Banca March | The European Central Bank expects an economic contraction of 5.5% in 2020 and a recovery in 2021 to growth of 4.3%. In this context of deteriorating growth forecasts, the ECB continues to increase its asset purchases to support the region’s economy. Even though, it does not reveal the composition of the purchases within this specific programme of support for European economies hit by COVID-19, we can take a look at its usual programme of sovereign debt purchases (known as the PSPP).
Yves Bonzon (Julius Baer) | On the fiscal side all countries might provide support measures that are quantitatively and qualitatively strong enough to ensure recovery when the containment ends. The way the required transfers from governments to their private sectors are financed, in essence the chosen mix of tax increases, borrowing from private savings and monetisation, will play a determining role on the recovery capacity of different countries and regions.
Philppe Waechter (Ostrum AM) The main point on the ECB meeting is the large uncertainty contained in the GDP forecasts. Last March, the ECB forecast was +0.8% for 2020. Today, Christine Lagarde said the gdp was expected to drop between -6 and -12% for 2020. That’s a huge revision reflecting uncertainty for the foreseeable future.
In the midst of the Q1 2020 earnings season, the financial sector is beginning to protect itself from the more than likely economic shock of the coronavirus. Meanwhile, The European Comisssion offered European banks temporary relief from capital regulations that could boost credit by up to €450 Bn this year. Brussels argued that the economic damage caused by the coronavirus crisis would justify a “selective” relaxation of the regulations introduced in the wake of the 2008 financial collapse.
Lidia Treiber (Wisdom Tree) | As the impact of Covid-19 lockdowns begin to more deeply unveil the economic impact that these severe measures have had on different European countries, the cost of funding has started to rise sharply for hard hit countries such as Italy and Spain. The spread of peripheral sovereign bonds over German sovereign bonds has begun to widen as investors become concerned about the rising debt to gross domestic product (GDP) levels for countries with already weaker fundamentals.
Bank of America Global Research | On 22 April 2020, the ECB announced temporary measures to mitigate the impact of possible rating downgrades on collateral availability. This includes the acceptance of certain non-investment grade rated assets as collateral for its credit operations. In the collateral easing measures announced on 7 April, the central bank announced plans to temporarily mitigate effects from rating downgrades.
Santander Credit Research | The scrapping programme to remove older vehicles and replace them with new ones helped Germany’s economy to emerge quickly from the consequences of the financial crisis a decade ago. Senior managers in the automotive industry, as well as trade unions, are due to meet with the German chancellery in Berlin on May 5 to discuss ways of overcoming the economic crisis. And this programme may be on the table.
The European Council will discuss the European Recovery Fund at its meeting on Thursday 23 April. If last week France was talking about a fund of 500 billion euros, while Italy continues to insist on coronabonds, now Spain is proposing an up to 1.5 trillion euros fund, financed by perpetual debt issued by the EU. The intention is for this funding to be available on 1 January 2021.
Nicola Mai (PIMCO) | With euro area output expected to drop by almost 10% this year, and unemployment and fiscal deficits to rise, an ample, blunt and well-coordinated response from European ministers was warranted. However, the new measures announced by finance ministers last week disappointed – again.
Sam Theodore (Scope Insights) | The pandemic is fast pushing the European banking sector into a new and different stage; one that none of us could have anticipated. At this time there is no reason for credit investors to fear outright bank failuressincethis is not a copycat of the last financial crisis.(Even so and rather surprisingly, the risk of default for European banks is high in several credit-strategy models). There is, however, a clear need to reassess some of the underpinning rationales for investing in the debt of European banks.The dynamics of the landscape a rechanging and a return to the past is not likely anytime soon.