(1/2) The ECB said yesterday "We stand ready....>

ECB: (1/2) The ECB said yesterday "We stand ready to take appropriate and

targeted measures, as necessary and commensurate with the underlying risks."

- Their recent comments suggest that fiscal measures should be the first

response. This makes sense as it is much easier for national governments to

target fiscal measures at particular economic groups or sectors (such as SMEs).

However, with Italy the country most hit by the virus, announcing a big fiscal

package when BTP spreads are already widening could have other unintended

consequences unless there are other mitigating measures.

- The ECB's response is more limited to either helping the financial sector

provide liquidity or more conventional policy such as lowering the deposit rate

or engaging in further QE. With rates already negative, it is hard to see a big

boost to consumer sentiment or a large increase in disposal income from a lower

deposit rate or more QE.

- This leaves the TLTRO (or a TLTRO directly linked to a deposit rate cut) as

the most obvious instrument to be tweaked. At present the borrowing allowances

are linked to loans to non-financial corporations and households. Could these