INTERNATIONAL MONETARY POLICY : Financial analysis.

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                        International monetary policy

            “it's the biggest challenge since world war two”- Angela Merkel

           The financial markets have been under much pressure, volatility, and uncertainty since COVID-19. At the end of February 2020, the global equity markets were in a freefall. As coronavirus put Europe and the United States in virtual lockdown, financial economists, credit rating and country risk experts have scrambled to rearrange their assessments considering the unprecedented economic challenges posed by the crisis. The outbreak has caused turmoil in the stock market. In this paper, I would like  to talk about the relationship between the corona or covid19 crisis and financial markets, the first months of its appearance in Europe and USA, and the economy at large because what has started as a primarily health crisis has by now become a fully-fledged economic crisis, so  I'm  going to talk about why the economy will be hit or is already being hit relatively hard. Besides, for factories and for larger companies it is severe implications because people who do not work get lower income they spend less plus we have a face of high uncertainty but again this is something that's really  important.  Mrs. Merkel addressed the German nation and said that we are facing the largest challenge since World War two, so this is a strong shock to the economy since everything is closed but not everybody is affected similarly. It was obvious that is not going to be a matter of one two maybe three months even right, so we will be facing a severe recession so what can we do about it. One way of approaching this is monetary policy.[pic 2]

       This means that central banks who set interest rates and find other ways of getting liquidity money into the economy act. The US Federal Reserve has these past months lowered interest rates to effectively zero. Besides, it has also announced that they will be buying mortgage-backed securities and government bonds to the extent of roughly eight hundred billion us dollars. The ECB acted in a similar way, interest rates were at zero in the eurozone or even negative by launching a seven hundred and fifty billion bond buying program. This is central banks creating incentives to invest by lowering interest rates for investors. Furthermore, government debt becomes less interesting because you don't get any interest at all even negative interest in the euro zone but also for consumers to take out loans because they get them on really good terms to buy houses,  in order to  well invest in goods,  but also in while consuming more. The problem is consumers who are facing a high degree of uncertainty might even lose their jobs, will not invest much plus, and investors are so concerned that they might not even buy corporate bonds because that is safer than equity, so, if you shy away from risks you want to buy debt instruments not equity not stock but even  in these high times of uncertainty, bonds are too risky corporate bonds for many investors,  this  is why the ECB is also buying these bonds that firms issue.

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     That is one aspect of the impact. The other one in these periods of uncertainty is equity markets. They have plummeted again not very surprisingly because companies face the risk of going out of business but even for large companies. For instance, Boeing a company that was already facing severe economic problems in good times and is now hit even harder and will need government support.

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    On the other, what you can see above is triple B investment grade rated. Debt markets have remained calm for a long time until last 3months when also yield spreads so that is the risk premium that investors demand skyrocketed. Therefore, it is important for the ECB but all other central banks as well to act not only lower interest rates but also to actively engage in buying bonds which is or used to be 10 or 15 years.