Economy & Politics

The programmed end of state aid is already worrying the ECB

The European Central Bank warned on Wednesday against a premature end to budget support in the euro area, which could delay the recovery and precipitate the insolvency of companies hit by restrictions linked to the covid-19 pandemic.

The European Central Bank warned on Wednesday against a premature end to budget support in the euro area, which could delay the recovery and precipitate the insolvency of companies hit by restrictions linked to the covid-19 pandemic.

(AFP) – After billions of euros urgently released by governments to support the economy, a “sudden end (…) could lead (…) to an economic contraction more severe than during the first wave of the pandemic ”, warns the ECB in its latest semi-annual report on financial stability. These aid measures include in particular public guarantees on bank loans and moratoriums on their repayment, in addition to partial unemployment schemes, deferral of charges and sectoral aid.


Wi, PK OGB-L Commerce, Unterstützung für die Geschäfte, rue Alzette Foto: Guy Jallay / Luxemburger Wort

Intended to help companies that have lost at least 40% of their turnover, the measure announced in mid-November by the government received the Commission’s approval on Wednesday. The 120 million euros can therefore indeed be distributed.


If this support were to suddenly stop, the companies most affected by the restrictions, such as in the gastronomy sector, “could face serious solvency problems or a more lasting imbalance in their economic models (… ) even as the rest of the economy is recovering, ”adds the institution. This risk of chain failures “is exacerbated” by the fact that many companies, households, but also States find themselves heavily in debt following the first wave of the pandemic, underlines the report.

The exposure of banks to private and public debt means that they have more provisioned in 2020 for the risk of defaulted loans but remaining “optimistic in certain cases”. Ultimately the profitability of banks “should remain low,” said Luis de Guindos, vice-president of the ECB, quoted in a press release. If government aid remains essential, it must remain “targeted on economic support linked to the pandemic” to avoid “medium-term debt sustainability problems”, according to the central banker.


There is no question for the Minister of Finance to play defensive. Faced with the health and economic crisis, Pierre Gramegna tabled on Wednesday a draft 2021 budget, proactive in terms of investments but also support.


In its previous report in May, the ECB threw a stone in the pond by estimating that the risk of the collapse of the euro zone could resurface with the explosion of public debt in most countries to face the impact of coronavirus. This risk is no longer mentioned in November, as Europe seeks a solution to promulgate its historic recovery plan of 750 billion euros blocked by Hungary and Poland.


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