In Germany, Angela Merkel has announced a 130 billion euro stimulus package to combat the crisis caused by the pandemic. After the second day of negotiations, the German coalition government has managed to agree on an aid programme to be implemented between this year and next, which will be added to the one launched in March, valued at 156 billion euros, exceeding the initial estimates of 50-100 billion.
Bankinter | The European Commission (EC) has given Banca Monte Dei Paschi Di Siena (MPS) the go-ahead to finally set up a toxic asset restructuring entity. The plan has yet to be approved by the ECB and the Italian watchdog (Consob) but there is a high probability of success. The most important thing is that the EC does not consider the operation as a form of state aid. The finalisation of the process is planned for end-2020 or the beginning of 2021.
Gilles Moëc (AXA IM) | Although purchases through the Pandemic Emergency Purchase Programme(PEPP) have retreated from the peak at 8.5bn per day at the beginning of May, the latest pace is still consistent with all the €750bn being spent by the end of September, while the ECB has pledged to maintain it until at least the end of the year. Mechanically, the ECB would need to “top it up” by at least €350-400bn –i.e. to bring it above the symbolic level of 1 trillion euros –to be comfortable until December.
Yesterday, Paolo Gentiloni, Commissioner for Economic Affairs, said the beneficiary countries, including Spain, will have to present a reform plan by 15 October, together with the draft 2021 budget, in order to be able to access funding from the 750 billion euro Reconstruction Plan transfers.
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.