European Central Bank on back foot as Lagarde bungles coronavirus message

The European Central Bank was engaged in an unprecedented rearguard action on Friday after chief Christine Lagarde drew fire from investors and even heads of state for what they saw as a clumsy response to the coronavirus outbreak.

The ECB provided fresh stimulus on Thursday to support the euro zone economy as the pandemic hits activity, but Lagarde spooked markets by saying it was not the ECB's job to help virus-stricken countries struggling in the debt markets, such as Italy.

She took to the airwaves to row back on her comments after a sharp sell-off in Italian government bonds and ECB Chief Economist Philip Lane reinforced the more supportive message the following day.

"We will not tolerate any risks to the smooth transmission of our monetary policy in all jurisdictions of the euro area," Lane said in a surprise blog post on Friday.

But the damage was done. The presidents of Italy and France, both staunchly pro-European, took the rare steps of publicly criticising the ECB for, respectively, failing to show solidarity and doing too little to support the economy.

One ECB policymaker said the slip-up was a reminder of Lagarde's background as a politician and lawyer, highlighted by critics when she was chosen last year for a role that is normally reserved for monetary policy experts. Lagarde took charge at the ECB in November.

"We knew this would happen eventually," the policymaker told Reuters on condition of anonymity. "This is completely different than discussing climate change or gender balance. The smallest nuances matter here. Saying the right thing at precisely the right time matters."

The ECB declined to comment.

Wolfgang Munchau, director of the Eurointelligence economic newsletter, concurred: "Lagarde's gaffe is not easily corrected because it reveals that she is approaching her job with the mindset of a lawyer."

But the Bank of Spain's governor defended Lagarde.

"President Lagarde is the best person to manage this crisis," Pablo Hernández de Cos said on Friday, adding her words had been misinterpreted.

DRAGHI NOSTALGIA

Some investors and politicians drew comparisons on social media to Lagarde's predecessor, Mario Draghi, whose "whatever it takes pledge" at the height of the bloc's debt crisis in 2012 is credited with saving the euro.

As Lagarde did on Thursday, Draghi regularly called for governments to take action to resolve the euro zone's problems rather than relying on the ECB's largesse, to little effect.

"We miss Mario Draghi," the former president of the European Parliament Antonio Tajani, now a senior opposition politician in Italy, tweeted. "Lagarde proved inadequate to the gravity of the coronavirus emergency situation."

She also mistakenly referred during the news conference after Thursday's ECB meeting to 100 billion euros of additional purchases of bonds by the end of the year, later correcting herself. The ECB had earlier announced that the so-called envelope would be worth 20 billion euros more than that.

Lagarde also said the ECB's first consultation about its strategy review had been postponed by six months, which later turned out to be weeks.

The transcript of the press conference did not reflect these errors.

"Christine Lagarde literally fluffed her lines," said Neil Wilson, an analyst at online trading platform Markets.com.

BOND MARKET

Italy's 10-year government bond yield soared 55 basis points on Thursday, its biggest one-day jump since late 2011. The 10-year bond yield spread over Germany surged almost 67 bps, the biggest one-day widening move since 2013, according to Datastream.

French central bank chief Francois Villeroy de Galhau joined Lane in correcting the message, arguing that the ECB is willing to deviate from its self-imposed rule that bond purchases should be done in sync with each of the 19 euro member countries' shareholding in the bank, known as the capital key.

"If there are fragmentation risks we will use all of the possible flexibility, which means for purchases of public debt that we can temporarily distance ourselves from countries' capital keys and buy more of some debt and less of others," Villeroy told France's Radio Classique.

Some analysts noted that even if the communication was flawed, the underlying measures were powerful.

"The ECB's new easing package includes bold measures that look targeted and flexible enough to support the banking sector and to improve the transmission of monetary policy," Pictet Wealth Management Strategist Frederik Ducrozet said. "The power of the ECB's targeted and flexible package was lost in the ambiguity of the message about spreads."

Unlike the U.S. Federal Reserve and the Bank of England, the ECB held back on cutting its rates, which are already deep into negative territory. Sources close to the discussion said a cut was not proposed on Thursday, even though markets had fully priced in a move.

Italy's central bank chief Ignazio Visco said the ECB would act again if required and clearly articulate its motives.

"If needed there will be more; more action and more words. Perhaps clearer and better understood words."