After ECB Dividend Cap Flouted, Finnish Watchdog Mulls Next Step

(Bloomberg) — Finland’s financial watchdog is trying to figure out how to respond after a lender it oversees explicitly disregarded the European Central Bank’s guidelines on shareholder rewards.

The decision by Alandsbanken Abp, announced on Jan. 1, to pay almost four times the dividend cap set by the ECB is “unfortunate,” Jyri Helenius, head of banking supervision at the Finnish Financial Supervisory Authority, said in an interview. The lender acted without its watchdog’s permission, but Helenius acknowledged there’s not much he can do about it.

“We expect banks to comply with the recommendation, even though we aren’t able to make it legally binding,” Helenius said. “It’s unfortunate that a Finnish bank is slipping from the common European front on this.”

Last month, the ECB lifted a de facto ban on dividends but urged banks to limit such shareholder payouts to less than 15% of profit for 2019 and 2020, or 0.2% of their key capital ratio, whichever is lower. Alandsbanken says it plans to pay out 59% of 2019’s earnings, citing record profits that year.

The cap on bank dividends in the euro zone is stricter than in the U.K. and Switzerland and has prompted criticism from some corners of the financial industry. ​

Nordea Bank Abp, Finland’s biggest bank, has said it will follow the recommendation but that it will contact the ECB to “discuss the intended level of distribution,” noting that it is “one of the best capitalized banks in Europe.”

Alandsbanken, which is too small to come under direct ECB supervision, said the latest guidelines fail to take into account the comparative strength of some banks in the euro zone.

Long-Term Risks

Alandsbanken said holding back on dividends could alienate the very investors it relies on to grow. “The long-term risks to the bank may be larger” if shareholders don’t get a substantial portion of profits, it said. That’s why it’s “choosing not to follow” the guidance of the Finnish FSA and, by extension, the ECB, it said.

The Finnish FSA will “engage” with lenders that ignore the ECB’s guidance, Helenius said. “It’s very exceptional that a bank would disregard our recommendation,” he said.

Helenius is now urging the financial industry to be patient. Once the ECB repeals its recommendation, set to be in place through September, “at least in Finland it will be possible then for banks that have enough capital to pay dividends for both 2019 and 2020,” he said.

The ECB directly oversees the biggest euro-zone lenders while national regulators in the bloc supervise smaller banks, some of which have been allowed to pay dividends. German regulator BaFin has said it will permit payouts if financial firms have sufficient financial strength.


ECB’s Dividend Recommendation Flouted by Small Bank in Finland

(Bloomberg) — A small Finnish bank is explicitly disregarding European regulatory guidelines on dividends with the justification that ignoring its shareholders would be more risky in the long run.

Alandsbanken Abp said on Friday that it is “choosing not to follow” the recommendations of the Finnish Financial Supervisory Authority and, by extension, the European Central Bank.

The ECB has urged lenders to show restraint with dividends and share buybacks in light of the ongoing pandemic, and the threat it poses to the economy. But Alandsbanken says it won’t heed that guidance because its profits in 2019 “were the highest in the bank’s 100-year history.

The regulatory recommendations “do not distinguish between the strongest and the weakest bank in Europe,” Alandsbanken said in a statement. Its board “believes that the long-term risks to the bank may be larger if — based on our current level of earnings and risks — we choose to follow the regulatory recommendation than if we also begin to take the bank’s other important stakeholder groups into account.”

Last month, the ECB lifted a de facto ban on dividends but urged banks to limit such shareholder payouts to less than 15% of profit for 2019 and 2020, or 0.2% of their key capital ratio, whichever is lower. That makes the ECB more hawkish than watchdogs such as the Bank of England.

Alandsbanken, which said it doesn’t expect to receive government aid in this or future crises, is proposing a total dividend of 1 euro ($1.22) per share for 2019. That’s equivalent to 59% of its earnings per share, almost four times the ECB’s guideline.

The ECB directly oversees the biggest euro-zone lenders while national regulators supervise smaller banks. Some smaller banks in the bloc have been allowed to pay dividends, with German regulator BaFin saying it will permit payouts if banks have sufficient financial strength.


Astra’s Vaccine Won Approval, But How Good Is It?

By Bloomberg Opinion

Sam Fazeli, a Bloomberg Opinion contributor who covers the pharmaceutical industry for Bloomberg Intelligence, answered questions about the approval in the U.K. Wednesday of a Covid-19 vaccine developed by AstraZeneca Plc and the University of Oxford. It follows the shot developed by Pfizer Inc. and BioNTech SE, which was cleared earlier this month and has already been rolled out in the U.K., U.S. and Europe. Moderna Inc.’s vaccine also gained emergency authorization in the U.S. The conversation has been edited and condensed.

The Astra vaccine is the third to be approved by either the U.K., U.S. or EU, but it’s different from the first two. How so?

All vaccines aim to deliver pieces of a live virus or a whole inactive (killed) virus to the body so that the immune system has an opportunity to raise a response to it and form a memory. That way, when the actual pathogen arrives, it is ready to rapidly deploy antibodies and immune cells (T-cells) to kill the virus and infected cells, respectively. The Pfizer-BioNTech and Moderna vaccines deliver the genetic material in the form of “messenger RNA,” which instructs cells to create a modified version of a key coronavirus protein. This, in turn, prompts an immune response that can fend off the real virus. AstraZeneca-Oxford’s vaccine, AZD1222, uses a “viral vector” – a tool for delivering the same genetic material – which it derived from an engineered chimp adenovirus, similar to the virus that causes the common cold. (Johnson & Johnson uses a similar approach, but its vaccine uses a human adenovirus to deliver the genetic material.) One of the other key differences between the Astra vaccine and those of Pfizer-BioNTech and Moderna is that it doesn’t require super-cold storage and can be transported and kept at normal refrigerator temperatures. This makes it much easier to use and distribute, especially in more rural areas and countries where cold-chain logistics are problematic.

How well does the Astra vaccine work compared with those other two?

In preclinical tests and early trials in humans, the vaccine did O.K. It was not as protective against viral infection in the nose and throat of nonhuman primates, though it did prevent severe disease. In the early stages of human trials, the vaccine did not induce as strong an immune response, measured by looking at antibody levels, as that seen with Pfizer-BioNTech and Moderna’s shots. This may explain the lower efficacy seen so far in its later-stage U.K. and Brazil trials and may have to do with the way the vaccine delivers its genetic material. There are also subtle differences in the actual protein structure Astra uses in its vaccine compared with the other two shots. While all of the shots target what’s called the “spike” protein — the rod-like structures that protrude from the virus and help in binding to cells and infecting them — Astra’s is the only one to use an original form of that protein, which has been shown to be less immunogenic in some experimental settings.

Wasn’t there a problem with the Astra trials? The dosage was given out incorrectly, and the data was confusing?

Yes. The Astra-Oxford team reported late-stage preliminary results from its U.K. and Brazil trials that contained data from about 12,000 subjects vaccinated with AZD1222 and a similar number on placebo. Not only were the trials smaller than the Pfizer-BioNtech and Moderna trials, the efficacy of the vaccine was also lower at 70%, compared with the more than 90% seen with the other two vaccines. And the Astra data was complicated by the fact that 1,367 subjects in the U.K. trial, out of a total of 3,744 who received the vaccine, got only half of the required dose on their first jab because of a manufacturing issue. If you ignore those subjects, the efficacy was about 62% when combining the U.K. and Brazil data. The other issue is that there were only 718 participants 55 or older, who are at higher risk of hospitalization and death, and that’s not enough to judge the potential of the vaccine for that important cohort. There was also a problem with the time interval between the first and the second dose as the trials started looking at the vaccine as a single dose, only later converting to a two-dose regime. All of this raised questions and caused some confusion, which is unfortunate given the generally positive results.

Are you comfortable with the data now? Did the U.K. make the right decision?

The vaccine clearly works. We just don’t know how well. In a normal world, the Astra data we’ve seen so far would be the kind that would generate hypotheses requiring further trials to prove things like efficacy, the required dose level, the best dosing interval and its effect in the older population. The U.K.’s Medicines & Healthcare products Regulatory Agency, which cleared the shot, has for sure seen more data than has been published; that data, whenever it is revealed, will be crucial in helping us understand what the approval was based on. The MHRA’s analysis suggests that the vaccine’s efficacy was 73% up to 12 weeks after one dose of the vaccine. But this is what is called an exploratory analysis and was not based on predefined criteria, again making it hypothesis-generating and needing a future trial. It’s also possible that the trial has some data on the new variant of the virus that has been discovered in the U.K., and how sensitive it is to the vaccine.

Speaking of that variant, it appears to be more transmissible than the original forms of the virus . Despite the lockdowns and restrictions it triggered in the U.K., it has since spread elsewhere including the U.S. The good news is that vaccines may work just as well against this variant, but given that viruses are always mutating, there’s a risk of other variations cropping up that could be more resistant to shots. How adaptable is the Astra vaccine?

The Astra, J&J, Pfizer-BioNTech and Moderna shots are all amenable to rapid reengineering with any new variant. All four vaccine developers can make new candidates within a few weeks. That is one of their strengths compared with other technologies.

The U.K. has approved a dose schedule that seems different from other vaccines. What was this based on?

The approval is for a first dose, followed by a second dose up to 12 weeks later. This is much longer than that for Pfizer-BioNTech’s vaccine (21 days) and Moderna (28 days). In the published data on Astra’s trials, there was a reference to the fact that the median time interval for subjects who received two standard doses of the vaccine in the U.K. trial was 69 days, with a range of 50 days to 86 days. So the 12-week interval is at the very top end of that range. I don’t believe there is likely to be enough data to judge which dose interval is best until the MHRA publishes its approval letter and shows the data that was used to back its decision. What I am worried about is that if the first shot does not provide a strong enough immunity to suppress viral replication in people, it may lead to the virus amassing even more mutations and developing the ability to evade the vaccine. This could affect the efficacy of other shots, too. We just don’t know.

What about U.S. approval? Is that close to happening?

U.S. approval will need data from the much larger and simpler trial that Astra is conducting there. That data should come out in the first quarter. Astra is testing two standard doses of the vaccine four weeks apart in as many as 20,000 individuals. The question is what happens if the efficacy comes out at the same 60% to 64% level seen in the U.K. and Brazil trials. Even though this meets regulatory guidelines for approval, which require efficacy of 50% or more, will the U.S. approve it given the much higher efficacy of the Pfizer-BioNTech and Moderna vaccines? And if it does not, what will that mean for the U.K. approval? Will U.K. subjects, and those of other countries that approve Astra’s vaccine, be deemed as vaccinated when it comes to U.S. travel? This remains to be seen.


GLOBAL INSIGHT: Alt-Data Show Activity Drops on Virus, Holidays

(Bloomberg Economics) – – With the Covid-19 recession rendering many traditional indicators outdated before they are published, Bloomberg Economics is using a set of high-frequency, alternative data to build daily activity indicators. Here’s what the latest data show:

  • As expected, economic activity in several of the world’s largest advanced economies plummeted over the Christmas holidays.
  • An increase in Covid-19 infections and stricter containment measures in November and early December, led activity to drop sharply in the third week of December. A decline in mobility and other alternative data indicators is not unusual over the Christmas and New Year holidays. But in some countries, such as Germany and Italy, very strict containment measures imposed shortly before Christmas added to the weakness.
  • Japan is the only bright spot among advanced economies. Activity held steady at more than 90% of its pre-virus level both because of a large measure of success in controlling the virus and the lack of the seasonal factor of Christmas.
  • Our indicators provide a high-frequency guide to the pace of recovery across countries, and attempt to improve the signal-to-noise ratio in alternative data. They are not a substitute for the detailed country view.

The activity indexes are estimated using a dynamic factor model. This methodology extracts an unobservable latent common factor of the underlying high-frequency data in the spirit of Stock and Watson. The model is estimated with daily figures from Jan. 1, 2020 to Dec. 29, 2020.

The high-frequency statistics we use have some obvious advantages — providing a more timely read than traditional data series. They also come with some caveats attached:

  • The high weight of travel and mobility indicators may lead to overweighting this type of activity in the index.
  • The index is not fully comparable across countries as we partly use different indicators for different countries, and the relationship between mobility and output likely varies between countries. A complete set of sources is shown in the table below.
  • We don’t have a long enough time series to map the relationship between the activity indicators and GDP.
  • In a dynamic factor model, component weights adjust as new data become available. Future updates of the index will likely result in small backward revisions to historical readings.
  • Our model nowcasts missing data points. That can mean backward revisions of past readings as new data become available.

High-Frequency Indicators Included in Factor Model


Mohegan Pulls $100 Million Leveraged Loan Sale for Casinos

  • Some casinos have reopened since the deal was launched in May
  • Investors pushed back on loan that offered more than 14% yield


(Bloomberg) — Mohegan Gaming & Entertainment has pulled a $100 million leveraged loan sale that was intended to refinance debt and keep its casinos afloat during the pandemic.

The company had offered to pay a yield of over 14% for the new loan maturing in October 2021. The borrower is an extension of the Mohegan tribe in Connecticut and operates the Mohegan Sun in that state as well as other casinos in North America.

“It was pulled because we were able to open earlier than anticipated and have enjoyed very strong operational results,” a spokesperson for the company said in an emailed statement.

A representative for Credit Suisse Group AG, which was leading the loan offering, declined to comment.

The casino business in the U.S. has largely ground to a halt amid the Covid-19 pandemic. But several of Mohegan’s managed properties, including Mohegan Sun in Connecticut and Paragon Casino Resort, recently reopened.

Gaming revenues for the Mohegan Sun from June 1 through to June 14 increased about 10% compared to the same period in the prior year, according to a June 18 filing. Income from operations over the same period since reopening increased about 15% compared to the same time in 2019.

Proceeds from the new loan, along with $42 million of cash on the company’s balance sheet, were intended to repay $138 million outstanding on a $250 million revolving credit facility due October 2021, according to a May 12 reportfrom Moody’s Investors Service. The firm assigned a rating that was seven notches below investment-grade on the debt.

Marketing for the loan began in May, but some investors pushed back on the company’s efforts to borrow on concerns about its ability to raise all the money it needs to repay maturing debt and to fund ambitious planned expansion. Commitments were due on May 11.

The company obtained a waiver on June 11 on its 7.875% bonds due in 2024 for any default that may occur from halted gaming operations due to the outbreak, according to the filing. Those bonds last traded at about 85 cents on the dollar and had fallen to as low as 47.5 cents in April, according to Trace data.


ECB to Let Some Banks to Pay Out 15% of Profit in Dividends

By Nicholas Comfort

(Bloomberg) — The European Central Bank said it will allow some banks to resume partial dividend payments next year, while urging them to maintain financial reserves to weather the pandemic.
For the first nine months of next year, banks should keep dividends and share repurchases to less than 15% of profit for 2020 and 2019 or 0.2% of their key capital ratio, whichever is lower, the ECB said.

European lenders, whose shares have lagged behind the broader market this year, have repeatedly warned that the ECB’s de-facto ban on dividends risks driving investors away. Despite optimism that the end of the pandemic is in sight, some regulators remain concerned that allowing a full return to payouts may leave banks without the financial reserves to bear losses without taxpayer bailouts.

The Bank of England said last week that it will allow lenders to make payouts that don’t exceed 0.2% their risk-weighted assets, or 25% of cumulative quarterly profits over 2019 and 2020 after deducting shareholder distributions.
Bloomberg reported last week that European regulators planned to take a more conservative approach than the BOE.


ECB Hands Banks $203 Billion in Cheap Cash to Boost Lending

  • The takeup may lift excess liquidity to 3 trillion euros
  • Central bank facility is designed to encourage banks to lend

(Bloomberg) —

Euro-zone banks took 174.5 billion euros ($203 billion) in another dose of ultra-cheap funding as the European Central Bank gives them every possible incentive to keep lending to the pandemic-stricken economy.

The bids for the targeted loans, known as TLTROs, came from 388 banks, and the takeup was at the high end of economists’ expectations. The loans will likely push excess liquidity in the euro zone above 3 trillion euros for the first time on record. The euro fell as much as 0.2% to $1.1633.

“This should weigh on Euribor fixings in the coming days,” said Rishi Mishra, an analyst at Futures First. “The fact that banks are willing to borrow more is an unequivocally positive outcome, as it means monetary policy is alive and kicking in more ways than just QE and forward guidance.”

The takeup, while high, was well below the record 1.3 trillion euros in the previous round three months ago, suggesting that most lenders now consider themselves well-financed.

The three-year loans have become one of the ECB’s most-important tools during the coronavirus crisis. They carry an interest rate as low as minus 1% — meaning the ECB pays banks to borrow — as long as they are used to fund credit to companies and households.

They also more than compensate banks for the official policy rate of minus 0.5%, which works as a charge on their reserves and erodes their profitability. Without TLTROs as a counterbalance, that could eventually curb lending.

Piet Christiansen, chief strategist at Danske Bank A/S in Copenhagen, estimates that excess liquidity will rise by another 600 billion euros to 800 billion euros by the summer of 2021.

Dual-Rate System

Some economists reckon the ECB has stumbled on a dual-rate system that allows it to cut borrowing costs with no practical limit without damaging the banking system.

Still, the extraordinary access to cheap cash — combined with other monetary stimulus such as massive bond-buying programs — does raise the prospect of side effects such as elevated asset prices and risky lending.

It could even undermine the ECB’s influence over short-term market rates. Three-month Euribor — the rate at which banks can theoretically borrow from one another — fell to a record low of minus 0.508% this week.

When it dropped below the ECB’s policy rate last week, that was a phenomenon that had happened only once before, in August 2019, shortly before the central bank cut its deposit rate. Euribor futures, which reflect the three-month benchmark rate held small gains following the announcement, a sign borrowing costs may fall further.

More stimulus could be ahead. The ECB projects that the economy will contract 8% this year, and the inflation rate has fallen below zero for the first time in four years. Rising coronavirus infections could worsen the outlook.

Economists predict the 1.35 trillion-euro pandemic bond-buying program will be expanded again this year. Markets aren’t pricing another 10 basis-point rate cut until October 2021.

“We think this dovish view should and will prevail,” said Frederik Ducrozet, chief global strategist at Banque Pictet & Cie in Geneva.



ECB calls on Brussels to make recovery fund permanent

The European Central Bank has urged the EU to consider making its new pandemic recovery fund permanent, as it published data showing that Croatia, Bulgaria and Greece would be the fund’s biggest net beneficiaries.

The EU plans to issue €750bn of debt to support a revival of the region’s pandemic-stricken economy by distributing grants and loans to member states, a move the ECB called “an important milestone in European economic policy integration”.

The scheme’s centrepiece — €390bn of grants — would provide a net benefit worth more than 10 per cent of the pre-crisis Croatian and Bulgarian economies and almost 9 per cent for Greece, the ECB estimated in a research note published on Wednesday.

Also among the net beneficiaries are Portugal, which will gain 5.4 per cent of its 2019 GDP; Spain with a gain of 3.4 per cent of GDP, and Italy with a gain of 1.9 per cent of GDP.

The scheme “ensures stronger macroeconomic support for more vulnerable countries”, the ECB said.

The heaviest net losers include the “frugal four” countries that initially opposed the new fund. Austria, Denmark, Sweden and the Netherlands will all lose out on a net basis by nearly 2 per cent of pre-pandemic GDP, as will Germany, according to the central bank’s analysis.

Bar chart of Net impact of Fund spending (% of 2019 GDP, selected countries) showing Which countries benefit most from the EU recovery fund?

The ECB assessed the benefit each country would derive from the grants after deducting the cost of repaying its share of the extra EU debt needed to fund them.

It noted that although the fund is “a one-off” it “could also imply lessons for economic and monetary union, which still lacks a permanent fiscal capacity at supranational level for macroeconomic stabilisation in deep crises”.

The EU should consider making the fund a more permanent part of its policymaking arsenal when it restarts talks on its budget rules, the ECB said.

The finance raised by the fund will increase the EU’s outstanding debt 15-fold, the ECB estimated.

ECB officials have long argued that the EU should issue a large, commonly guaranteed pool of debt to rival German Bunds in a bid to reduce the bloc’s vulnerability to future national sovereign debt crises.

However, the idea is contentious among conservative policymakers who insist the recovery fund — dubbed Next Generation EU — should only be a temporary crisis-fighting tool and worry that some countries may not make efforts to repay EU loans.

Jens Weidmann, president of Germany’s central bank, warned this month about the risk of “creating the impression that debt at the EU level somehow doesn’t count or that it is a way of evading tiresome fiscal rules”. He added that the recovery fund should “remain a clearly defined crisis measure and should not open the door to permanent EU debt”.

But the ECB said: “Provided it is deployed for productive spending and accompanied by growth-enhancing reforms, Next Generation EU would not only help to underpin the recovery but also increase the resilience and growth potential of member state economies.”

It estimated that the overall financial support from the fund would be equal to almost 5 per cent of eurozone gross domestic product.

Economists worry about the longer term financial sustainability of some southern European countries that are expected to vastly increase their budget deficits to fund their response to the coronavirus pandemic. Greece’s debt is expected to rise above 200 per cent of GDP, while Italy is set to exceed 160 per cent and Spain is heading towards 130 per cent.

Fabio Panetta, an ECB executive board member, said in a speech on Tuesday that for heavily indebted countries “the sizeable funding provided at the European level presents a unique opportunity to address concerns of competitiveness and long-term sustainability”.

He added: “Growth will be the only solution to the accumulation of public and private debt.”

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ECB to review flagship bond-buying tool in fighting Covid crisis

The European Central Bank has launched a sweeping review of its main pandemic crisis-fighting tool, which some of its top policymakers believe could lead to contentious changes to its other asset-purchase programmes.

The review will assess the impact of the flagship bond-buying scheme that the ECB launched in response to the coronavirus crisis in March and expanded to €1.35tn in June, two of its governing council members told the Financial Times on condition of anonymity.

They said important questions for the review would be to consider how long the Pandemic Emergency Purchase Programme should continue and whether some of its extra flexibility should be transferred to the ECB’s longer running asset-purchase schemes.

“Having that extra flexibility has been very useful,” said one council member. “We should look at all bits of the toolkit very carefully. We will have a good discussion, a good debate, and I don’t know where we will end up.”

The ECB declined to comment on the review, which is expected to be discussed by the council next month. It comes as debate is intensifying on the council over whether it should start drawing up plans to wind down the PEPP or consider expanding it further.

Until the new programme’s introduction, the ECB’s sovereign bond purchases were bound by self-imposed rules, designed to avoid it being accused of using monetary policy to directly finance governments, which is illegal under EU law. 

It might be easier for some national central banks to accept that we expand the traditional asset purchase programme rather than the PEPP

ECB council member
This changed with the PEPP, which ditched the restriction of only buying up to a third of a country’s debt and introduced a more flexible interpretation of the rule requiring it to buy sovereign bonds in proportion to the size of each country’s economy. 

It also started buying Greek government bonds, breaking with the ECB’s tradition of not buying debt rated below investment grade.

Any move to increase the flexibility of the ECB’s overall bond-buying programme is likely to prove controversial, particularly among its critics in Germany who are gearing up to launch another legal challenge at the country’s constitutional court. 

When the court ruled in May that the ECB needed to do more to explain why its government bond-buying had not breached EU law, it pointed to the self-imposed rules as a key reason why the purchases still appeared to be legal.

A second council member said the review would look at whether the ECB should shift away from using the PEPP and focus instead on increasing the scale of its other asset purchase programmes, while potentially giving them the same extra flexibility. 

“It might be easier for some national central banks to accept that we expand the traditional asset purchase programme rather than the PEPP,” said the second council member.

Some ECB council members are concerned that the PEPP risks becoming a more lasting part of the central bank’s policy framework, especially after it was extended from the end of this year until June 2021.

Jens Weidmann, president of Germany’s Bundesbank and one of the longest-serving ECB council members said this month that “the emergency monetary policy measures must be scaled back when the crisis is over”. He added: “When deciding on the PEPP, it was particularly important to me that it have a time limit and be explicitly tied to the crisis.”

As of last week, the ECB had bought €527bn assets under the PEPP on top of the more than €2.8tn of assets it owns under its other asset purchase programmes. Some economists expect it to increase its bond-buying plans by a further €500bn as early as December in an attempt to raise inflation back towards its target of just below 2 per cent.

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(Economist Intelligence Unit)- Greece was already in technical recession when the coronavirus crisis hit

Greece economy: Economic outlook: all eyes on tourism


* The Greek economy was already in technical recession when the coronavirus (Covid-19) crisis hit, but strict measures to contain the pandemic and the catastrophic impact on tourism have dealt the economy a further heavy blow.

* The lowpoint in terms of economic activity has already passed: high-frequency hard and sentiment data point to an easing of the downturn from May onwards.

* Tourism-which directly and indirectly accounts for around one-fifth of the economy-was largely wiped out in the second quarter. Latest data show an increase in arrivals from abroad, but these are down dramatically compared with 2019.

* The economy will partly recover in the second half of the year, but the likelihood of further restrictive public health measures means that the recovery will be weak and uneven in coming quarters.

* Extremely favourable external financing conditions give the government space to support workers and firms, and Greece will benefit significantly from EU fiscal support, boosting growth rates in 2021-24.


Aug. 11 (Economist Intelligence Unit) — Greece’s reliance on tourism means that it will probably experience a contraction in real GDP that is worse than the EU average this year. Moreover, unless an effective vaccine is rolled out in the first half of 2021, next year’s tourism season will also suffer compared with recent years.

Greece was already in technical recession when the coronavirus crisis hit-recording negative quarterly growth in the fourth quarter of 2019 and the first quarter of 2020-but the scale of the fallout from the coronavirus pandemic is an additional, large negative factor for economic activity.

Greece has so far managed the public health crisis very well, but the imposition of strict measures to limit social contact, and the country’s over-reliance on tourism, mean that the damage to economic activity is already worse than for many other EU countries.

Latest data reveal extent of the second-quarter downturn

The high-frequency data released by Greek and EU sources give some idea of the scale of the downturn in the first few months of the pandemic. Hard data, which is released with a significant lag, indicate that the peak of the downturn was in April. As of May (latest available), data mostly indicate an easing of the downturn, but in all key branches of the economy activity was still firmly in negative territory. Working-day-adjusted retail trade turnover, for example, fell by 5.3% year on year in May, compared with a 24.5% decline in April. Industrial output declined by 7.5% year on year in May, after a 10.2% decline in April.

Labour market data indicate a less dramatic decline in April-May than retail trade and industrial output figures, but the negative trend is visible. As of May the seasonally adjusted unemployment rate was 17%, up from 14.5% in March. This rate is likely to rise substantially in the coming months. Economic weakness, a poor labour market outlook and and a consequent plunge in demand have contributed to much lower price pressures, with the harmonised index of consumer prices (HICP) falling by 1.9% year on year in June. A recent report by the Hellenic Confederation of Commerce and Entrepreneurship (ESEE) revealed that more than three-quarters of retailers were already engaged in discounting amid fragile consumer demand.

The most up-to-date sentiment data suggest an improvement in recent months, albeit from extremely low levels and with big differences by sector. The Economic Sentiment Indicator improved to 90.8 in July, from 87.6 in the previous month, according to the European Commission. Business optimism was higher in services, construction and industry. However, retail trade sentiment was particularly weak, falling to 70.4, from 84.4 in June. Consumer confidence also fell further in July. According to Eurostat, Greek consumers are the most pessimistic in the EU.

The July manufacturing purchasing managers’ index (PMI) was 48.6 in July, down from 49.4 in June, and below the 50 level separating expansion from contraction. It has, however, recovered significantly from a trough below 30 in the second quarter. Firms reported weaker demand from tourism-related industries, according to IHS Markit. The survey also registered the fifth consecutive cut in workforce numbers.

Tourism is the key

The Greek economy is particularly exposed to the coronavirus crisis owing to its dependence on international tourism, one of the hardest-hit sectors globally. Directly and indirectly, tourism accounts for about one-fifth of the Greek economy, and has contributed about half of all growth in recent years.

The second quarter was a disaster for tourism, coinciding with major restrictions on international travel and the peak of domestic and foreign restrictive measures. In June the number of air passengers arriving in Greece was 93% lower than a year earlier. A report by the Hellenic Association of Professional Conference Organisers (HAPCO), the Athens Convention and Visitors Bureau (ACVB) and the Thessaloniki Convention Bureau found cancellation rates for international conferences in Greece were running at 95%.

In mid-June Greece started to open up to international arrivals. The cruise sector opened again on August 1st and in early August the tourism minister, Haris Theocharis, reported that almost 80% of hotels were open. That Greece is seen as a success story in public health terms has had a positive impact on foreign tourists’ willingness to travel there. However, there is widespread risk aversion to travel in general, reflecting concerns about the increased risk of contracting the virus while travelling and uncertainty regarding changes in border controls and whether or not quarantine is mandatory when arriving or returning. Available data for tourism in Greece in the third quarter so far are not especially encouraging. Air passenger arrivals in July picked up versus June but are still down by around three-quarters on last year.

The risk of new restrictive measures

During February, as European countries gradually became aware of the threat of the coronavirus, Greece reacted quite slowly by the standards of regional peers. However, the Greek government started to act strongly at the end of February, and by late March Greece became one of the most restrictive countries in the EU with the exception of Italy. Given the low number of cases and deaths in Greece, the government felt able to loosen restrictions on economic life in mid-June. This helped the economy to start to recover. However, as the number of cases began to rise again from July onwards, the government tightened some measures again. This is likely to weigh negatively on the nascent economic recovery.

More fiscal space to support the economy

The coronavirus has loosened significantly the fiscal constraints that Greece has faced for a decade. Greece’s euro zone creditors have waived onerous primary surplus targets for now in acknowledgement of the extraordinary situation. Greece is set to get a big entitlement under the EU recovery fund. One estimate by Bruegel, a Brussels-based think tank, found that Greece’s entitlement under the Next Generation EU support and 2020 budget amendment would total grants worth 13.5% of GDP and guarantees worth a further 1.35%. This is the largest allocation of any member state except Bulgaria and Croatia.

Meanwhile the monetary interventions of the European Central Bank (ECB) have created a favourable financing backdrop, creating more space than at any time since the global financial crisis for the government to use fiscal policy to support the economy. As of early August, the nominal yield on Greek ten-year bonds was close to an all-time low of around 1%, with the yield on five-year bonds being below 0.25%. In early August the government announced new support measures worth EUR4.5bn, with a focus on returning pre-paid taxes and support for seasonal employees working in tourism.

Bumpy recovery with huge uncertainties ahead

The outlook for the Greek economy remains highly uncertain, and the risks to our forecasts in both directions are unusually large. Our current forecast is for a contraction of 7.5% this year, and a recovery of 3% in 2021. This rests on an assumption that there is not another national lockdown and a vaccine is available by the end of next year.

During the rest of 2020, we expect a choppy recovery, influenced by a pattern of easing and tightening of public health measures. This pattern will probably define 2021 as well. This year risks to the forecast are probably weighted to the downside, not least because of the recent increase in cases in Greece, which could have a negative impact on tourism demand. For next year, if a vaccine is rolled out more quickly than expected, the recovery could be a lot stronger than we project.

Source: Economist Intelligence Unit

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