 6 months, more precisely from 6 April 2020 until 5 October 2020, but were later extended by the IMF Board.³⁴¹

The access limits under the large-scale natural disaster window of the RFI remained unchanged; these access limits, hence, continued to amount to 80% of the member country’s quota on a yearly basis, and to 133.33% of the member country’s quota on a cumulative basis. Access under this natural disaster window, moreover, remained only possible in cases where the damage incurred from the disaster had amounted to at least 20% of the member country’s GDP, and provided that the member country’s existing and future policies remained sufficiently robust to deal with the shock of the natural disaster.³⁴²

The level of access to the RFI in individual cases depends, moreover, on the following elements: (1) the member country’s balance of payments needs, (2) the member country’s repayment capacity, (3) the member country’s already outstanding credit to the IMF, and (4) the member country’s track record with regard to using IMF resources in the past.³⁴³

The financial assistance that the IMF provides under the RFI is, furthermore, subject to the same funding conditions as the ‘Flexible Credit Line” (FCL), the “Precautionary and Liquidity Line” (PLL) and the “Stand-by Arrangements” (SBA). Financial assistance under the RFI is, moreover, expected to be reimbursed within a time frame from 3¼ to 5 years.³⁴⁴

Financial assistance under the RFI is provided without a need for the member state to commit to a full programme or to reviews. However, a member country requesting RFI assistance remains committed to cooperate with the IMF by making efforts to resolve its balance of payments difficulties and by describing the general economic policies it proposes to follow in order to deal with the problems for which the support has been requested. Prior actions may be required where warranted.³⁴⁵

Although RFI financing often happens under the form of a one-off purchase of currencies in order to meet an urgent balance of payments need of a limited duration, this does not imply that the instrument cannot be used repeatedly. Such a repeated use of RFI-resources over a 3-year period is possible, provided that the member country’s balance of payments need has been primarily caused by an exogenous shock, or in case the member country has, prior to the support request, established a track record of adequate macroeconomic policies, including through an IMF staff-monitored programme.³⁴⁶

Similar to what happens under the RCF, besides granting emergency financial support under the RFI, the IMF can also provide technical assistance. Such technical assistance may be given in order to strengthen the member country’s capacity to establish comprehensive macroeconomic policies. Areas of concern which can be put at the centre of attention under this technical support may include: (1) statistical capacity building, and (2) the establishment and organisation of fiscal, monetary and foreign exchange institutions in order to help establish capacity in the policy fields of taxation and public expenditure, payments, credit and foreign exchange operations.³⁴⁷

3.4.4.6 Short-Term Liquidity Line (SLL)

On 15 April 2020, the IMF announced a new measure for helping member countries dealing with the Covid-19 pandemic, which was called the “Short-term Liquidity Line” (SLL).³⁴⁸

The idea behind this measure was that IMF member countries with a sound policy framework, that were facing short-term liquidity shortages and balance of payments problems could apply for IMF loans. If granted, these loans would be extended for a period of 12 months. The special feature of this credit line, compared to its predecessors, is that it has “revolving access”. This implies that it allows borrowing member countries to partially, or fully, repay the loans, and then reclaim them over the 1-year period for which the loans apply, in order to meet their short-term liquidity needs.³⁴⁹

The SLL was set up as a special facility and designed as a revolving safety net for member countries characterized by extraordinarily strong fundamentals and policies. It provides liquidity support to such member countries facing potential, moderate short-term balance of payments problems with regard to the member countries’ capital account and reserve pressures, and which are due to volatility on the international capital markets. The SLL is, hereby, aimed to help the member countries in dealing with the impact of liquidity events and with minimizing the risk of shocks, in order to prevent the latter from developing into deeper crises and from spilling over to other countries. As such, the SLL was aimed to add to the IMF’s existing lending toolkit and other components of the global financial safety net.³⁵⁰

The SLL was conceived as a special facility under the IMF’s General Resources Account (GRA). It was designed to provide swap-type liquidity support, and contained several innovative features, amongst which revolving access. The characteristics of the SLL are as follows³⁵¹:

• (1) The SLL is conceived to address “potential, moderate, short-term balance of payments needs related to capital account pressures” that could originate from external events, rather than from “domestic” shocks. Access is limited to 145% the applying member country’s quota (= which is the normal annual access limit under the GRA).³⁵²

• (2) Individual SLL agreements are in principle approved for a period of a year. However, successor SLL agreements may be granted for as long as a member country continues to meet with the requirements for obtaining support under the SLL and, more specifically, continues to show a particular balance of payments problem.

• (3) The SLL grants “revolving access”. This feature allows for repeated purchases and redemptions (partial or in total), within and across SLL agreements. Redemptions in this way replenish the member country’s right to make new calls to the maximum approved access.

The SLL is moreover based on a special fee structure. This fee structure contains a non-repayable commitment fee of eight basis points (bps), besides a service fee of 21 bps.³⁵³

As noted, the SLL is intended for member countries having extraordinarily strong fundamentals and policy frameworks. It, moreover, is based on the same qualification criteria that applied to support under the “Flexible Credit Line” (or, abbreviated: “FCL”). The basic assessment elements in order to qualify for SLL support is whether the member country: (1) is characterized by extraordinarily strong economic fundamentals and policy frameworks at an institutional level; (2) conducts—and has a sustained track-record of conducting—extraordinarily strong policies; and (3) remains committed to maintaining these high standards of conduct in the future. These conditions, coming down to the fact that the member country must satisfy the same qualification criteria as under the FCL, are intended to facilitate the transition from the FCL to the SLL.³⁵⁴

3.4.4.7 Extended Credit Facility (ECF)

The Extended Credit Facility (ECF) is designed to provide financial assistance to member countries with so-called “protracted”—i.e., “prolonged”—balance of payments problems.³⁵⁵

The ECF was created as part of the “Poverty Reduction and Growth Trust” (PRGT). This happened under a broader reform to make financial support granted by the IMF, more flexible, as well as better equipped to respond to the diverse needs of low-income countries (LICs), including in crisis situations. The ECF is considered to be the IMF’s main tool for providing medium-term financial support to said low-income countries.³⁵⁶

The ECF is, more in particular, conceived to support low-income countries’ economic programmes aimed at moving towards a stable and sustainable macroeconomic position, consistent with poverty reduction and strong and sustainable growth. The further idea is that the ECF can also help such low-income countries to receive additional foreign aid.³⁵⁷ The basic requirement for eligibility under the ECF is that the member country applying for such support should be facing a protracted balance of payments problem. This condition implies that the underlying macroeconomic imbalances that the applying member country is facing, are expected to extend over a medium to long term period.³⁵⁸

Support under an ECF arrangement may be granted for an initial period of 3–5 years, with an overall maximum of 5 years. However, after the expiry, cancellation or termination of a first ECF arrangement, the IMF may approve additional ECF arrangements. The IMF determines any concrete access to ECF financing on a case-by-case basis. The IMF will thereby, in accordance with the applying access standards, consider the following elements: (1) the member country’s balance of payments needs, (2) the strength of the member country’s economic program, (3) the ability of the member country to repay the IMF, (4) the amount of outstanding IMF credit the applying member country already has, and (5) the member country’s track record in using and repaying IMF credit.³⁵⁹

Under the rules governing the PRGT, total access to PRGT concessional finance is limited to 100% of the member country’s quota on a yearly basis, and total concessional credit outstanding for an amount of 300% of the member country’s quota. These limits may be exceeded in exceptional circumstances. This is, however, subject to strict maximum caps, namely 133.33% of the member country’s quota annually, and 400% of the member country’s quota cumulatively. The IMF may, moreover, increase access during the course of an existing agreement, when necessary, however subject to the applicable limits.³⁶⁰

Although ECF access is of a concessional nature, it is still conditional on the applying member country agreeing to implement a set of policies that will help it move towards a stable and sustainable macroeconomic position over the medium term. The applying member state must thereto describe its commitments, including specific conditions, in a letter of intent that has to be provided to the IMF. The conditionality of the IMF programmes is said to be “streamlined” and to focus on policy actions that are considered essential for achieving the programme’s objectives. An effort will be made to base the ECF support programmes on the applying member country’s own development strategy and to safeguard the member country’s social objectives.³⁶¹

ECF financing comes at a zero interest rate until at least June 2021. A grace period of 5½ years, and a final maturity of 10 years, applies. The level of the interest rates on concessional facilities under the PRGT is to be reviewed by the IMF every 2 years.³⁶²

3.4.4.8 Flexible Credit Line (FCL)

The Flexible Credit Line (FCL) was created as part of the IMF’s reforms with regard to lending to member countries who face liquidity shortages. One of the main objectives of the 2009 lending reforms was to reduce the stigma member countries fear when borrowing from the IMF. A further aim of these reforms was to encourage countries to seek assistance before a crisis they are facing may escalate. The Flexible Credit Line (FCL) was in this regard conceived to meet needs for crisis prevention and mitigation loans of member countries with extraordinarily strong policy frameworks and with a history of sound economic performance.³⁶³ The flexibility the FCL allows for was, moreover, intended to allow the IMF to respond to a wide range of member countries’ specific needs.³⁶⁴

By 2 March 2021, five countries—Chile, Colombia, Mexico, Peru and Poland—had entered into FCL arrangements with the IMF.³⁶⁵

In order for a member country to be eligible for support under the FCL, it must have extraordinarily strong economic fundamentals, as well as a convincing policy track-record. The overall condition for applying for support under the FCL is, furthermore, that the member state must be facing potential or actual balance of payments pressures. The member country must also meet with the qualifying criteria described hereafter³⁶⁶:

• (1) A qualified member country has the option of drawing on a FCL credit line at any time within a predefined period, or to just consider it as a precautionary instrument.

• (2) The FCL aims at providing a qualified member country with substantial, immediate, and unconditional access to IMF resources, on the basis of sound public policy frameworks

• (3) The FCL functions as a revolving credit line, with an initial duration of 1 or 2 years.

  Under a 2-year FCL arrangement, a review of the member state’s policies by the Board of Directors of the IMF is to be carried out within a period of 12 months after the approval of the arrangement, in order for the member state to retain access to the IMF resources during the second year. This examination is intended to enable the IMF to evaluate the member state’s continuous conformity to the qualification criteria to be assessed. If a country decides to draw on the credit line granted to it, repayments will subsequently have to be made over a period of 3¼ to 5 years.

• (4) Access to IMF resources under a FCL arrangement is not capped. The IMF, moreover, assesses the need for resources on a case-by-case basis in accordance with the member state’s actual or potential balance of payments needs.

The cost of obtaining a loan under the FCL is similar to that of borrowing under the IMF’s more traditional instruments, namely the SBA and PLL.³⁶⁷

Access to the IMF resources on a precautionary basis is conditional on the payment of a yearly commitment fee on the amount that could be drawn during that annual period. This commitment fee is later repaid on a pro rata basis if the member state chooses to effectively draw on these resources during said period. The commitment fee rises according to the level of access that remains available during a period of 12-month (with 15 basis points for amounts committed up to 115% of the member country’s quota, with 30 basis points for amounts committed between 115% and 575% of the member country’s quota, and with 60 basis points for amounts that exceed 575% of the member state’s quota).³⁶⁸

As with other IMF drawing arrangements, the lending rate charged on FCL drawings consists of: (1) a market-determined “SDR interest rate”—with a minimum floor of 5 basis points—and a margin, which on 15 May 2021 amounted to 100 basis points. The SDR interest rate and the additional margin are together referred to as the “basic rate of charge”. And (2) surcharges which are dependent on the amount and duration of the outstanding credit. A surcharge of 200 basis points is due on the amount of outstanding credit exceeding 187.5% of the member state’s quota. If the credit that has been drawn rises above 187.5% of the member state’s quota after 3 years, said surcharge even increases to 300 basis points. Taken together, the level and duration surcharges are designed to discourage the member country to make a large and prolonged use of these IMF resources.³⁶⁹ Moreover, a service charge of 50 basis points is applied to each amount that is effectively drawn.³⁷⁰

At the centre of the process of evaluating if a member country will be granted access to the FCL, is an assessment made by the IMF, that the member country meets the following criteria³⁷¹:

• The member country is characterized by extraordinarily strong economic fundamentals, as well as policy frameworks of an institutional nature.

• The member country implements—and has a long track-record of successfully implementing—extraordinarily strong public policies.

• The member country demonstrates an ongoing commitment to maintain these policies in the future.

When the IMF grants access to the FCL, this at the same time demonstrates the IMF’s confidence in the qualified member country’s meeting with said set of criteria.³⁷²

The IMF has in this regard pointed to the existence of a (practical) set of indicators and thresholds that has been developed in order to improve the transparency and predictability of the qualification frameworks for accessing the FCL, while at the same time maintaining existing qualification standards.³⁷³ In addition to an overwhelmingly positive assessment of the member country’s general public policies during its most recent so-called “Article IV consultation” (cf., furthermore, Sect. 3.4.5.2.), the further criteria with regard to the soundness of the overall monetary, fiscal and financial system of the applying country which are resorted to in order to assess a country’s eligibility for a loan under the FCL are as follows³⁷⁴:

• (1) A sustainable external position.

• (2) The country’s capital account position has to be dominated by private money flows.

• (3) Regular access by the sovereign to international capital markets on favourable terms.

• (4) When the FCL arrangement is resorted to as a precautionary measure, a reserve position that—despite possible pressures on the balance of payments that have led to applying for the IMF assistance in the first place—remains relatively comfortable.

• (5) Sound public finances, amongst which a sustainable public debt position.

• (6) Low and stable inflation that is situated within the framework of a sound monetary and exchange rate policy.

• (7) A sound financial system characterized by the absence of solvency problems that could pose a threat to systemic stability.

• (8) Deploying an effective supervision of the financial sector.

• (9) Integrity and transparency with regard to data.

3.4.4.9 Precautionary and Liquidity Line (PLL)

It has been recognized that the 2008 global financial crisis (and its aftermath) underlined the need for better and more effective global financial safety mechanisms, in order to help members deal with negative shocks (such as crises).³⁷⁵

Not surprisingly, there have been several changes to the IMF lending policy and instruments in the aftermath of the financial crisis of 2008. According to the IMF, one of the main objectives of these reforms has been to complement the IMF’s traditional crisis resolution instruments with more adequate mechanisms for preventing (new) crises. This led to the implementation of the so-called “Precautionary and Liquidity Line” (PLL). This instrument was mainly developed to allow the IMF to deal, in a sufficiently flexible manner, with liquidity needs of eligible member countries. In general, the eligibility to the PLL implies that the applying member country is characterized by sound economic fundamentals, while however at the same time showing certain vulnerabilities that prevent it from resorting to the “Flexible Credit Line” (FCL).³⁷⁶

The PLL’s specific purpose is to provide financing to eligible member countries for dealing with actual or potential balance of payments needs of countries. The PLL is thereby conceived to serve as a safety net or to help resolve crises in a wide variety of situations. In assessing eligibility under the PLL, the IMF combines an ex ante qualification process of eligibility criteria, with targeted ex-post conditionality in order to be able to address possible remaining vulnerabilities that have been identified in the qualification assessment. A PLL qualification is, moreover, believed to give a strong signal that the IMF underwrites the strength of both the economic fundamentals and the specific policies of qualifying countries. This implies that, in such a manner, already the mere approval of a PLL application may help to build market confidence in the member country’s policy plans.³⁷⁷

Actual PLL agreements can either have a (short) time frame of 6 months or a (relatively long) time frame of 1 to 2 years.³⁷⁸

The relatively short 6-month term is conceived to meet the actual or potential short-term balance of payments needs of eligible member countries. Access to this facility is subject to the condition that the member country can make credible and sufficient progress in addressing its vulnerabilities within this (short) 6-month period. A maximum of 125% of the applying member country’s quota is (normally made) available upon approval of such PLL arrangement during a short time frame of 6 months only.³⁷⁹ Still, in case the applying member country is facing a larger actual or potential short-term balance of payments need that stems from an exogenous shock, including increased tension at a global or regional level, PPL access may be granted for a higher limit amounting to 250% of the member country’s quota per PPL arrangement. This is at the same time the maximum ceiling for a member country’s total access under 6-month PLL arrangements.³⁸⁰

However successive 6-month PLL arrangements may be granted to eligible member countries provided that: (1) a what has been referred to as a “cooling-off period” of at least 2 years has passed since the date on which the IMF granted the previous 6-month PLL arrangement, or (2) it appears that, because of exogenous shocks, the applying member country’s balance of payments problems last longer than originally thought. The granting of such a successive PLL arrangement is, furthermore, subjected to the condition that the IMF cannot provide more than one additional 6-month PLL arrangement under these circumstances.³⁸¹

Member country’s access to all these PLL arrangements is, moreover, subject to, on one side, specific PLL limits and caps, and, on the other side, common annual and cumulative access limits. With regard to the PLL arrangements with a duration of 1 to 2 years, PLL access is contained to 250% of the member country’s quota for the first year, and to a total of 500% of the member country’s quota for the whole duration of the arrangement. In such PLL arrangements with a duration of more than one year, amounts granted in the second year may, if needed, be brought forward to the first year through a technique called “rephasing”. In order to make use of this possibility, the member country needs the prior approval by the IMF Board at a review.³⁸² Total access to PLL arrangements is, moreover, subject to a cumulative ceiling of 500% of the member country’s quota, regardless of the duration of the PLL arrangement.³⁸³

Similar to a FCL qualification, a PLL qualification also signals the soundness of the fundamentals and policies of qualified member countries. The central element of the eligibility assessment is that the member country meets the following requirements³⁸⁴:

• (1) The member country has strong economic fundamentals and policy frameworks at an institutional level.

• (2) The member country manages to implement—and has a track-record of implementing—sound policies.

• (3) The member country is committed to maintain sound policies in the future.

Member countries that face any of the situations mentioned hereafter at the time of approval, may not make use of an assigned PLL arrangement: (1) the member country faces a sustained inability of accessing international capital markets; (2) the member country faces a need for significant adjustments at a macroeconomic or structural policy level (unless such an adjustment has already been initiated, in a believable manner, prior to the PLL approval); (3) the member country faces a public debt situation that is highly unlikely to be sustainable in the medium term; or (4) the member country faces widespread bank insolvencies.³⁸⁵

Member countries that start to make use of PLL arrangement, automatically commit to implement policies for reducing the remaining vulnerabilities that appear from the PLL eligibility process, with targeted conditionality. This at the same time implies that once a member country has been found eligible for 1- to 2-year PLL arrangements, prior actions, structural targets and quantitative performance criteria may only be still resorted to if they are critical for the success of the programme. In such a case, a quantified macroeconomic framework, supported by indicative targets, will allow for the assessment of the member country’s progress towards achieving the programme’s objectives. Indeed, the 1- to 2-year PLL arrangements continue to be assessed by the Executive Board of the IMF through biannual reviews. In these biannual reviews, the IMF Executive Board assesses whether the member country remains on track to meet the programme’s objectives. In case a member country has a genuine balance of payments problem at the time of entering a 1- to 2-year PLL arrangement, access is phased in through semi-annual disbursements, in line with the same review periodicity. In contrast, mere 6-month PLL arrangements themselves are not monitored through reviews. However, such short 6-month PLL arrangements may include prior actions in case these are deemed fundamental for the success of the PLL arrangements.³⁸⁶

To access IMF resources on a precautionary basis, a member country has to pay an annual commitment fee on the resources available for purchase during a 12-month period, which will subsequently be repaid, on a pro rata basis, if the member country chooses to use the resources during that period.³⁸⁷

Similar to other IMF drawing arrangements, the PLL actual borrowing rate consists of: (1) the market-determined SDR interest rate that has a minimum floor of 5 basis points, and a margin (by 15 May 2021 amounting to 100 basis points). Together the SDR interest rate and the margin are referred to as the “basic rate of charge”. And (2) surcharges, which depend on the amounts and the duration of the outstanding credit. A surcharge of 200 basis points is to be paid on an amount of outstanding credit above 187.5% of the member country’s quota. If the credit remains over 187.5% of the member country’s quota after 3 years, this surcharge increases to 300 basis points. Together, the level and duration of the surcharges are conceived for discouraging a large and prolonged use of IMF resources under the PLL-line.³⁸⁸ In addition, each amount effectively drawn is subjected to a service charge amounting to 50 basis points.³⁸⁹

As of 11 February 2021, only three countries, namely the Republic of Northern Macedonia, Morocco and Panama, had made use of the PLL.³⁹⁰

3.4.4.10 Standby Credit Facility (SCF)

The Standby Credit Facility (SCF) is aimed at providing financial assistance to low-income countries (LICs) that are facing short-term balance of payments needs.³⁹¹

The SCF was conceived in the context of the “Poverty Reduction and Growth Trust” (PRGT), as part of a wider restructuring operation of making the IMF’s financial aid more flexible and responsive to the diverse needs of LICs.³⁹²

To be eligible for this SCF support, an LIC must meet the following requirements: (1) the member country must have achieved broadly sustainable macroeconomic positions, and (2) the member country is experiencing episodic and short-term financing and adjustment needs, such as those caused by shocks or crises. The SCF is hereby aimed at supporting member countries’ economic programmes in order to achieve, maintain or restore a stable and sustainable macroeconomic position that is consistent with strong and sustainable growth as well, as with poverty reduction. The SCF is also aimed at providing policy support and at helping to catalyse foreign aid.³⁹³

The SCF is made available to countries eligible under the Poverty Reduction Trust (PRT). To qualify for SCF support, the LIC must, moreover, face a balance of payments need that should be resolved within two, and in any case up to 3 years. The overall intent of SCF support is to help the LIC to establish a sustainable macroeconomic position. Moreover, a member country with a potential but not (yet) immediate balance of payments need, may consider to apply for SCF financing as a precautionary measure without already resorting to it.³⁹⁴

An SCF arrangement can last between 12 and 36 months. As SCF arrangements are intended to meet short-term, episodic BoP needs, use of the SCF-facility is normally limited to 3 years over any 6-year period, assessed on a so-called “rolling basis”, however with exceptions for SCF arrangements considered of being precautionary.³⁹⁵

Eligibility to SCF financing is determined upon compliance with the following set of requirements: (1) the applying member country’s balance of payments needs, (2) the strength of the applying member country’s economic programme, (3) the repayment capacity of the applying member country, (4) the amount of outstanding IMF credit of the applying member country, and (5) the applying member country’s history of using and repaying IMF credit.³⁹⁶

Any form of access to concessional financing under the PRGT is normally limited, on an annual basis, to 100% of the applying member country’s quota, and to 300% of said member country’s quota on a cumulative basis. In exceptional circumstances, access may be higher, however with firm ceilings of 133.33% (annual) and 400% (cumulative) of the member country’s quota.³⁹⁷

Under the SCF, the applying member country must agree to implement a set of policies that will help it in achieving a stable and sustainable macroeconomic position in the short term. The applying member country must describe this commitment, including specific conditions, in a letter of intent that has to be submitted to the IMF. SCF programmes must, thereby, be aligned with the applying member country’s poverty reduction and growth objectives. In case of SCF arrangements with an initial duration of more than 2 years, the member country must draft a so-called “Poverty Reduction and Growth Strategy” (PRGS) which has to be available for the second and subsequent reviews.³⁹⁸

The following further conditions apply to funding under the SCF: (1) a zero-interest rate, (2) a so-called “grace period” with regard to repayments of 4 years, and (3) a final maturity of 8 years. In addition, an availability fee at 0.15%, on an annual basis, is charged on any undrawn portion of the available amount during each 6-month period. The IMF reviews the level of interest rates on the PRGT concessional facilities every 2 years, based on the PRGT interest rate mechanism.³⁹⁹

3.4.4.11 Catastrophe Containment and Relief Trust (CCRT)

The Catastrophe Containment and Relief Trust (CCRT) is aimed at enabling the IMF to provide debt relief grants to the poorest and most vulnerable member countries that have been affected by natural and/or public health disasters.⁴⁰⁰

Such debt service payment relief frees up additional resources to meet a member country’s exceptional balance of payments needs that are caused by such disaster, and may be deployed for both containment and recovery purposes. The CCRT was stablished in February 2015 during the Ebola outbreak. It was modified in March 2020, in immediate response to the outbreak of the Covid-19 pandemic. CCRT grants are, moreover, intended to complement donor funding and IMF concessional lending through the PRGT.⁴⁰¹

The predecessor of the CCRT was the “Post-Disaster Debt Relief Trust Fund”. In February 2015, in response to the outbreak of the Ebola crisis, the IMF decided to transform said “Post-Disaster Debt Relief Trust Fund” into the CCRT. It was at the same time decided to expand the range of situations covered by the IMF disaster assistance in order to ensure that it would include rapidly spreading epidemics.⁴⁰²

After the outbreak of Covid-19, in March 2020, the IMF resorted to adopting a series of reforms to the CCRT in order to allow for the provision of immediate debt service relief to the poorest and most vulnerable IMF member countries affected by the Covid-19 pandemic (but, by extension, by any future pandemic as well). As a result of these reforms, the CCRT can since then be used to provide financials means to pay debt service owed to the IMF by eligible low-income member countries, in cases that these are hit by the most catastrophic natural disasters or have to combat public health disasters, including epidemics or pandemics. Phrased differently, the CCRT debt relief mechanism has as purpose to free up resources in order to allow an eligible member country to deal with the exceptional balance of payments needs resulting from such a disaster, rather than having to allocate these resources to debt servicing.⁴⁰³

Eligibility for assistance under the CCRT is subject to the following requirements: (1) the applying member country must be eligible for concessional borrowing through the PRGT; (2) the per capita income of the applying member country must be below the International Development Association (IDA) operational threshold (which, as of 15 May 2021, amounted to USD 1185) or, for small states having a population of less than 1.5 million people, below the double of this IDA threshold (which, as of 15 May 2021, amounted to USD 2370).⁴⁰⁴

The CCRT has two drawing windows: (1) the “Catastrophe Containment window” that is intended to help contain public health disasters, and (2) the “Post-Catastrophic Relief window” that is intended to provide exceptional assistance to an eligible member country in the aftermath of a natural disaster. Besides serving different objectives, the two windows also have different qualification criteria, as well as different conditions of assistance.⁴⁰⁵

The CCRT was, upon its creation, initially funded by the balance of the former “Post-Catastrophe Debt Relief Trust”, as well as by the at the time remaining funds from the “Multilateral Debt Relief Initiative”.⁴⁰⁶

A first relief benefiting 25 eligible member countries was decided upon on 13 April 2020.⁴⁰⁷

By means of a further response to the Covid-19 pandemic, the IMF launched an urgent fundraising effort intended to raise debt service relief for a full 2-year period, as well as for future needs.⁴⁰⁸ In response, on 23 November 2020, the EU granted a contribution of EUR 183 million (equivalent to SDR 152 million or USD 217 million) to the CCRT.⁴⁰⁹

3.4.4.12 Overview in Some Tables

Tables 3.3, 3.4, 3.5, 3.6, 3.7, 3.8 and 3.9 provide an overview of IMF Executive Board-approved assistance since end-March 2020, under its various lending facilities and debt service relief financed by the CCRT.⁴¹⁰

Table 3.3 Combined overview of IMF Financial Assistance as of 28 February 2021 (in thousands of SDRs) [Source: International Monetary Fund (2021f) (as accessed on 10 March 2021)]

Table 3.4 Overview of IMF Financial Assistance to Asian and Pacific countries as of 4 March 2021 [Source: International Monetary Fund (2021e) (as accessed on 10 March 2021)]

Table 3.5 Overview of IMF Financial Assistance to European countries as of 4 March 2021 [Source: International Monetary Fund (2021e) (as accessed on 10 March 2021)]

Table 3.6 Overview of IMF Financial Assistance to countries of the Middle East and Central Asia as of 4 March 2021 [Source: International Monetary Fund (2021e) (as accessed on 10 March 2021)]

Table 3.7 Overview of IMF Financial Assistance to countries of Sub-Saharan Africa as of 4 March 2021 [Source: International Monetary Fund (2021e) (as accessed on 10 March 2021)]

Table 3.8 Overview of IMF Financial Assistance to countries of the Western Hemisphere as of 4 March 2021 [Source: International Monetary Fund (2021e) (as accessed on 10 March 2021)]

Table 3.9 Overview of Debt Service Relief from the Catastrophe Containment and Relief Trust (CCRT) as of 4 March 2021 [Source: International Monetary Fund (2021e) (as accessed on 10 March 2021)]

Table 3.3 gives a combined overview.

Tables 3.4, 3.5, 3.6, 3.7, 3.8 and 3.9 appeared on the IMF website based on information available on 4 March 2021, almost a year after the WHO declared Covid-19 a pandemic on 11 March 2020.

An exception concerns Table 3.3 that was published on the IMF website based on information available on 28 February 2021.⁴¹¹

In total, as of 4 March 2021, the IMF had made about USD 250 billion, or one quarter of its USD 1 trillion lending capacity, available to its member countries.⁴¹²

As part of the Covid-19 rapid arrangements, borrowing countries committed to governance measures to promote the responsible and transparent use of these resources.⁴¹³

3.4.5 IMF Surveillance

3.4.5.1 General

When a country becomes a member of the IMF, it agrees to submit its economic and financial policies to the scrutiny of the international community as represented by the IMF. Such a member country also, in general, agrees to general obligations such as: (1) the pursuing of policies conducive to orderly economic growth and reasonable price stability, (2) the avoiding of manipulating exchange rates in order to gain an unfair competitive advantage, and (3) the providing of the IMF with data on its economy.⁴¹⁴ The IMF itself conducts regular monitoring of the economies of its member states, which goes, moreover, accompanied by the associated provision of policy advice. The focus of this advice is to identify weaknesses that may cause or could lead to financial or economic instability. This process is generally known as (IMF-)surveillance.⁴¹⁵

The surveillance by the IMF concerns three main level: (1) country surveillance; (2) regional surveillance, and (3) global surveillance.

3.4.5.2 Country Surveillance

3.4.5.2.1 General Characteristics

The country surveillance conducted by the IMF is an ongoing process which all of the IMF member countries have to endure. It culminates in regular (usually on a yearly basis), in-depth consultations with each and every individual member country. When needed, the IMF may also conduct interim discussions with the surveyed member countries. These consultations with individual member countries are generally known as “Article IV consultations”, under reference to the fact that they are mandated by Article IV of the IMF Articles of Agreement.⁴¹⁶

What usually happens under an Article IV consultation, is that a team of IMF economists, pays a visit to the member country in order to assess said country’s economic and financial developments, and to discuss the country’s economic and financial policies. Such meetings are conducted with both government and central bank officials of the member country concerned. IMF missions may also meet with parliamentarians and representatives of the entrepreneurial world, of workers organisations, and of civil society in general.⁴¹⁷

The IMF team then reports the findings of its survey to the IMF management, and subsequently presents them for discussion to the Executive Board of the IMF. A summary of the IMF Board’s findings is then submitted to the government of the country surveyed.⁴¹⁸

This country survey mechanism allows to feed the views on economic matters of the global community and to transmit the experience of international experts into national policies. Summaries of these discussions are, moreover, published in press releases, which are then posted on the IMF website, as are most of the country reports prepared by the IMF staff members as well.⁴¹⁹

3.4.5.2.2 The 2020 Article IV Report with Regard to the United States

With regard to the United States, the last country surveillance as of 15 May 2021 happened for the year 2020. The resulting Article IV report was then published on the website of the IMF on 10 August 2020.

According to the report, on 17 July 2020, the United States experienced an unprecedented socioeconomic shock because of the Covid-19 pandemic. The report especially points to the fact that, in order to preserve lives and support public health, the United States deemed it necessary to implement a widespread shutdown of the American economy in March 2020. Despite the United States already soon after, namely by the end of April 2020, decided on a gradual easing of restrictions and the lifting of stay-at-home orders, the resulting collateral economic damage was deemed to be enormous. Besides the fact that many Americans tragically lost their lives and many more had become seriously ill, there was also considerable economic collateral damage. By mid-July 2020, nearly 15 million Americans had lost their jobs. Moreover, many large and small businesses were facing severe financial difficulties, while the outlook for the near future was still extremely uncertain. It was at the time estimated that it would most likely take an extended period of time to repair the American economy and to bring economic activity back to pre-pandemic levels.⁴²⁰

According to the IMF report, especially the prospects for the poorest American households were particularly precarious. The IMF report in this regard holds that the economic costs of the Covid-19 crisis were borne disproportionately by the most poor and vulnerable members of the American society, a fact that highlighted the deep inequalities that have been plaguing the United States for a long period already. According to the report, the Covid-19 pandemic especially highlighted a wide variety of structural flaws in the US health care system. The report reached the conclusion that health care provision in the United States is fragmented, decentralised, mainly employer-based, overpriced, and leaving a significant share of low-income households without coverage. These have all been characteristics of the American health care system that added to the disastrous consequences of the Covid-19 pandemic. (Cf., furthermore, Sect. 5.2.2.) The IMF report also drew attention to the fact that the Covid-19 pandemic has in the United States created particularly severe strains on labour-intensive and face-to-face services (while these, already inherently, tend to employ mostly low-income workers). The report, in this regard, pointed to the high unemployment rates among low-income households. As this is also the group of people who have little to no savings, the report expressed its concern about an expectancy that poverty rates and other social tensions will most likely exceed those observed following the global financial crisis of 2008.⁴²¹

According to the IMF’s assessment, at the same time, the United States eventually put a strong policy response to Covid-19 in place. According to the IMF report, US policymakers acted quickly and aggressively to protect both livelihoods and businesses and to mitigate the lasting economic costs of the Covid-19 pandemic. The IMF report especially refers to the unprecedented action taken by the American Federal Reserve, aimed at: (1) stimulating the economy, (2) supporting the well-functioning of both domestic and international financial markets, (3) promoting the flow of credit, hence of liquidity to all layers of society, and (4) strengthening a smooth transmission of monetary policy to the general society.⁴²² (Cf., furthermore, Sect. 3.3.)

The report continues by pointing to the fact that, at the same time, especially the federal authorities put a series of fiscal measures in place in order to: (1) help enterprises in general and small businesses more specifically, besides certain specific economic sectors (such as airlines), (2) increase resources for health care providing, (3) expand unemployment insurance, (4) create incentives for enterprises to retain employees, (5) transfer cash directly to households, and (6) provide financial resources to state, municipal and local governments.⁴²³ (Cf., furthermore, Sect. 4.4.)

Obviously, given what actually happened in the United States during the year 2020 (cf. Sect. 2.5.), the IMF’s assessment may be somewhat biased. This is probably due to the fact that, as mentioned above (cf. Sect. 3.4.1.), the IMF’s approach mainly focuses on economic matters and is not as much concerned about human suffering (such as a multitude of Covid-19 related deaths, in addition to many sick people).

According to the IMF report, additional policy efforts will most likely be needed in order to counter the long-term effects of the Covid-19 pandemic and to keep addressing a wide range of deeply rooted socioeconomic challenges that have been put in perspective because of the Covid-19 pandemic, and that are likely to continue to affect the United States for many more years to come. An important element in this regard is that, already prior to the Covid-19 pandemic, and even after a decade of economic expansion, the United States was increasingly facing troubled socioeconomic outcomes related to factors such as: poverty, inequality of opportunities, declining socioeconomic mobility, increasingly polarised income distribution, growing barriers to trade and foreign investment, and an unsustainable medium-term path of public debt. The IMF stressed the importance of putting policy solutions in place, not only to address the consequences of the Covid-19 pandemic itself, but also to⁴²⁴:

• (1) reshape systems of welfare distribution, education (ensuring equal access to education) and health care (in order to expand opportunities and reduce inequalities).

• (2) invest in infrastructure.

• (3) help to achieve more open, stable and transparent trade policies, supported by a strengthened international system, and,

• (4) in the medium term, reduce the public debt-to-GDP ratio.

In the IMF’s view, achieving these multiple objectives would require a new set of fiscal measures in order to stimulate demand, increase health preparedness and support the most vulnerable. The United States was advised to use its little fiscal space for accelerating the exit from the contraction caused by Covid-19, as well as for improving its social safety nets in a sustainable way, and for facilitating a broader redesign of the US economy. The IMF report was also of the opinion that further efforts would be necessary to prepare for future health crises (or even for a resurgence of a new strain of the Covid-19 virus) and to ensure that those without medical insurance would obtain access to affordable, quality health care.⁴²⁵

3.4.5.3 Regional Surveillance

3.4.5.3.1 General

Regional surveillance involves the IMF’s review of policies deployed by currency unions—notably (1) the Euro Area, (2) the West African Economic and Monetary Union, (3) the Central African Economic and Monetary Community, and (4) the Eastern Caribbean Currency Union. Such regional economic outlook reports are also prepared to examine economic developments and key policy issues in the following regions: Asia-Pacific, Europe, the Middle East and Central Asia, Sub-Saharan Africa and the Western Hemisphere.⁴²⁶

3.4.5.3.2 The 2020 Article IV Report Concerning the Euro Area

The most recent regional surveillance of the euro area concerned the year 2020. The relevant report was more precisely issued on 18 December 2020. Obviously, one of the crucial issues of the 2020-euro area surveillance has been the Covid-19 pandemic, which, in the words of the IMF Executive Board, “has taken a significant human and economic toll”⁴²⁷ within the euro area.

According to the findings of the IMF, euro area real GDP declined sharply in the first half of 2020, though the unprecedented policy responses at the national and EU levels helped cushion the impact of the Covid-19 crisis—including by effectively limiting in-creases in unemployment and insolvencies—and supported a strong rebound in the third quarter of 2020.⁴²⁸ The IMF added to this that the “second wave” and—in its own words—“necessary measures to contain it” were to be expected to weigh on economic activity in the term to follow.⁴²⁹ With these harsh wordings, the IMF demonstrated its continued adherence to neoliberal thinking, with economic interests invariably being prioritized over other societal interests, such as public health and even human lives, which must all give way—always—to economic interests.

The IMF, furthermore, rightly observed that, “while rapid and widespread delivery of safe and effective vaccines would likely spur a faster recovery, a prolonged health crisis and slower recovery could depress investment and increase private and public sector vulnerabilities”.⁴³⁰ According to the IMF’s assessment, in such a downside scenario, significant labour market hysteresis could start to take place, next to increasing inequality and poverty. Taken together, these “scarring” effects could weigh heavily on the growth potential of the euro area.⁴³¹

In its further assessment of the impact of the Covid-19 pandemic within the euro area, the IMF staff pointed out that the EU key policy challenge would be to “continue countering the pandemic while facilitating a robust and inclusive recovery, including by addressing the health crisis, containing economic scarring, supporting resource reallocation and transformation to greener and more digital economies, and limiting the crisis’s impact on inequality and poverty”.⁴³² The IMF staff added to this that “(i)n a downside scenario, sizable further stimulus would be needed”.⁴³³

Some main topics of concern to the IMF staff were the following⁴³⁴:

• (1) Fiscal policy: According to the IMF Staff assessment, fiscal policy within the euro area (for 2021) will have to be based on further providing broad-based financial support. However, once the Covid-19 pandemic will have calmed down, fiscal policy should again focus on managing the transition from necessary lifelines to facilitating a durable recovery, with as priorities investing in climate change mitigation and digitalization, while addressing likely increases in inequality and poverty. Over the medium term, fiscal policy should focus on sustainably boost growth, with a need for credible and carefully calibrated fiscal consolidation strategies in high-debt countries.

• (2) Monetary policy: According to the IMF Staff, additional monetary policy stimulus must support the recovery and facilitate a sustained increase in inflation.

• (3) Financial sector measures: Supportive financial sector measures should be maintained until the recovery is well underway, while capital and liquidity buffers should be rebuilt gradually to ensure banks’ continued capacity to extend credit. Improving the EU’s crisis resolution capabilities, completing the banking union, and further advancing the capital market union were also mentioned as key to further increasing euro area resilience.

• (4) Structural policies: Structural policies should focus on facilitating reallocation of resources to expanding firms and sectors, limiting scarring, and protecting the vulnerable (e.g., adjusting job retention schemes, strengthening social safety nets, promoting job search, enhancing training programs, and providing carefully targeted hiring subsidies).

Some further findings of this 2020 Article IV surveillance report shall be revisited in the next Chap. 4 (dealing with Covid-19 related issues of fiscal policy and state aids).

3.4.5.4 Global Surveillance

Global surveillance entails reviews by the Executive Board of the IMF of global economic trends and developments. The main of these reviews result in a wide variety of reports, such as (1) the World Economic Outlook reports (dealing with the overall economic situation of the world), (2) the Global Financial Stability Reports (covering developments, prospects, and policy issues in international financial markets), and (3) the Fiscal Monitor (dealing with the latest developments in public finance).

All three groups of reports are published twice a year, with updates being provided on a quarterly basis. In addition, the Executive Board of the IMF holds more frequent informal discussions on a wide variety of topics dealing with world economic and market developments.⁴³⁵

3.5 Increase of Debt

3.5.1 Introduction

Already in the pre-Covid-19 pandemic era, both public and private debt were on the rise, thus illustrating how the capitalist money creating system (based upon banks granting credit), supported by neoliberal monetary (and fiscal) policy, does not allow any rational planning whatsoever. These vast amounts of credit, moreover, create an expectancy of ever more economic growth, as, within the logic of the capitalist system itself, all the created credit must be paid back out of economic activities.⁴³⁶ This raises the question how ever a more sustainable economic model will be achieved base upon such a monetary system.⁴³⁷

One of the biggest monetary challenges during pre Covid-19 times was, hence, how to reconcile these ever-growing mountains of debt with the intent of creating a more sustainable economic system, with as aim, amongst other things, of (1) countering climate change, in addition to (2) finding solutions to the numerous intergenerational injustices entailed by the capitalist money creation model (amongst which inequality and poverty).⁴³⁸

Regretfully, with the onset of the Covid-19 pandemic, these noble goals have largely been temporarily put on hold, while due to various economic factors, not in the least the vast amounts of new money that has been created because of monetary support measures, the Covid-19 pandemic would only further increase the already gigantic debt mountains.

3.5.2 Global Debt in General and Government Debt in Particular

3.5.2.1 Findings of the Institute of International Finance

According to the “Institute of International Finance’s global debt monitor”-report of February 17, 2021, global debt soared to a new record high of USD 281 trillion in 2020: Coupled with a sharp pandemic-driven decline in government and corporate revenues, total private and public debt for the 61 countries in the IFF’s sample rose by USD 24 trillion in 2020, making up over a quarter of the USD 88 trillion rise over the preceding decade. Debt outside the financial sector hit USD 214 trillion, up from USD 194 trillion in 2019.⁴³⁹ This brought the worldwide debt-to-GDP ratio at over 355%.⁴⁴⁰

The Institute of International Finance’s global debt monitor estimated government support programs had accounted for half of this rise, while global firms, banks and households added USD 5.4 trillion, USD 3.9 trillion and USD 2.6 trillion respectively. This all implied that debt as a ratio of the world economic output—known as gross domestic product—surged by 35 percentage points to over 355% of GDP.⁴⁴¹

There was also little sign of a near-term stabilization.⁴⁴²

By comparison, according to the same Institute of International Finance, global debt had amounted to USD 247 trillion in Q2 2018 (or 317% of the then global debt-to-GDP ratio).⁴⁴³ Emerging market debt was then reported to account for USD 71 trillion (or 212% of EM GDP), around USD 4.8 trillion higher than its 2017 level, with China having accounted for over 80% of this increase.⁴⁴⁴ Global debt in Q2 2018 excluding the financial sector was reported to amount to USD 187 trillion.⁴⁴⁵

Still according to the same Institute of International Finance, in the course of 2020, global debt-to-GDP ratio had surged by 35 percentage points (%pts) to over 355% of GDP. This upswing was well beyond the rise seen during the 2008 global financial crisis. Back in 2008 and 2009, the increase in global debt ratio had remained “limited” to 10% and 15%, respectively.⁴⁴⁶

Further debt trajectories by the Institute of International Finance were expected to vary significantly among the difference countries, a principal factor being the Covid-19 vaccination rollouts. Indeed, the pace of vaccination as of December 2020 differed considerably across countries, and difficulty in vaccine rollout was expected to delay economic recovery, prompting further debt accumulation. For highly indebted countries facing ongoing fiscal constraints, difficulty in accessing and distributing vaccines was thus especially expected to contribute to further debt strains, particularly in low-income countries.⁴⁴⁷ This is again something we shall have to keep in mind when we shall address the disaster of (the early months of) the EU Covid-19 vaccination campaign in Chap. 9 (Cf. Sect. 9.4.3.).

For 2020, government debt on average topped 105% of GDP—up from 88% in 2019. General government debt was hereby reported to account for more than half of the rise-up of the global debt, over USD 12 trillion in 2020 vs USD 4.3 trillion in 2019.⁴⁴⁸

This is illustrated in Fig. 3.2 which gives an overview of the global debt surges from 2013 until 2020.s

Fig. 3.2

Global debt surges from 2013–2020 [Source: Jones (2021), IIF, BIS, IMF and National Sources]

Unsurprisingly, mature markets saw the biggest increase in government debt (+ USD 10.7 trillion), as the fiscal response to the Covid-19 pandemic was constrained in most emerging markets. While some Covid-19 pandemic-related fiscal measures were expected to expire in 2021, budget deficits were nevertheless expected to remain well above Covid-19 pre-pandemic levels. The IFF itself expected global government debt to increase by another USD 10 trillion in 2021, and to surpass USD 92 trillion by end-2021. The IFF, furthermore, indicated that, although sizeable budget deficits have been essential to tackle the Covid-19 crisis, finding the right exit strategy could be even more challenging than after the 2008/09 financial crisis. E.g., political, and social pressure could have as effect that it will limit governments’ efforts to reduce deficits and debt. This may in turn jeopardize their ability to cope with future crises. According to the IFF, this may already soon constrain policy responses for mitigating the adverse impacts of societal problems, such as climate change and natural capital loss,⁴⁴⁹ implying that fighting the Covid-19 pandemic may be likely to exhaust countries too much to fight climate change (and similar matters) with an equal resilience.

According to the quoted IFF-report, debt rises were particularly sharp in Europe, with non-financial sector debt-to-GDP ratios in France, Spain, and Greece increasing some 50 percentage points. The rapid build-up was mostly driven by governments, particularly in Greece, Spain, Britain, and Canada. Switzerland was the only mature market economy in the IIF’s 61-country analysis to record a decline in its debt ratio.⁴⁵⁰

Figure 3.3 gives an overview of the surge in debt-to-GDP ratios, in some countries, in 2020 (expressed in percentage points).

Fig. 3.3

Surge in debt-to-GDP rations (percentage points, estimated change in debt ratios 2020) [Source: Jones (2021), IIF, BIS, IMF and National Sources]

Among emerging markets, China saw the biggest rise in debt ratios excluding banks, followed by Turkey, Korea, and the United Arab Emirates. South Africa and India recorded the largest increases just in terms of government debt ratios.⁴⁵¹

3.5.2.2 Findings of Eurostat

According to Table 3.10, the combined public debt of the 27 EU member states in Q4 2018 amounted to EUR 10,746,928 million, in Q4 2019 to EUR 10,970,052 million, and in Q4 2020 to EUR 12,078,220 million.

Table 3.10 Governmental gross debt of EU member states in million euro [Source: Eurostat (2021b)]

This implies that while the rise in public debt from Q4 2018 to Q4 2019 was EUR 223,124 million, the rise in public debt from Q4 2019 to Q4 2020 was EUR 1,108,168 million. The latter is largely due to Covid-19.

This is illustrated in Fig. 3.4⁴⁵² and in Table 3.10. Figure 3.4 gives an overview of the public debt (as % GDP) in the Euro Area Member States in 2019 and 2021. Table 3.10 gives an overview of the governmental gross debt of the EU member states in million euro from 2018 until 2020.

Fig. 3.4

Public debt (as % GDP) in Euro Area Member States in 2019 and 2021

3.5.2.3 Findings of the “World Debt Clock”

On 3 April 2021, the World debt clock⁴⁵³ mentioned a global public debt (of all the countries in the world combined) of more than USD 79,853,127,000,000, −.

Table 3.11 gives a rough estimate, based upon figures that were at the time made public on the same website, of the global debt of all world countries combined during various years.

Table 3.11 Total global, public debt according to the “World Debt Clock”

3.5.2.4 Assessment by the IMF

In a paper of April 20, 2021, that was made available on the IMF-blog,⁴⁵⁴ Marcos Chamon and Jonathan Ostry pointed to the fact that while during the Covid-19 pandemic, monetary and fiscal policy of a variety of countries got characterised by a combination of high public debt and low interest rates, this had already been the case for many advanced economies prior to the Covid-19 pandemic. The authors, moreover, expressed their concern that this could even become starker in the aftermath of the Covid-19 pandemic. According to these authors, the Covid-19 pandemic also caused a growing number of emerging market and developing economies to experience negative real rates—referring to the interest rate minus inflation—with regard to government debt. According to said authors, this was partly due to the own policy of the IMF itself, which had urged countries to spend as much as they could in order to protect the vulnerable members of their societies and to counteract long-lasting damage to their economies. However, the IMP had at the same time stressed the importance to keep public spending well targeted. In the opinion of said authors, this was especially critical for emerging market and developing economies that started facing tighter constraints and associated fiscal risks, making it necessary to prioritize public spending even more.⁴⁵⁵

For said authors, the main matter is what will have to be done about the high levels of public debt in the aftermath of the Covid-19 pandemic. The IMF itself pointed to the fact that it would become necessary to fiscal anchors—referring to both rules and frameworks—for dealing with the effects of the historically low interest rates. Some suggested that in case borrowing costs would again move up, this would do be done only gradually in order to deal adequately with possible fallout.⁴⁵⁶

For Chamon and Ostry, two issues seemed salient⁴⁵⁷:

• (1) First, the authors raised the issue whether it will remain possible to keep borrowing cheap for the entire horizon relevant for fiscal planning in the aftermath of the Covid-19 pandemic

  In the own opinion of said two authors, the answer to this question is negative. While they point to arguments holding that negative growth-adjusted interest rates could be considered, the authors themselves highlighted the risks around such a benign future.⁴⁵⁸

• (2) Second, the authors raise the question whether it will suffice to resort to higher interest rates in a gradual manner only.

  The answer of both authors to this second question was again negative: according to said authors, theory and history suggest that, when private financial markets start worrying that fiscal space may run out, they have a tendency to penalize countries quickly.

The authors, moreover, considered three alternative viewpoints⁴⁵⁹:

• (1) In a first scenario, interest rates could be kept low in advanced economies, even if this would imply that debt would continue to increase. In such a case, there would be per definition no need to worry about debt or steady (non-progressing) deficits. According to said authors, debt ratio would simply continue to rise but would eventually stabilize at a higher level. The question what is to happen once this higher level is obtained, however, remains unanswered.

• (2) In a second scenario, interest rates could be kept low at given debt levels, but they should not be kept low if debt were to still increase in a significant manner. According to the authors, it is likely that most G7 countries could continue to run a primary deficit close to 2% of GDP while still stabilizing their debt ratios. In this scenario, such countries would continue to enjoy a free lunch, under the condition that deficits remain below the debt (ratio)-stabilizing level.

• (3) In a third scenario, interest rates would be kept low but could be adjusted, probably even abruptly. In this scenario, the case could be made to take advantage of favourable conditions for reduce debt and rebuilding buffers.

However, still according to Chamon and Ostry, the more prudent baseline is the one that implies that borrowing costs will increase significantly, especially for emerging markets and developing economies. In such a scenario, the task for monetary authorities will become to determine the fiscal policy that is needed to anchor expectations in a riskier future. Advanced economies that still have ample fiscal space may in such a scenario not need to worry much, but those that have extremely high debt will need to take some anchoring insurance. Still according to both authors, emerging market and developing economies alike will in the aftermath of the Covid-19 pandemic most likely have to deal with more binding fiscal constraints and a need to adjust sooner (but again, not before the recovery would be firmed up).⁴⁶⁰

Of course, in our previous work,⁴⁶¹ we ourselves have proposed a total different approach for dealing with this matters, which we shall readdress in Chap. 11.

3.5.2.5 Public Debt-to-GDP Ratio in the EU

In 2019, the general government debt-to-GDP ratio in the euro area reached an average of 80% of GDP in the euro area. This percentage amounted to 78% in 2019 (cf. Table 3.12).

Table 3.12 Governmental gross debt in EU member states in percentage of gross domestic product (GDP) [Source: Eurostat (2021b)]

The outbreak of the Covid-19 pandemic led to a severe economic situation and triggered the need for larger stimulus measures. As a result, the average debt-to-GDP ratio in the euro area got projected to jump by around 15%, to an average of nearly 102% for the year 2020. The European Commission, furthermore, expected debt-to-GDP ratios to stabilize at extremely elevated levels over 2021 and 2022, assuming unchanged policies.⁴⁶² Still according to the European Commission, the key driver for the increase in the public debt-to-GDP ratio were primary deficits. The increase in the public debt-to-GDP ratio in 2020 was hereby believed to reflect the combined effects of a major deterioration of the member states’ primary balances and the contraction they were suffering in GDP. These two elements together had a significant snowball effect of increasing debt. It was, however, expected that the average primary deficit would halve from 7.2% of GDP in 2020 to 3.4% in 2022. The high debt-to-GDP ratios in the euro area were, nevertheless, still expected to continue to be a drag on debt dynamics throughout 2021 and 2022, but the European Commission also believed that a favourable interest rate-growth differential could help to contain the projected increase.⁴⁶³

This is further illustrated in Table 3.12 which gives an overview of the governmental gross debt of the EU member states in percentage of the gross domestic product (GDP) from Q4 2018 until Q4 2020.

According to figures made available by Eurostat, at the end of Q3 2020, the euro area was still strongly impacted by policy responses to the Covid-19 containment measures which materialized in increased financing needs: the government debt to GDP ratio in the euro area stood at 97.3%, compared with 95.0% at the end of Q2 2020. Within the EU, the ratio increased from 87.7% to 89.8%. Compared with Q3 2019, the government debt to GDP ratio rose in both the euro area (from 85.8% to 97.3%) and the EU (from 79.2% to 89.8%). The increases were attributed to two factors: government debt increasing considerably, and GDP (and hence also tax income) decreasing.⁴⁶⁴

The highest ratios of government debt to GDP at the end of Q3 2020 were recorded in Greece (199.9%), Italy (154.2%), Portugal (130.8%), Cyprus (119.5%), France (116.5%), Spain (114.1%) and Belgium (113.2%), and the lowest in Estonia (18.5%), Bulgaria (25.3%) and Luxembourg (26.1%).⁴⁶⁵ Compared with Q2 2020, 20 Member States registered an increase in their debt to GDP ratio at the end of Q3 2020, and five a decrease, while the ratio remained stable in Estonia and The Netherlands. The largest increases in the ratio were observed in Greece (+8.5 percentage points—pp), Cyprus (+6.2 pp), Italy (+4.9 pp), Portugal (+4.8 pp), Lithuania (+4.6 pp) and Bulgaria (+4.0 pp). The decreases were recorded in Austria (−3.4 pp), Finland (−1.7 pp), Czechia (−1.5 pp), Belgium (−0.9 pp) and Ireland (−0.7 pp).⁴⁶⁶ However, compared with Q3 2019, all Member states registered an increase in their debt to GDP ratio at the end of Q3 2020 (when the full impact of Covid-19 containment measures was strongly felt). The largest increases in the ratio were recorded in Cyprus (+22.9 pp), Italy (+17.4 pp), Greece (+17.3 pp), Spain (+16.6 pp) and France (+16.5 pp).⁴⁶⁷

This is further illustrated in Table 3.13 which gives a representation of the percentage wise increase of the governmental gross debt in million euro by comparing 2020-Q4 with 2019-Q4, and 2019-Q4 with 2018-Q4.

Table 3.13 Percentage wise increase of the governmental gross debt in million euro comparing 2020-Q4 with 2019-Q4, and 2019-Q4 with 2018-Q4 [Own calculations, based upon: Eurostat (2021b)]

3.5.3 Private Debt

3.5.3.1 Findings of the Institute of International Finance

According to the “Institute of International Finance’s global debt monitor”-report of 17 February 2021, non-financial private sector debt (household and corporate) hit 165% of the global GDP in 2020, up from 124% in 2019. Still according to the IFF, supportive government measures, such as debt moratoria and loan guarantee programs—while much needed for fighting the Covid-19 pandemic—were reported to have pushed non-financial corporate debt some eight percentage points higher, to 100% of GDP. Firm level data, in addition, suggested that many large enterprises, particularly in the United States and Japan, made use of this additional borrowing capacity for building up their cash holdings, though small enterprises faced more difficulties in building such buffers. Household debt throughout 2020 was reported to have increased by 4 %pts. to 65% of GDP, in part reflecting loan moratoria and the resilience of residential real estate markets to the Covid-19 pandemic.⁴⁶⁸

Still according to the quoted IFF-report, financial enterprises saw the largest annual jump in debt ratios in over a decade: debt in the financial sector was reported to have increased by over 5 %pts., to 86% of GDP in 2020. This has been the largest increase since 2007 and, moreover, the first annual rise since 2016.⁴⁶⁹

Mature markets have seen the biggest increases in debt ratios in 2020 (outside the financial sector). This increase was reported to have been particularly sharp in Europe, with non-financial sector debt-to-GDP ratios in France, Spain, and Greece having increased by some 50 %pts. The rapid debt build-up was in these countries mostly driven by national governments, which was in particular the case in Greece, Spain, the United Kingdom, and Canada. According to the IFF-report, Switzerland was the only mature market economy in the IFF sample that recorded a modest decline in the government-to-debt ratio. Balance sheet vulnerabilities in the non-financial enterprise sector were also reported to have increased significantly across many countries, particularly in France.⁴⁷⁰

Among emerging markets, China witnessed the biggest increase in debt ratios (ex-financials), followed by Turkey, Korea, and the UAE. South Africa and India recorded the largest increases in government-to-debt ratios, while the run-up in corporate debt was reported to have been the largest in Peru and Russia. Still according to the IFF-report, emerging market FX debt was reported to have remained broadly stable at USD 8.6 trillion in 2020, as sharp losses in EM currencies reduced enterprises’ incentives to borrow in foreign currency. Debt build-up was relatively limited across frontier markets and low-income countries, in part reflecting the limited fiscal space in these territories to support enterprises and private households.⁴⁷¹

According to the IFF, a phenomenon referred to as “corporate zombification” occurred in 2020. This phenomenon implied that, as global recovery gathered pace, governments were expected to be developing exit strategies from the exceptional fiscal support measures they had resorted to for fighting Covid-19. E.g., by the end of 2020, it appeared that support measures such as government guarantees, and debt moratoria had been successful in preventing a surge in business bankruptcies. As a result, the decline in the number of enterprises that filed for insolvency was extraordinarily low across many European countries, though China and Turkey were reported to have seen some an increase.⁴⁷²

However, it was feared that the premature withdrawal of supportive government measures in the aftermath of the Covid-19 pandemic could still lead to a surge in bankruptcies and make a new wave of non-performing loans necessary, with financial stability implications for the banking sector. Sustained reliance on government support could pose systemic risks to financial system as well. In the assessment of the IFF, a prolonged period of loan guarantees—coupled with sustained low interest rates—could encourage still more debt accumulation by the weakest and most indebted corporates.⁴⁷³

3.5.3.2 Findings of Eurostat

According to Eurostat, one of the important legacies of the Covid-19 pandemic will be an immense increase of the global public and private debt.⁴⁷⁴

Faced with an exceptional occurrence as a global pandemic, which at the time of the Eurostat-assessment had been going on for more than a year already, the rise in debt was expected to be exceptional: in size, speed, and scope.⁴⁷⁵

Eurostat expected the public sector to absorb the biggest part of the global debt increase, both due to its ability to borrow more and under better conditions (e.g., at lower interest rates and for longer maturities).⁴⁷⁶ During the Covid-19 pandemic, the need for this increase of public debt has, however, been extremely sudden. E.g., it has been estimated that the surge in debt for Italy and Spain during a single year (2020) has been equivalent to 25% of GDP, whereas it had taken 5 and 3 years, respectively to accumulate a similar increase of public debt in the aftermath of the 2007–2008 financial crisis.⁴⁷⁷

This increase in public debt was in the opinion of Eurostat expected to occur in both advanced and emerging economies. Although the increases were expected to be somewhat smaller for emerging economies, the situation of the latter group of countries still remained particularly delicate due to a variety of factors, such as: they had less fiscal margin to play with; they are in general more dependent on foreign financing and international support, and they are more vulnerable to debt crises to begin with.⁴⁷⁸

While the increase in public debt during the year 2020 has mainly occurred in countries that already in pre-Covid-19 times were deeply indebted, Eurostat pointed to the fact that households have, generally speaking, been starting from much lower levels of debt than in the run-up to the 2007–2008 financial crisis. Eurostat also pointed to the fact that the picture with regard to corporate debt was in some countries more mixed.⁴⁷⁹

In addition, in emerging economies, there has in some countries been a sharp increase in corporate debt in China which more than tripled since 2008.⁴⁸⁰

With regard to advanced economies, information was only later available because in this group of countries, the impact of the Covid-19 outbreak was concentrated in Q2 2020.⁴⁸¹ Nevertheless, from early data from the United States, there appeared an increase in corporate debt and a relative normality among the debt situation of households: between January and June 2020, non-financial corporate debt rose by 9.4% (around double the total increase registered in 2019), while household indebtedness remained much more stable (+1.9%, a figure similar to that registered in the same period in 2019).⁴⁸² While the biggest part of the increase in debt was considered most likely to occur in the public sector in light of the large arsenal of economic measures resorted to for combatting the Covid-19 crisis, the possible improvement in household balance sheets was more likely expected to be temporary.⁴⁸³

3.6 Conclusions

It is clear that after the two severe crises of the past decade and a half—particularly the severe financial crisis of 2008 (and its aftermath), and the Covid-19 crisis of 2020–2021—the monetary systems of many Western countries have been stretched beyond their capacity.

According to Stiglitz, in the United States, the US FED has played an active role in countering the economic effects of the Covid-19 pandemic, which resulted in a broad range of monetary interventions (cf. Sect. 3.3.). This brought Stiglitz to the following general assessment⁴⁸⁴:

In the US, the Federal Reserve has taken an active role in countering the economic effects of the pandemic, with a broad range of interventions providing liquidity to markets that seemed at the point of becoming dysfunctional, lending to a wide array of firms, and supporting sagging bond prices, even for junk bonds. While, as in Europe, there is a charade that the central bank does not lend money directly to the government, it is clear that that is precisely what has been happening. The Fed’s balance sheet has expanded enormously, increasing in a few weeks as much as it did during the years of the financial crisis.

While the mandate of the ECB is markedly different from the Fed’s – its focus is supposed to be on inflation, which is not yet a problem – its actions are similar, though its balance sheet has not expanded anywhere near the extent to which the Fed’s has. The narrowness of the ECB’s mandate has been questioned, as the problem of high inflation, paramount at the time of ECB’s founding, has faded and as other macroeconomic problems have moved to the centre. It’s now clear that ensuring low inflation and low debt and deficits is neither necessary nor sufficient for ensuring stability or growth.

With circumscribed EU budgets, the ECB plays a critical role in sustaining EU-wide economic growth. But as we have already noted, under current circumstances, the ECB’s ability to do that is limited, especially with interest rates already near to zero.

But there is, in the opinion of Stiglitz, one more disturbing aspect of both the American and EU interventions: it is in effect bailing out, once again, the private sector for reckless decisions, especially concerning the size of their indebtedness (that had been build up in the past). For Stiglitz, such bailouts create a moral hazard: enterprises can more and more assume that even if they recklessly resort to excessive debt, they can count on public bailouts sparing them from any consequences.⁴⁸⁵

In Chap. 11, we shall assess what this implies for the future of the Western world, at the same time readdressing some findings of our previous research in which it has been held that the time is more than ripe for looking for alternative approaches to the prevailing, neoliberal monetary (and fiscal policy) order—and, hence, for an alternative socioeconomic system that could be built upon such a new monetary order.