Germany lines up $600 billion virus aid as EU backs stimulus

Germany pledged to spend whatever necessary to protect its economy and the European Commission said it's ready to green-light widespread fiscal stimulus for euro nations as policy makers aimed to calm the markets with a decisive response to the coronavirus.

KfW, the German state bank, can lend as much as €550 billion ($610 billion) to companies to ensure they survive the pandemic and shield their workers from its impact, German Economy Minister Peter Altmaier said at a briefing in Berlin. Finance Minister Olaf Scholz, standing alongside him, said Germany is prepared to take on additional debt and will consider full-blown fiscal stimulus if the situation worsens. Switzerland pledged 10 billion Swiss francs ($10.5 billion) of aid for its companies. European stocks surged.

"This is the bazooka," Mr. Scholz said. "We're using it to do what is necessary. We'll check later to see if we need additional smaller weapons."

Chancellor Angela Merkel said later Friday that the measures show "that we're ready to do whatever is necessary, to do whatever Germany needs, so we can get through this crisis as best possible."

EU governments were at a crossroads by Friday after a chaotic week that saw European Central Bank President Christine Lagarde warn of a Lehman-style meltdown and markets tumble as the epidemic seemed to be spiraling out of control. The commission forecast the EU economy will shrink by 1% this year with Italy, the hardest hit country, already on lockdown and the rest of the continent set to follow.

Spanish Prime Minister Pedro Sanchez declared a state of emergency Friday after the number of confirmed cases jumped by 40% in 24 hours to 4,209. A week ago there were 261. "The Spanish government will do whatever it takes" to slow contagion, Mr. Sanchez said.

Switzerland's aid program is targeted at small businesses and freelancers who've been hit by government restrictions on cultural events and school closures. "To them we say, we're not abandoning you," President Simonetta Sommaruga told reporters in Bern.

Ms. Lagarde, who has been urging the politicians to act, triggered a massive selloff on Thursday when she indicated the ECB wasn't prepared to bail out the markets. On Friday, her ECB colleagues insisted the central bank still has plenty of ammunition and is willing to use it.

Italian Governing Council member Ignazio Visco told Bloomberg Television that officials are prepared to target bond purchases toward the worst-hit countries — such as his — to narrow bond spreads. That would make borrowing more affordable for companies, individuals and the government in Italy as they ride out the downturn.

"We can frontload, we can concentrate on particular jurisdictions according to the circumstances," Visco said in the interview.

Italian sovereign debt rallied temporarily after his comments, while securities of so-called core countries fell, tightening the Italy-Germany 10-year yield spread by 10 basis points as of 2:08 p.m. in London. The surge in European stocks erased some of the declines on Thursday, the worst trading session on record for the STOXX Europe 600.

Completing the barrage of policy pledges, European Commission President Ursula von der Leyen said she's ready to recommend that euro members trigger an emergency clause in their budget rules that would allow the whole bloc to engage in fiscal stimulus if there's a severe downturn.

In the meantime, she said countries can have full flexibility within the fiscal rules, meaning measures to address the impact of the virus won't be factored into the assessment of their deficits. Italy has already announced a €25 billion stimulus package that is set to push its deficit beyond the 3% limit this year.

Governments will also be allowed full flexibility within the bloc's state aid rules, in order to support struggling companies.

"This is not only an unprecedented challenge for our health-care systems, but also a major shock for our economies," Ms. von der Leyen said. "We stand ready to do more as the situation evolves. We will do whatever is necessary to support the Europeans and the European economy."

The commission announced a €37 billion "Corona Investment Fund" that would use spare money from the EU budget to help businesses, health-care systems and sectors in need. It also said the EU's own investment fund will guarantee 8 billion euros of loans to 100,000 small- and medium-sized enterprises. Affected companies will be able to delay the payment of their existing loans.

Earlier in the day, Markus Soeder, the head of the Bavarian sister party of Chancellor Angela Merkel's CDU, predicted that a recession in Germany is "just around the corner" with potentially devastating consequences.

"We have to expect the loss of thousands, maybe even millions of jobs," Mr. Soeder, who is also prime minister of Bavaria, said at a news conference in Munich. "We have to do to whatever it takes to keep the economy running."

As part of efforts to cushion the virus impact, Germany's lower house of parliament earlier Friday approved enhanced government powers to provide financial support to companies forced to halt work and send staff home.

The law, which would allow affected firms easier access to funds for paying furloughed employees, was fast-tracked through the legislative process, reviving measures that helped Germany avoid mass layoffs during the 2008 financial crisis.

The German proposals include allowing companies to defer billions of euros of tax payments and a massive expansion of loans from KfW.

The German bond market sold off rapidly after the announcement by Messrs. Scholz and Altmaier, led by debt with the longest maturities. Thirty-year yields jumped 20 basis points to -0.22%, the most in over a decade, on a closing basis.

"No healthy company should go bankrupt because of corona and no job should be lost," Mr. Altmaier said. "We are spreading a comprehensive protective shield over workers and firms."