Name: The main issue for investors is interest rates are very low in Europe:Economist
Uploaded: 2020-03-13T07:52:26.000Z
Duration: 6 min 23 s
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we want to talk more about this news out of Europe and what effect it could have on the global economy with us now to discuss is Azad Zangana.

He is Schroeder's senior European economist and strategist, and we also want to introduce our panel for the next 90 minutes.

Yahoo Finance is Brian Chung and Dan Hallie are with us as let's start with you.

You recently cut your global growth forecast because of everything that's been going on 22.3%.

When you look at the actions that were taken today by not just the Bank of England, but the coordinated action with the UK government, you look at potential for E C B action.

Are you It all reassured that that will help matters or mitigate some of the risks that we're seeing out there, and it will certainly help support households and support businesses through this period off significant shock.

But to be honest, even now, as we look at the spread of the virus on the scale of the shutdown that we're seeing in Italy, potentially the shutdowns we're about to see in the rest of Europe as well it leads me to downgrade by forecasts even further to what?

To somewhere around maybe 2% maybe even lower than that.

It really depends on the scale of off the action, the government's take.

But when you look at Europe and the CCB meeting tomorrow, their options are actually much tighter than they were say in 2008 and you brought up Italy.

There's gonna have to be some kind of bailout package at some point for Italy and I was reading Was it 700 billion to a trillion dollars?

When you've got the economy essentially shutting down there and you use the word deflation, are we looking at ah kind of asset deflation?

That could spread throughout Europe because of what started in Italy and is now spreading perhaps to the rest of the continent.

So the major issue for investors is that interest rates, already very low in Europe and really any additional cuts hair will have minimal impact at best.

Quantitative easing was already ongoing and it's far just 30 billion euros per month, which is very significant, but they know that the amount of purchase that they could do in the length of time that could do it for is limited.

So if they were to scale up the asset purchases, that would reduce the length of time they can carry on running quantitative Easing four now a bailout for Italy, I mean, frankly, is unrealistic.

There's just not enough scope to bail them out for a very long period off time.

So thieves to be has to get ahead of this has to make sure.

But yields on Italian debt remain contained that there's ongoing expectation that they will step in and help when needed.

So if it is a further slowdown, so further slowdown.

But I'm wondering if there is some concern or worry about to transmit transmission mechanism where it affects the financial institutions.

We know that negative yields have been impacting the bank's quite hard.

In Germany, for example, Deutsche Bank is one that's been really close, closely watch for profitability and you have Angela Merkel saying today some 58 million people 70% of population could end up being infected by the Corona virus as it spreads.

I'm wondering if you're watching financial conditions, watching the financial service industry to see if there's any worry they're absolutely and one of the things that one of the good things that came out off the sovereign debt crisis while back was that we now have mechanisms in place to provide liquidity to the banks independent, off governments on that's done directly through the European Central Bank.

You see your rival trading well below the deposit traitor in Europe, but they're still obviously concerns if governments not the default, that that's amore extreme scenario you talk about the bank's being awash with liquidity.

And yet that negative interest rate that, you know, the banks have an incentive to lend money as opposed to hold on to it.

You're taking a big hit of the moment that that's the problem, that now is not a very good time to lend to companies.

Incentive becomes the negative feedback Yes, on.

That's why fiscal policy is so important.

This is why President Lagarde is so keen on making sure fiscal policy makers steppin on provide the support that they need through tax breaks through allowing repayment holidays on loans.

This is the kind of support you're going to need in the NATO.

So is that I know you're primarily European, economist, but when you look at the sort of feedback loop around the globe right now, whether it's the China shut down, although it seems to be opening back up or now what is unfolding in the U.

How concerned are you about cross economic contamination across regions?

Well, of course, when this all started with China, the first analysis that we saw coming out from economists and strategists Waas, who has got exposure to China And of course, it's it's why'd Asia certain parts of Latin America as well commodity markets it more, more generally, it's We've gone beyond that.

We're now talking about Italy went out potentially about shutdowns in France and Germany, maybe even the UK Fairly soon.

This'll is going global, and he's going to have a much bigger impact.

But before people get too worried, remember that this is still expected to be short time.

The economic it could be just in the first quarter, we could see quite a big rebound in the second quarter at worth.

What do you expect to hear from the E, c B and Leggo?

What we think that she will deliver another rate cuts probably only 10 basis points down to the minors, 0.6.

But they are very much close to the limits of how far bacon cuts because there is AH whole range of banks, especially in Southern Europe, that cannot pass these negative rates on legally.

It's built into the contract's off their mortgages.

They would take big hits as these rates are cut.

So another 10 20 basis points after that and then they're done.

And out of that, the games have to start bailing banks out, which, of course, they want to avoid right now.

As you say, the capacity is somewhat limited, depending on how big all of this gets out.

Assad Zangana is fraud or senior European economists and strategists.

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