Lagarde unveils surgical aid for growth with ECB stimulus

Warning of a "major shock" to the prospects for global growth, Lagarde crafted what she called a "comprehensive" string of measures aimed at supporting activity by helping companies and keeping banks lending. That includes an enhanced loan program at an interest rate possibly even lower than the ECB's deposit facility. Officials rejected investor pressure to reduce borrowing costs again, but they promised to buy more bonds.

While the euro stayed lower, Italian bonds plummeted, a possible hint of investor alarm that the stimulus won't be able alleviate damage to the economy suffering the region's worst outbreak.

In a signal that there are limits to the institution's ability to keep providing stimulus, Lagarde urged governments to provide "an ambitious and coordinated fiscal policy response" to match the ECB's new injection of liquidity, symbolically placing that demand front-and-center in her opening statement. She called for "decisive and determined" action by finance ministers as soon as Monday, when they meet.

That followed her warning to European leaders on Tuesday that without appropriate action, the outbreak threatens to create conditions similar to the 2008 crisis.

The dramatic escalation in the ECB's own response after weeks of monitoring the worsening outbreak arrived in parallel with news of a loosening in Germany's reluctant stance toward fiscal easing, though still laced with caution. One day earlier, the U.K. had delivered a coordinated package including an emergency interest-rate cut, complementing a 30 billion-pound ($38 billion) budget stimulus.

"Together with the substantial monetary policy stimulus already in place, these measures will support liquidity and funding conditions for households, businesses and banks and will help to preserve the smooth provision of credit to the real economy," Lagarde told reporters in Frankfurt.

The ECB's move reflects mounting concern as the disease disrupts tourism, business travel and global supply chains, giving Lagarde a major test just over four months into the job.

European stocks extended declines after the announcement, with the Stoxx Europe 50 Index down 10% as of 3:39 p.m. in Frankfurt. The euro fluctuated between gains and losses before falling 1.1% against the dollar. Italian bonds plunged, with 10-year yields up 57 basis points.

Questioned on the market reaction, Lagarde said it takes time for such decisions to be analyzed and appreciated.

Describing the euro-zone economy, Lagarde said that data already signal a considerably worse outlook, and that the virus had "heightened market volatility" in the run-up to the decision. She unveiled new forecasts which showed projections that were "notably" lower for 2020.

Where Lagarde defied market expectations on Thursday was in keeping the deposit interest rate at minus 0.5%, staving off pressure for a cut deeper below zero. With negative interest rates hurting banks and irking some voters in northern European countries, the arguments in favor of shunning such a move were clearly persuasive.

Here's a quick recap on what the ECB announced earlier on Thursday:

- Additional long-term loans for banks to provide immediate liquidity.

- More favorable terms on its so-called TLTRO targeted loan program.

- An extra 120 billion euros ($135 billion) of asset purchases focused on the private sector

- Temporary measures by the ECB's supervisory arm to ease capital demands for banks.

The TLTRO measure has possibly created a dual-rate regime through the back door, by allowing the rate offered on the program -- which would be used by banks to lend into the real economy -- to fall by as much as a quarter-point below the deposit rate, which is already half a point below zero.

The ECB's measures announced on Thursday also open a new dimension to the central bank's crisis toolkit by marrying liquidity provision intended to channel money to small and medium-sized enterprises with an easing of capital demands, also aimed at encouraging banks to lend.

The increase in quantitative easing will pump liquidity into the financial system, and the ECB signaled that purchases could be skewed toward corporate debt "support favorable financing conditions for the real economy in times of heightened uncertainty."

Lagarde's call on "governments and all other policy institutions to take timely and targeted actions" has yet to be heeded throughout Europe. While indebted Italy, the worst-affected country from the virus, has added stimulus, Germany and particularly has been reticent.

Still, Chancellor Angela Merkel said on Wednesday that the government will do whatever is needed to limit the impact of the coronavirus. The administration is prepared to abandon its long-standing balanced-budget policy, according to people with direct knowledge of its economic policy.