State aid should remain targeted, high housing prices are a cause for concern.
The ECB headquarters in Frankfurt am Main.
The European Central Bank (ECB) sees dangers for the stability of the financial system in the euro area in view of the corona pandemic and the consequences for the economy. The massive economic policy aid measures provided support so that the risks were contained in the short term, the ECB said on Wednesday in its six-month financial stability report.
But a hasty end to aid such as government loan guarantees and loan moratoriums could put pressure on firms and households. According to the central bank, companies could then be more vulnerable “than at the height of the global financial crisis” in 2008/2009. With a renewed willingness to take risks, especially with investment funds, as well as excessive prices of some assets, the risk of price corrections also increases.
“It is to be expected that the profitability of the banks will remain weak,” warned ECB Vice President Luis de Guindos. Credit losses are expected to be delayed due to government bailout programs. Overall, according to the ECB, the vulnerability of banks and companies will increase in the medium term as a result of the crisis. According to De Guindos, government aid is currently essential. “But they should remain focused on pandemic-related economic support and avoid creating medium-term debt sustainability concerns,” he said. In the course of the year to date, euro countries have already borrowed more than one trillion euros to finance aid programs, according to the central bank.
In addition, signs of excessive residential property prices are driving the central bank. In the first half of the year, house prices in the euro area rose by five percent. Whether prices hold up depends largely on how much unemployment increases during the crisis and to what extent household incomes fall if government aid is withdrawn. The ECB currently sees the greatest price exaggerations in Luxembourg. The Netherlands, on the other hand, has the highest household debt.
The ECB, however, is heading for an extension of its multi-billion dollar emergency purchase program. “As the consequences of this pandemic are likely to last longer than we anticipated when our last decision last summer, the extension of the timeline is an obvious candidate for calibration,” said ECB board member Yves Mersch about the bond purchase program PEPP (Pandemic Emergency Purchase Program) Interview published on Wednesday with the Financial Times (FT).
The ECB has announced a “thorough reassessment” of the situation for its December meeting (December 10th). Europe's monetary authorities left no doubt that they want to step up again in the fight against the negative economic consequences of the pandemic.
Mersch, whose eight-year term of office at the ECB ends on December 14 of this year, reiterated in the interview the assessment of other leading ECB representatives that the PEPP purchase program and particularly cheap long-term loans for commercial banks (TLTRO) have proven to be particularly effective in the current crisis would have.
The particularly flexible purchase program PEPP, which was launched in March, currently has a volume of 1.35 trillion euros and, according to current planning, should run until at least the end of June 2021. Economists expect not only a time extension, but also that the ECB will invest even more money in the purchase of securities.
Mersch, who is also the vice-head of the ECB's banking supervision, signaled to the banks in the euro area that they would soon be able to pay dividends to their shareholders again. In the coming year, in his opinion, this should be allowed again – at least if institutes convince the supervisors that they have enough capital to iron out the consequences of the pandemic.
