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.
The European Commission has been asked to set up a 2 billion euros reconstruction fund to assist the countries and sectors most affected by the Covid-19. The fund would operate, at least partly, on the basis of grants and subsidies rather than loans to avoid excessive leverage by any of the member states. This instrument should be financed by issuing long-term bonds guaranteed by the EU budget. The EC points out that this type of bond is not the same as the “coronabonds” demanded by some countries at the start of the pandemic.
Adrià Morrón Salmerón (Caixabank Research) | The measures necessary to combat the COVID-19 outbreak will generate a significant increase in public debt in the world’s major economies, including in the euro area.The sustainability of euro-area debt is not in question, but the environment is demanding and places the ECB in a key position. A swift and sustained recovery in economic activity is also essential, which in turn requires a coordinated economic policy response.
Andrea Enria, the President of the European Central Bank (ECB) Supervisory Board, said in an interview that he expects banks to keep back over $27 billion of the $35 billion they planned to distribute in dividends as capital on their balance sheets. In addition to this, Enria said the institutions have also cancelled their current and planned share buy-back programmes
DWS | The ruling of the German Federal Constitutional Court on the expansion of the European Central Bank’s (ECB’s) balance sheet has given new impetus to an old question. Does this seeming expansion of the money supply, which currently is mainly achieved through bond purchases by the Bundesbank and other national central banks of the Eurozone, bring a substantial risk of inflation?
Spain has announced this week measures to impose a 14-day quarantine on international travellers. These spark new doubts over the tourism sector. Only the new EU coordinated plan for tourism, which recommends reopening borders and reviving the sector, could cancel the Spanish government’s decision.
If the European Central Bank (ECB) were to introduce a digital currency for citizens, with the possibility of them being able to open deposit accounts directly with the institution, it would undermine the role of the banking sector as an intermediary. This disintermediation would lead to legal problems and economic inefficiencies, stated Yves Mersch, Luxembourg’s representative on the ECB’s board.
Just a few weeks before the ECB’s key meeting (4th June), Lagarde has responded to Germany with the biggest weekly purchase since the start of the pandemic: 44 billion euros, 54% higher than the weekly average since April. Furthermore, Olli Rehn affirmed that the German Constitutional Court’s ruling could have an impact on the central banks’s ability to exercise its price stability mandate.
Intermoney | On Friday, the first support measures within the EU worth €540 Bn were given the final go-ahead, but there are still some clouds around. There is a general requirement for accessing these loans for all countries, linked only to their use for direct or indirect Covid-19 health costs. There is no particular conditionality. In Italy, however, there are concerns about the conditionality of ESM resources in the future. If the recovery allows it, the conditions would already be a reality in 2022 at the latest.