Absorb shock now or face permanent destruction, Draghi warns: FT

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© Reuters. FILE PHOTO: European Central Bank’s outgoing President Mario Draghi (R) symbolically hands over the chairmanship to successor Christine Lagarde in Frankfurt, Germany

FRANKFURT (Reuters) – European governments must quickly absorb the shock of the coronavirus crisis, even at the cost of high debt, as the alternative is permanent destruction, former European Central Bank President Mario Draghi wrote in a newspaper opinion piece on Wednesday.

Considered the savior of the euro amid Europe’s debt crisis, Draghi argued that governments must protect jobs and production , taking over and cancelling private-sector debt to protect jobs and maintain income to families that are innocent bystanders in the crisis.

“The alternative – a permanent destruction of productive capacity and therefore of the fiscal base – would be much more damaging to the economy and eventually to government credit,” Draghi, who stepped down in October, wrote in an opinion piece in the Financial Times.

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Arguing that the crisis was of “biblical proportions,” Draghi said banks must quickly lend to firms at zero cost and the capital needed for this lending must be provided by governments in the form of guarantees so jobs are maintained.

“The cost of these guarantees should not be based on the credit risk of the company that receives them, but should be zero regardless of the cost of of the government that issues them,” said Draghi, who has spoken rarely since leaving office.

He said liquidity must also be provided through debt or even the postal system, if that reaches people the quickest.

“And it has to be done immediately, avoiding bureaucratic delays.”

While some fear the cost of a surge in debt levels, Draghi argued that low interest rates are here to stay, so this would not add to government’s debt service costs.

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Source: Investing.com

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