- Some casinos have reopened since the deal was launched in May
- Investors pushed back on loan that offered more than 14% yield
By Nicholas Comfort
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.
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.
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.
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.”
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.
* 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 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
Berat Albayrak told a Turkish television channel that this year the country’s economy could shrink by up to 2 per cent, or expand by a maximum of 1 per cent. But estimates from international institutions for an even sharper contraction were baseless, he said in the interview late on Wednesday evening.
The IMF forecasts that the Turkish economy will contract by 5 per cent in 2020, while the World Bank’s baseline scenario is for a 3.8 per cent fall.
Mr Albayrak said the sharp decline in the lira had made Turkey more competitive in attracting tourists and selling goods overseas, adding that he was not worried about the exchange rate. The currency has lost about a fifth of its value against the dollar this year.
Goldman Sachs estimates that Turkey spent about $65bn of its central bank foreign currency reserves in June and July on efforts to keep the currency stable, but since the start of August it appears to have abandoned the attempt.
The central bank has rebuffed calls to raise its benchmark interest rate to stem the lira’s losses. It will confront the dilemma when it holds its next monetary policy committee meeting, in a week’s time.
Earlier this week President Recep Tayyip Erdogan called for interest rates to fall further. He subscribes to the unconventional view that higher interest spurs inflation.
“There is a very important paradigm shift now with a competitive
exchange rate, low interest rates and most significantly, a
transformation that is based on production, not imports,” said Mr
Albayrak, who is Mr Erdogan’s son-in-law.
In a move which some analysts said was intended to buffer the lira, the Turkish central bank has recently hiked banks’ funding costs.
Late last week it scrapped its usual one-week repo operation priced at the policy rate of 8.25 per cent. On Thursday the bank instead held a one-month repo auction at which lenders set the rate through their bids at 271 basis points above 8.25 per cent according to Bloomberg.
“The [central] bank is trying to rein in lending . . . without hiking the base
rate,” Timothy Ash, an analyst at BlueBay Asset Management, wrote in a
The supply of credit has risen sharply since the government compelled banks to increase lending. Regulators this week also took other steps to cool lending, including reducing the loan-to-asset ratio for banks.
But letting the lira weaken “is essentially a muddle-through scenario”, Mr Ash said: “Clearly the central bank does not want the ignominy of being forced to hike the base rate [and] it’s not even clear they would get approval from the president for such a move . . . unless the lira is in freefall.”
Mr Albayrak rebuffed suggestions that Turkey needed a higher interest rate to support portfolio inflows, arguing that net flows have been negative for the past two years. Foreign investors have sold about $12bn of Turkish assets over the past year, according to Bloomberg.
“The exchange rate will rise today, fall tomorrow . . . What is important is that Turkey manages the volatility,” Mr Albayrak said.
He blamed “crisis lobbies” for portraying the currency as under siege and said that the lira’s decline would have only a limited impact on inflation, which is running at an annual rate of about 12 per cent.
Turkey’s economy needs to become more independent in order to cope with divergences with the country’s traditional allies over foreign policy, Mr Albayrak said, adding that overseas military excursions had put pressure on the public finances.
Tax revenue fell to zero for four months this year because of coronavirus, and Turkey is likely to record a budget deficit of about 5 per cent of GDP this year, he said. But he reiterated that Turkey would not seek assistance from the IMF.
The U.S., Britain, European Union and Japan have so far secured about 1.3 billion doses of potential Covid immunizations, according to London-based analytics firm Airfinity. Options to snap up more supplies or pending deals would add about 1.5 billion doses to that total, its figures show.
“Even if you have an optimistic assessment of the scientific progress, there’s still not enough vaccines for the world,” according to Rasmus Bech Hansen, Airfinity’s chief executive officer. What’s also important to consider is that most of the vaccines may require two doses, he said.
A few front-runners, such as the University of Oxford and partner AstraZeneca Plc and a Pfizer-BioNTech SE collaboration, are already in final-stage studies, fueling hopes that a weapon to fight Covid will be available soon. But developers must still clear a number of hurdles: proving their shots are effective, gaining approval and ramping up manufacturing. Worldwide supply may not reach 1 billion doses until the first quarter of 2022, Airfinity forecasts.
Investing in production capacity all over the world is seen as one of the keysto solving the dilemma, and pharma companies are starting to outline plans to deploy shots widely. Sanofi and Glaxo intend to provide a significant portion of worldwide capacity in 2021 and 2022 to a global initiative that’s focused on accelerating development and production and distributing shots equitably.
The World Health Organization, the Coalition for Epidemic Preparedness Innovations, and Gavi, the Vaccine Alliance are working together to bring about equitable and broad access. They outlined an $18 billion plan in June to roll out shots and secure 2 billion doses by the end of 2021.
The initiative, known as Covax, aims to give governments an opportunity to hedge the risk of backing unsuccessful candidates and give other nations with limited finances access to shots that would be otherwise unaffordable. If governments put their own interests first, it could result in a worse outcome for everyone, allowing the virus to continue to spread, some officials warn.
Countries would need to strike a series of different agreements with vaccine makers to raise their chances of getting supplies, as some shots won’t succeed, a situation that could lead to bidding battles and inefficiencies, Seth Berkley, Gavi’s CEO, said in an interview.
“The thing we worry about most is getting a tangle of deals,” he said. “Our hope is with a portfolio of vaccines we can get countries to come together.”
Some 78 nations have expressed interest in joining Covax, he said. In addition, more than 90 low- and middle-income countries and economies will be able to access Covid vaccines through a Gavi-led program, the group said Friday. There’s still concern the rest of the world might fall behind.
“That is exactly what we’re trying to avoid,” Berkley said.
AstraZeneca in June became the first manufacturer to sign up to Gavi’s program, committing 300 million doses, and Pfizer and BioNTech signaled interest in potentially supplying Covax. Brazil, the nation with the second-highest number of coronavirus cases, also reached an agreement to secure doses of the Oxford vaccine with AstraZeneca.
The Trump administration agreed to provide as much as $2.1 billion to partners Sanofi and Glaxo, the biggest U.S. investment yet for Operation Warp Speed, the nation’s vaccine development and procurement program. The funding will support clinical trials and manufacturing while allowing the U.S. to secure 100 million doses, if it’s successful. The country has an option to receive an additional 500 million doses longer term.
The European Union is closing in on a deal for as many as 300 million doses of the Sanofi-Glaxo shot and is in advanced discussions with several other companies, according to a statement Friday.
“The European Commission is also committed to ensuring that everyone who needs a vaccine gets it, anywhere in the world and not only at home,” it said.
In China, home to some of the fastest-moving programs, President Xi Jinpingpledged to turn any vaccine developed by the country into a global public good.
The U.S. has invested in a number of other projects. Pfizer and BioNTech last week reached a $1.95 billion deal to supply their vaccine to the government, should regulators clear it. Novavax Inc. announced a $1.6 billion deal, while the U.S. earlier pledged as much as $1.2 billion to AstraZeneca to spur development and production.
U.S. investment to speed up trials, scale up manufacturing and boost vaccine development is “great news for the world,” assuming vaccines are shared, Berkley said.
“It helps drive the science forward,” he said. “On that I’m very positive. My concern is that we need global supply.”
European Council President Charles Michel floated a new proposal that would reduce the size of handouts to 400 billion euros, down from an original 500 billion euros, according to officials familiar with the discussions. Dutch Prime Minister Mark Rutte and his Austrian counterpart Sebastian Kurz rejected the new offer, and stood by a pledge to limit grants to 350 billion euros.
Denmark, Sweden and Finland, which initially had been aligned with the Dutch and Austrians, weren’t as opposed to the amount of grants in Michel’s latest proposal, said the officials, who asked not to be identified because the talks are ongoing.
Germany and France, with the backing of most of the bloc, are insistent that at least 400 billion euros of the package must be handouts in order to shield the fragile economies of southern Europe from the worst effects of the coronavirus pandemic.
“Europe is being blackmailed,” Italian Prime Minister Giuseppe Conte said Sunday as frustration with the Dutch-led group began to mount.
Despite the inability to find a consensus over the size of the stimulus package, talks continued into the evening.
With investors already pricing in a deal after a series of bold announcements in recent weeks, leaders are under intense pressure to bridge their differences before financial markets open on Monday. Yet they’ve largely been going around in circles since talks began on Friday morning as they struggle to bridge the familiar fault lines between the richer North and the southern countries worst affected by the pandemic.
“Ideally the agreement should be ambitious in terms of size and composition of the package, broadly along the lines of what has been proposed by the commission,” European Central Bank President Christine Lagarde said in response to a question from Reuters. “It is better to agree on an ambitious facility even if it takes a bit more time.”
Rutte and his allies are trying to water down the handouts that the highly indebted South sees as critical for shoring up its finances. While Saturday proved less bad-tempered and more constructive than Friday’s gathering, it was still difficult to discern much progress.
“Until now what we have seen is the commission, the president of the council and the majority of member states making an effort to come closer to four countries,” Portugal’s Antonio Costa said. “They also have to make some effort.”
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The 27 leaders are meeting in person for the first time since February, when initial talks over the EU’s seven-year, 1 trillion-euro budget also ran into the buffers. Now, with more than 100,000 Europeans dead from the virus and an economy to rebuild, investors are looking to the group to muster a display of unity to maintain the rally in stocks.
“The will to find a compromise should not make us renounce the legitimate ambitions which we must have,” Macron said Sunday. “In the coming hours we will see if the two are compatible.”
“Things are moving in a fairer direction,” Austrian Chancellor Sebastian Kurz said. “I personally would find it a real shame if it was abandoned.”
The deliberations are proving to be a baptism of fire for Michel, a former Belgian Prime Minister, and European Commission President Ursula von der Leyen, who drew up the original plan. They only took up their jobs in December and have faced criticism from governments over their handling of the pandemic response.
Merkel and Macron have been pressing for an agreement before the summer but haven’t yet been able to bring their weight to bear to force a result. The bloc’s two largest economies are seen as crucial power brokers and they were photographed sitting on a sunny terrace as they searched for a breakthrough.
“We’re entering the third day of talks and it certainly is the decisive one,” Merkel said on Sunday morning. “It’s possible there will be no agreement today.”
A spokesman for the Economy Ministry, which oversees the program, declined to comment.
The state-backed loan guarantees are a key feature in the global response to the economic fallout from the pandemic. Spain and other European governments have pledged trillions of euros to help keep businesses afloat.
Europe’s fourth-largest economy had one of the continent’s strictest lockdowns in response to a deadly outbreak of the virus. The economy is also greatly dependent on the floundering tourism industry and its long-troubled labor market means the jobless rate could spike as high as 24% this year, according to central bank forecasts. In a worst-case-scenario, the Bank of Spain expects the economy to contract by as much as 15% in 2020.
Since Spain launched its program on March 17, banks have financed around 70 billion euros worth of loans –- about 54 billion of which are state-backed. That’s a much greater deployment of loan guarantees than in other European countries.
The loans are funneled through Spain’s Instituto de Credito Official, known as ICO, a state finance agency. Most of the guarantees have been deployed to help finance small and medium-sized companies. Some large businesses have also tapped the program. British Airways owner IAG SA borrowed around 1 billion euros through ICO to help its Spanish units Iberia and Vueling weather the collapse in travel demand.
In the event of a default, the Spanish government has pledged to back 80% of a loan to an SME and 70% for a large company.
When Socialist Prime Minister Pedro Sanchez first rolled out the program, some companies complained that banks were requiring them to purchase other products in order to secure financing, something known as cross-selling.
Other business people said banks required them to personally guarantee the loans, pledging their own homes, for instance. And some executives said the interest rates that banks were charging on the loans was unnecessarily high and not in line with the government’s guidelines.
Those complaints from borrowers have, for the most part, quieted down. One reason, according to officials, is that the government has rolled out the program in increments of around 20 billion euros each. That has allowed them to make tweaks along the way, detecting initial problems and then admonishing some banks to avoid cross-selling, for instance, in the following tranche.
Spain rolled out the final increment of the 100 billion euro program last week, accelerating the conversations to bolster the size of one of the country’s most significant responses to the coronavirus crisis.
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