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ECB’s Lagarde Warns of 2008-Style Crisis Unless Europe Acts

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

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

German bunds fell, with the yield on 30-year debt rising 5 basis points to -0.41% at 9:44 a.m. in Frankfurt. The yield on Italy’s 10-year debt fell 13 basis points to 1.20%. The Stoxx Europe 600 equity index rose as much as 2.2% to a session high.

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

Weaker Growth

The euro-area economy is expected to expand just 0.8% this year

Source: Organization for Economic Cooperation and Development

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

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

What Bloomberg’s Economists Say

“Lots of firms in the euro area are already feeling the pinch from the spread of the coronavirus, but the smaller ones may need the most support [...] To play its part, the European Central Bank will probably throw them a lifeline this week, helping to avoid the widespread bankruptcies and layoffs that could threaten price stability once the virus outbreak has passed.”

-- David Powell. Read the ECB INSIGHT

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

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

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

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