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Emergency fiscal programs: no choice but to increase the (monetized) deficits

The essential


• The large fiscal packages announced by governments to counter the virus crisis aim, so far, at stabilization more than stimulus.
• In addition to funding the emergency response to the virus situation itself, these packages intend to prevent a worsening of the crisis through the
financial and household income channels.
• Only part of the amounts recently announced by governments are budget-easing measures, strictly speaking. Of these, there is a larger push in the
US and Japan than in Europe so far.
• Other amounts are advances meant to be reimbursed, or (for the largest amounts) government guarantees of corporate debt. Regarding guarantees, the push in Europe is, at this stage, much larger than in the US.
• Within the specific architecture of the Eurozone, European institutions have also played a major part, by lifting restrictions so that member states can deploy their national programs.
• A European-level mutualized response is also under way, with a number of programs already decided and larger ones currently being negotiated.
• The combined effect of the recession and the whole array of above-mentioned measures on deficits and debt could be, very roughly for large advanced economies given the many unknowns, increases of 7% to 15% in deficits (in GDP terms) and 15% to 25% in public debt in 2020.
• However, the monetization of most or all the additional public debt through the large QE programs announced by central banks will mitigate the damage caused to governments’ debt sustainability.
• Yet, the recently announced stabilization-aiming fiscal measures are not the end of the fiscal easing chapter opened by the crisis. Indeed, they will probably give way to further measures, this time stimulus-oriented, once the confinement measures have been gradually lifted.
• It is also very probable that some of the crisis-fighting fiscal measures, currently presented as temporary will become more or less permanent due to demands of a stronger government role in the economy and stronger social safety nets. If not matched by offsetting revenue raising measures, they may lead to permanently higher structural primary deficits.



 May 2020






Large fiscal
support programs
are necessary
to prevent
defaults and
a collapse in



No all the
amounts of the
fiscal programs
are budget



countries have
announced very
large amounts of
public guarantees
on corporate

The large fiscal packages recently announced by governments aim at stabilization more than stimulus.

The goal is not to stimulate investment and consumption (unavailable options when populations are confined) but to:

1/ fund emergency response to the virus situation itself

2/ contain the economic damage so that it does not worsen the recession through two major channels:

     A - A collapse of household income and expectations thereof
     B – Cascading defaults leading to a systemic financial crisis

Only part of the amounts recently announced by government are budget-easing measures, strictly speaking.Their order of magnitude is between 1.5% and 4% of GDP for large European economies, with a larger push by Japan (as much as 7%) and the US (more than 10%). Part of the explanation for the lower European numbers (together with the limited fiscal space of a number of countries) is that large pre-existing automatic stabilizers, starting with generous short hour and unemployment insurance schemes, already cushion the damage brought by the crisis to household income.

  •  A portion of these budget measures is directly intended at countering the virus outbreak, by financing medical and emergency response goods and services as well as medical research.
  • A large other portion is made up of direct support to household income through the enhancement of automatic stabilizers. It includes support for sick leave, short hour schemes, unemployment insurance and other benefits. Depending on the country, existing benefits have been extended (in terms of amounts or in terms of workers covered, notably short-term workers and the self-employed, who may not be eligible in normal times) and new schemes have been created. In the case of the US, where, despite the large fiscal push, there is no political choice to protect all permanent labour contracts altogether, a one-off cash payment has been delivered to nearly all citizens (except high earners), in addition to the enhancement of existing benefits. A cash grant system has also been announced in Japan.
  • A number of other direct budget measures target corporations, through subsidies (mostly targeting the wage bill or aimed at very distressed sectors) and tax cuts. Being partly forgivable (when used for payroll, mortgage payments and utilities bills), a large part of the loans issued to small corporations in the US does qualify as budget spending. 

Other amounts are not strictly budget measures but rather liquidity support, as they are meant, in principle, to be repaid to the state treasuries, although some of them could later be forgiven.

  • These include deferrals of taxes and various bills (aimed at corporations and households), as well as direct public loans to corporations.
  • A number of countries have also set aside amounts for public acquisition of corporate equity capital.

Finally, a large portion of the amounts announced is made up of public guarantees of corporate debt. In this aspect, the push is greater in Europe than in the US, knowing that in the case of the more disintermediated US economy, the Federal Reserve securities purchases programs launched to deal with the crisis also play a very large role in credit easing. These public guarantees will become public spending and debt only if activated by a loan default.

  • In the Eurozone, these guarantees represent much larger amounts than the actual budget measures (as much as 35% and 42% of GDP in Germany and Italy respectively). While in most cases the guarantee only covers most of a loan’s amount (typically 90% for small companies), it can be extended to 100% in some instances.

The fiscal
programs are
fully backstopped
by the central
banks’ securities

  • They represent a lesser amount, at this stage, in the United States, where the Treasury has mainly extended its guarantees to the Fed’s lending programs by $450bn (or 2% of GDP). 

Within the specific architecture of the Eurozone, European institutions have already played a major part. The EU Commission has first and foremost had an essential role in enabling member states to deploy their national programs, as of the beginning of March, by:

  • Confirming that EU budget rules do not apply to the current emergency situation.
  • Relaxing the restrictions applying to state aid to corporations.

In addition, European-level programs have also been launched.

  • Dissent the amounts and features of these programs has fuelled tensions among Eurozone countries. Southern countries, with Italy being the most vocal, have been asking for joint issuance of debt, a solution rejected by Germany and other Northern countries (with the Netherlands being the most vocal).
  • Nonetheless, agreement has already been secured on a number of mid-size programs, and on committing to work on a larger European Recovery Fund (see box below).

The large
public debt will
be mostly held
by the central

Mutualized European fiscal response

Despite their differences, European countries and institutions have agreed, at this point, to the following fiscal measures (together with a number of smaller ones):

  • A €37bn EU Commission program in favour of health systems, SMEs and labour markets.
  • A €540bn (although a very theoretical amount), or 5% of GDP, package made of:

- An ESM Precautionary Credit Line program for state budgets, available to all Euro member states for amounts up to 2% of their GDP under the condition that it is used solely for Covid-19-related direct and indirect healthcare, cure and prevention costs. An important feature of an ESM program is that it can open the way to the ECB’s OMT operations (which, unlike the sovereign QEs already launched, is not constrained to respecting the “capital key”, i.e., the ECB could target additional purchases specifically towards a certain country). Whether to request such a program has been a hot political topic in Italy (and remains undecided at the time of writing)

- An EIB pan-European guarantee fund of €25bn to support €200bn of financing with a focus on SMEs.

- The SURE program, which will provide €100bn to support national short-hour work schemes, in the form of cheap loans granted from the EU to member states.

  • On 23 April, the European Council validated the principle of a Recovery Fund, yet without many details, although European decision-makers have hinted that it could be worth €1.0tn. Its exact amount, financing, ways to deliver aid (i.e., the proportion between loans and grants) and how it will interact with the European budget remain to be decided and could prove contentious items in further negotiations.


The combined effect of the recession and these emergency fiscal programs on deficits and debt could be, very roughly for large advanced economies given the  many unknowns, increases of 7% to 15% in deficits (in GDP terms) and 15% to 30% in public debt in 2020.

  • Any accurate calculation is heavily complicated by the fact that: 1/ both the fall in GDP and its effect on deficits (through revenue losses, increased expenses and the denominator effect), while undoubtedly large, are difficult to estimate at this stage; 2/ the final cost of announced fiscal measures will depend on the take-up rate of the deployed schemes (unemployment insurance, public loans, etc.), on the proportion of taxes and social contributions deferrals that are finally forgiven, and on the number of corporate defaults that will activate public guarantees; 3/ further crisisfighting fiscal easing measures may be announced in the coming weeks or months; and 4/additional easing measured deployed in a stimulus mode to accompany the recovery (see later) may also have an impact on 2020 figures.
  • While the debt increase is here to stay, the deficit situation should, on the other hand, rapidly improve once the recession is over, although it may not come back quickly to pre-crisis levels (see later). 

However, despite deteriorated headline fiscal metrics, the damage caused by these programs to public debt sustainability will be mitigated by their monetization through the large QE programs announced by central banks:

  • The announced fiscal plans will be at least mostly (and likely more than) funded by the QE programs announced by central banks. Hence, public debt issuance net of central bank intervention may actually be negative in 2020 in most large advanced economies.
  • Debt held by the central bank raises sustainability issues that, while not nil, are much lighter than those raised by market-held debt in most situations: In the case of debt held by the central bank, interest cost is cancelled by the seigniorage effect, while refinancing risk is reduced by the central bank’s option (and decision that may be heavily influenced by politics and a public good rationale) to simply roll-over the public securities.

All in all, our view is that this combination of large fiscal programs and debt monetization should be successful in preventing that the unavoidable large “real economy” recession caused by the pandemic and the lockdowns morphs into either a systemic financial crisis or a long-lasting recession extending well beyond the pandemic’s peak.

  • While there have been notable shortcomings in some of the initially announced schemes (such as the limited extent of the state guarantees in terms of percentage of the loans, or risk profile and ratings conditions for corporations to be covered), some of these have already been addressed, and there is enough additional fiscal space backstopped by central banks to plug the remaining holes if it is an absolute necessity.

Once the
lockdowns are
lifted, new fiscal
programs will
probably be
announced, this
time stimulusoriented.






The crisis may
lead to a rising
demand for state
intervention in
the economy
and welfare

  • As might have been expected, given their size and the speed of their deployment, some of the schemes have ran into various operational obstacles (notably, depending on the country, bureaucratic delays, software issues, captation by large corporations instead of the targeted SMEs and even risks of outright abuse...). However, given the strong government commitment, there is no reason to believe that most of these obstacles will not be overcome (if they have not been already), while the remaining ones will probably only cancel a minor part of the intended effects of the programs. 

Currently announced stabilization-aiming fiscal measures, however, are not the end of the fiscal chapter opened by the crisis. Indeed, they will probably give way to further measures, this time stimulus-oriented, as the confinement measures are gradually lifted. These will be a further addition to public deficits and debt, at least over the medium term.

  • In addition to maintaining part of the stabilization and backstop measures longer than currently planned, typical stimulus measures could include tax cuts, consumption subsidies, accelerated amortization plans, household benefits and infrastructure spending. However, such plans are just starting to be discussed.
  • In Europe, such measures could, again, be deployed at government level or through mutualized instruments (notably the planned Recovery Fund, see previous box).

It is also very probable that some of the crisis-fighting fiscal measures, currently presented as temporary will become more or less permanent, due to demands for a stronger role government role in the economy and stronger social safety nets. If not matched by offsetting revenue raising measures, they may lead to permanently higher structural primary deficits.

  • To many observers, the crisis has revealed the need for increased state intervention in the economy, especially to ensure closer monitoring of the health and other strategic sectors, at least to improve the security of supply chains. This may carry a permanent fiscal cost. In the specific case of the US (especially against the current backdrop of the presidential campaign), the crisis may reveal weaknesses in the health system that will call for an increase in government spending.
  • In the post-crisis world, governments will also probably face demands for permanently stronger social safety nets. Notably, the extension of unemployment insurance schemes to temporary workers, the self-employed and the workers of the gig economy could be here to stay. The universal basic income (already approached by the direct cash grants to households decided in the US, Japan and possibly Spain) should be a rising theme.
  • Should these new political and social equilibria lead to permanently higher structural primary deficits, public debt sustainability will then depend, in addition to the readiness of central banks to continue to purchase debt, on whether the crisis-induced changes also allow economies to maintain an adequate level of long term nominal growth.

All in all, governments of large advanced economies have swiftly and energetically reacted to the crisis with very large fiscal programs. These show cross-country commonalities but also differences in structure and amounts that depend on the magnitude of already existing fiscal stabilizers, political choices (in particular that of letting a large proportion of labour contracts be terminated during the lockdowns) and the interaction of these programs with those announced by central banks. The central bank backstop means that these programs are sustainable over the short term, and can probably even be increased if need be, although politics may complicate things (especially in Europe). It also means that public debt sustainability may be less damaged than meets the eye after the crisis. While these large fiscal programs cannot prevent the collapse in activity that accompanies the pandemic and the lockdowns, they can, in our view achieve their goal of preventing this “real economy” crisis from leading to a systemic financial meltdown or a very prolonged recession.
However, in order to deal with the very negative confidence effect and higher unemployment that will persist (and could well increase) in the coming months, additional fiscal measures, this time stimulus-oriented, will probably accompany the lifting of the lockdowns and the recovery. After the crisis, some of these programs, initially intended to be temporary, will most likely have long-term consequences, fuelling demands for a larger role of the state in the economy and more social protection. As governments may have to yield to such demands, higher structural deficits may be here for a long time to come.


PERRIER Tristan , Global Views Analyst
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Emergency fiscal programs: no choice but to increase the (monetized) deficits
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