Axel Botte (Ostrum AM) | The EC recovery package “Recovery and Resilience Facility” draws on the joint France-Germany initiative to promote recovery efforts in Europe. Importantly, transfers across countries are no longer taboo. It is a great step forward to tackle increasing divergence in economic performances of member states. Under the proposal, the Commission will issue bonds with different maturities with the aim of minimizing funding cost.
The Next Generation EU fund, which is meant to address the eurozone’s main financing needs to counter the crisis, consists of €500bn delivered as grants according to country- specific financing needs and €250bn credited as loans. The news boosted the euro initially as the plans outstrip expectations for €500bn in funding previously proposed by Merkel and Macron.
Santander Corporate & Investment | Yesterday, the European Banking Authority (EBA) published a report with a preliminary assessment of the Covid-19 impact on the EU banking sector. The EBA flags up the fact that banks “entered the health crisis with strong solvency and liquidity reserves and managed the pressure on operational capacity by activating their contingency plans”. It also flags that “the crisis is expected to affect asset quality and therefore the future profitability of banks.
Martin Moryson (DWS ) | The data published yesterday by the Federal Statistical Office confirms the 2.2% decline in German economic output in the first quarter. This had already been calculated in a previous estimate. Combined with the last negative growth quarter of 2019, Germany is now officially in recession. However, Q1 is only the beginning. The real drama will only become evident in the figures for the Q2. Here we expect a 10 percent decline.
Olivia Álvarez (Monex Europe) | If the European Commission can get the EU-27 members on board with a project resembling the German-French initiative, markets could move significantly. Peripheral spreads can narrow notably from currently high levels and European stocks could deliver some rare outperformance. The euro could certainly recover from its depressed levels against the US dollar and other safe heaven currencies as the Swiss franc and the Japanese yen. This is particularly true given the notably bearish sentiment the single currency has recently attracted in futures markets.
Yves Bonzon (Julius Baer) | If the job losses are not quickly recouped, it must be expected that individuals will use their savings to support their consumption levels within a context of reduced incomes. This is a fundamentally different situation from the 2008 crisis when households (and companies, for that matter) had increased their savings sharply to compensate for the negative wealth shock resulting from the real estate and financial crisis.
BofA Global Research | We cut our Euro area GDP forecast to -8.3% this year and +4.6% next. The recovery will be weak, permanent income losses big. Fiscal stimulus is not enough to boost consumers and capex. Deficits will still be very big, c 17% cumulatively in 2020/21. The Franco-German initiative helps sentiment earlier than growth. ECB help will remain crucial. PEPP has to double, at least.
On Tuesday, the European Union’s economy and finance ministers (Ecofin) approved a temporary 100 billion euros fund that governments can use to finance their employment protection schemes, similar to Spain’s temporary lay-offs, amid the Covid-19 pandemic. The regulations establish a ceiling of 60 billion euros that cannot be exceeded by the three countries which have benefited most from the fund. This means that Spain could ask for a maximum of 20 billion euros from the SURE.
BofA Global Research | The Franco-German recovery fund initiative is a small positive surprise: EUR 500bn, joint EU issuance, allocated as grants. Caveats: it is too small in size to fix all problems, its exact design in allocation, repayment and timeline will be crucial. The political symbol could be strong, though, if the EU 27 can agree. The ECB may feel temporarily relieved now.
Santander Credit Research | So far this year, new registrations are down 42.4%, with a drop of 83.8% in April on top of falls of 55.6% in March, 7.2% in February and 8.2% in January. The UK, Italy, France and Spain were the most affected markets, with falls of 97.3%, 97.6%, 88.9% and 96.5% respectively, while the decline in Germany was limited to 61.1%. The extent of the decline in sales (at least in Q2’20) will be even worse than in 2008/09, when many car manufacturers and suppliers were in trouble.