NEW YORK - Another day, another nearly 10% drop in the U.S. stock market. Companies are starting to tap their credit lines. Policy gaffes in both Washington, D.C. and Frankfurt stoked the panic. The U.S. central bank’s decision to open the taps on $1.5 trillion of liquidity couldn’t stop the slide. But there’s no reason, yet, for the health crisis to create a financial one.

The Federal Reserve, through its New York wing, helps keep Treasury trading running smoothly with repo transactions, lending cash to banks and the like against U.S. government-bond collateral. It ramped that up massively on Thursday after “highly unusual disruptions” in the market. The gap between buy and sell prices had widened, making it harder for traders to transact.

Even before Thursday, the S&P 500 Index of U.S. stocks was down almost 20% from its closing high less than a month ago, in response to the coronavirus pandemic. Saudi Arabia’s decision this week to flood the market with oil, sending crude prices crashing, exacerbated the situation. Boeing on Wednesday drew on a big credit facility, and other companies have – entirely rationally – been doing the same to bolster cash in case there’s worse to come.

Individual news reports now talk about leveraged hedge funds being forced to sell their most liquid assets, regulations limiting banks’ capacity to act as dealers, or investors seeking the safest haven of all – cash – as everything else lost value. High-yield debt looks particularly precarious, in part because it’s used by a lot of oil and gas companies.

To cap it all, U.S. President Donald Trump on Wednesday made a ban on all visitors from large chunks of Europe the centerpiece of his administration’s Covid-19 response. He relegated or ignored both the practical containment steps sorely needed within the United States and immediate economic relief.

And in Frankfurt, European Central Bank President Christine Lagarde missed an opportunity to join the Fed and the Bank of England with a reassuring straightforward interest-rate cut, further fraying market nerves.

Yet the impetus for the recent selloff is the economic impact of a viral disease, not an underlying systemic financial problem. U.S. banks are in far better shape than before the global crisis in 2008-09, too. If policymakers can get a sound grip on Covid-19, the market infection needn’t become a pandemic.

CONTEXT NEWS

- The U.S. Federal Reserve said on March 12 it will introduce $1.5 trillion in new repurchase operations this week and start buying a range of maturities as part of its monthly Treasury purchases.

- The central bank will offer $500 billion in a three-month repo operation on March 12. It will offer an additional $500 billion in one-month repo and $500 billion in three-month repo loans on March 13.

- The third substantial increase in repo support announced by the U.S. central bank this week is intended, the New York Fed said, “to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.”

- The S&P 500 Index of U.S. stocks closed down nearly 10% on March 12.

- Major high-yield bond exchange-traded funds on March 12 fell to their lowest price level since February 2016 and an index for credit insurance protecting against exposure to junk bonds widening sharply to a nine-year high.

(Editing by Antony Currie and Amanda Gomez)

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