US stimulus package, biggest ever, likely not enough

The Federal Reserve has offered more than $3 trillion in loans and asset purchases in recent weeks to stop the U.S. financial system from seizing up, but it has not yet directly helped large swaths of the real economy: companies, municipalities and other borrowers with less than perfect credit.

That is partly because America's central bank is not allowed to take much credit risk itself, and loans to lower-rated borrowers have a higher chance of losses. The risk is exacerbated by efforts to stop the spread of coronavirus which have brought economic activity to a screeching halt. To alleviate that constraint, the

U.S. Treasury - whose job it is to manage the government's finances and help the Fed keep the economy steady - has taken on some of the risk that Fed loans will not be paid back.

It has contributed about $50 billion from a pool of money called the Exchange Stabilization Fund. That money will be used to absorb losses from Fed loans that go bad. Assuming only a fraction of loans will default, the Treasury contribution has allowed the Fed to lend much more without taking on additional risk. On Friday, the Treasury got about $450 billion more from Congress as part of a $2.2 trillion U.S. stimulus package, greatly increasing its ability to support the economy. Before the bill passed, the stabilization fund had about $93 billion in assets as of the end of February. Treasury

Secretary Steven Mnuchin told Fox News on Sunday he believed the additional funds could help the Fed and Treasury provide about $4 trillion in loans.

But investors and economists said even this additional money may be insufficient, and Congress will likely need to pony up trillions of dollars more before the Fed and Treasury can make a significant dent in the real economy. If it does not, many U.S. companies and local governments are at risk of defaulting on debt or even going under.

That is because of the sheer size of the world's largest economy, the unprecedented scale of economic disruption caused by attempts to contain the virus and higher credit losses if the government has to step in to support weaker borrowers, according to these experts.

Scott Minerd, chief investment officer of Guggenheim Partners and member of an investor committee that advises the New York Federal Reserve on financial markets, told Reuters he believes the government needs to give the Treasury about $2 trillion to help prop up the economy. Using expected losses from companies in the lowest tier of investment grade, Minerd estimates that the money approved last week might be only enough to absorb losses on loans of about $900 billion.

That is just a fraction of the roughly $9.5 trillion in outstanding U.S. corporate debt, much of which is either in the lowest-tier investment grade rating or already rated as junk, with a higher risk of default. Other areas that need support - such as the commercial paper market where borrowers go for short-term funding or the municipal market that local governments use to raise money for roads and schools - total trillions of dollars more. "I think we'll be back at the table with another program before this is over," Minerd said in an interview.

With the $2 trillion that he recommends, he said, "you're on your way to have something of a big enough scale to get things propped up." In a research note last week, Bank of America analysts said the aid package passed last week was the "bare minimum." They estimated the government will need a total of $3 trillion in fiscal stimulus and more if the recession deepens. The Fed declined to comment. The Treasury did not respond to a request for comment.