Curmi & Partners

COVID-19 pushing Europe to use its arsenal

By Noelle Micallef 

My last article for the Sunday Times of Malta (published 02/02/2020), was titled “The ECB – The market’s lifebuoy in 2019”. Fast forward to today, the COVID-19 outbreak forced Central Banks and Governments around the world to bring out all the weapons in order to safeguard the global economy.  

The shock caused by the virus will affect the economy in various ways. The production contraction due to the lockdowns imposed worldwide; disruption in supply chains given absences from the workplace; demand shock in the global economy caused by lower consumer demand because of higher uncertainty; and the impact on firms’ liquidity constraints are some of the ways which the pandemic is damaging the global economy. In a circular published by the EC, the forecasted 1.4% GDP growth for 2020 could fall to just over -1%. In light of the potential repercussions, higher authorities had to intervene to try and minimise the aftermath of this situation.

The EC responded in a number of ways including the following. €1billion EU budget guarantee was made to support hard hit SMEs with liquidity, and mobilising €8billion in working capital financing by providing liquidity and guarantees to banks. Credit holidays have been granted to help alleviate the financial strain on affected companies. The EC also introduced the Coronavirus Response Investment Initiative whereby:

-        €37billion are to be directed under the European Structural Investment Fund to fight the crisis;

-        An additional €28billion of unallocated structural funds should be fully eligible for fighting the crisis;

-        The EU Solidarity Fund’s scope may also be extended to include public health crisis, mobilising up to €800million to the hardest hit Member States.

Dismissed and self-employed workers, which will probably be greatly impacted by the virus, may benefit from the European Globalisation Adjustment Fund which will mobilise up to €179million. Governments which need to utilise State Aid may benefit from a facilitated procedure which speed up the Commission’s approval of such aid. The EC has also allowed national governments to provide access to liquidity to banks in the form of state guarantees. Full flexibility of the EU fiscal framework is also being allowed; specifically, it is ready to accommodate exceptional spending to counter the virus and adapt fiscal efforts required from Member States. 

On 12th March, the European Central Bank (ECB) decided on a comprehensive package of monetary policy measures including:

-        Additional longer-term refinancing operations; providing an injection of low interest rate funding to Eurozone banks with sovereign debt as collateral on the loans;

-        More favourable terms in the TLTRO-III operations outstanding during June 2020 to June 2021;

-        Additional net asset purchases of €120billion and reinvestments of the principal payments from maturing securities purchased under the APP will continue.

The ECB announced that banks can utilise capital and liquidity buffers and also allowed banks to use capital instruments that do not qualify as CET1 capital to meet Pillar 2 Requirements. On 18th March, the ECB surprised the market by introducing the Pandemic Emergency Purchase Programme, a new APP having an overall envelope of €750billion. This announcement included a relaxation in the modalities of the programme which will now include Greek government bonds and non-financial commercial paper. Moreover collateral standards for bank refinancing operations have also been eased.

Central Banks and Governments all over the world have taken drastic measures, such as reducing interest rates and introducing high stimulus packages. Even locally, the Maltese Government has introduced a number of measures to aid local businesses and employees in these difficult times. However, some analysts believe that the monetary policy decisions will eventually lead to higher debt in already indebted nations, therefore people won’t consume more. Lead economists around the world continue to urge Governments to bring out the ‘big artillery’ to fight the economic fallout of the pandemic, and have not excluded the possibility of introducing helicopter money into the economy.

This information has been concluded on 25th March 2020. The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business