- PPP program runs out of money, stepping up pressure on Washington to act
- CBO says virus-rescue bill will boost the U.S. budget deficit by $1.6 trillion
- Italy’s bond yield spread rises to a 1-month high
- China’s Q1 GDP plunges -9.8% q/q
PPP program runs out of money, stepping up pressure on Washington to act — The $350 billion Paycheck Protection Program (PPP) officially ran out of money on Thursday. The SBA said it will not be able to approve any more loans under the program until Congress passes legislation to raise the program size. The program provides loans to small and mid-sized businesses that are forgivable if at least 75% of the loan is spent on payroll and the rest on defined expenses such as rent and mortgage interest.
Democrats and Treasury Secretary Mnuchin are far apart on a deal, according to reporting by Bloomberg on Thursday. Senate Majority Leader McConnell has shown little interest in passing anything other than a clean $250 billion increase in the PPP program.
There was some good news for the PPP program on Thursday when President Trump told Senators on a phone call that he is open to including funding for hospitals and state/local governments in a PPP package, implying he is interested in the package Democrats are offering. Democrats are pushing a $500 billion package with $250 billion of new PPP funding, $100 billion for hospitals, and $150 billion for state and local governments.
If President Trump comes out strongly in favor of a $500 billion package that includes PPP, hospital, and state/local government funding, then there are hopes that Republicans in the House and Senate will follow suit. However, the odds appear to be slim that a package will get the unanimous support that would be necessary to approve the bill by unanimous consent in both houses of Congress. That would mean that House and Senate members might have to be called back to Washington from their recess to vote on any deal, thus slowing down the process.
The House has a pro-forma session scheduled for today. The Senate’s next pro-forma session is scheduled for Monday. Mr. McConnell’s office on Thursday officially announced that the Senate’s recess has been extended until May 4.
CBO says virus-rescue bill will boost the U.S. budget deficit by $1.6 trillion — The non-partisan Congressional Budget Office (CBO) on Thursday released its scoring of the recent $2 trillion virus-rescue bill passed by Congress. While the bill’s size was stated at $2 trillion, that size included a large amount of loans that will not add to the government’s spending on goods and services.
The CBO estimated that the bill will boost federal government spending this year by $1 trillion and will reduce government revenue by $571 billion, leading to a $1.6 trillion increase in the U.S. budget deficit. That means that the total deficit for the coming year will be somewhere near $2.6 billion after taking into account the $1 trillion budget deficit that existed before the pandemic arrived. The size of the deficit is likely to rise even more when Congress passes more virus-relief bills in the coming weeks.
The U.S. national debt is currently $23.9 trillion. Adding this year’s additional $2.6 trillion budget deficit implies that the national debt will grow to at least $26.5 trillion over the next year. The U.S. government’s finances were already in bad shape before the pandemic and the U.S. government finances are moving into a red zone. Once the pandemic emergency is over and the U.S. economy has been saved from a Depression, Washington in the coming years will be confronted with the even more urgent need to slash the national debt down to levels that ensure the long-term stability of the nation. Policy differences aside, there are only three ways to do that: cut spending, raise taxes, or both.
Italy’s bond yield spread rises to a 1-month high — The spread of the 10-year Italian bond yield over German bund yield jumped by 30 bp this week to a 1-month high and is now at 231 bp. That spread in mid-March spiked up to a 10-month high of 279 bp before falling back when the ECB started aggressively buying Eurozone bonds in its QE program, including Italian bonds. The ECB dropped its previous QE constraints and can now buy essentially whatever government securities it wishes, meaning it can focus its purchases on troubled bond markets such as Italy and Spain.
The markets were pleased last week when Eurozone finance ministers agreed to allow countries to borrow from the rescue-fund European Stability Mechanism (ESM) with few restrictions. However, there hasn’t been an agreement as yet for the Eurozone to issue joint coronabonds, which means Italy will remain on the hook for all of its own debts. This presents a major problem since Italy came into the pandemic with a massive national debt load of 135% of GDP.
Italy is the second hardest-hit country by the pandemic, behind Spain, with 36 deaths/100,000 people (Spain has 40 deaths/100k). Italy’s economy has been almost completely closed for weeks. The Bank of Italy’s head of bank supervision on Thursday said that domestic banks may need up to 50 billion euros of extra liquidity from March through July. The Italian government will have massive costs in covering health-related expenses plus at least some of the massive economic fall-out from the pandemic.
China’s Q1 GDP plunges -9.8% q/q — China’s Q1 GDP last night plunged by -9.8% q/q (-6.8% y/y), which was a less-severe drop than the consensus of -12.0%. Perhaps by no coincidence, China avoided seeing a GDP drop of more than 10%, which is the commonly accepted definition of a depression. The good news is that China appears to have brought its pandemic under control and the Chinese economy is now back to running at about 95% of normal capacity, according to Bloomberg estimates. China’s GDP is now expected to is mild q/q gains during the remainder of 2020, depending on whether China has really vanquished the virus and whether the rest of the world recovers.
