Kommentar: Siden finanskrisen i 2008 har myndighederne, herunder staterne i EU, centralbankerne og børsmyndigheder arbejdet på at skabe en model, så det ikke er staterne = skatteyderne, der skal skal redde banker ved bankkrak. Coronakrisen har fået de politiske vinde til at bakke, så regningen alligevel kan lande hos skatteyderne i EU-landene. Der er nu stærk iovervejelser i EU / ECB om at etablere en Bad Bank, til at overtage nødlidende udlån. Det bliver næppe de danske banker, der skal reddes – men kommer vi til at betale en del af regningen?
Fra ABN Amro:
Euro Financials: A eurozone ‘bad bank’ edges closer towards reality – The ECB has set tales wagging that a eurozone-wide ‘bad bank’ could be the solution for future non-performing loans (NPLs) that arise due to the coronavirus crisis. Andrea Enria – chairman of the supervisory board of the European Central Bank – has twice detailed in newspapers recently the justifications for creating a ‘bad bank’ to address future NPLs that may arise from the coronavirus crisis.
A previous solution to fix a future problem – The setup of a ‘bad bank’ is not new, failed loans would be removed from bank balance sheets and placed in a vehicle to be serviced and sold. In fact, the removal of NPLs from banks balance sheets would be similar to the initiatives that were rolled out at a national level in countries such as Spain and Ireland in the wake of the global financial crisis. The difference this time is that the process would be at the eurozone level. Enria notes that, ‘we need an integrated European response rather than a plethora of uncoordinated national initiatives’. The ECB touts the benefits of a ‘bad bank’; to free-up the banking sector to lend, promote consolidation, promote greener lending and to advance technology. Furthermore, ‘in the unlikely case that such a scheme ends up making losses, we could limit or even prevent any mutualisation of them across the EU. Instead, losses could be allocated by the nationality of the originating banks and each corresponding national scheme’. It would be a truly eurozone solution to a eurozone problem.
A tsunami of failed loans on the horizon? The ECB is taking a very proactive approach at this stage of the crisis. Thus far, NPLs have remained actually rather low in the banking sector as there is often a delay of a number of years to reach peak NPLs following a crisis. The ECB however, expects an incoming torrent of NPLS to arise. It estimates that in a severe but plausible scenario, non-performing loans at euro area banks could reach a colossal EUR 1.4tn, well above the levels seen following the 2008 financial and 2011 EU sovereign debt crises.
Sentiment supports the scheme and the willingness to change laws signals the green light – Up until recently, the idea that private banks should be allowed to offload NPLs in such a scheme was frowned upon. Authorities had believed that the ability of private banks to benefit from the schemes was something of the past. However, regulatory sentiment has clearly shifted. For instance, they recently gave the green light to Monte dei Paschi to off-load NPLs from its balance sheet. Crucially, Enria goes on to mention that the ECB could ‘make legislative adjustments, if necessary’ to address a future NPL mountain. In essence, this gives the green light to the creation of the scheme regardless of the previous state aid rules.
Good for banks and the speed of the economic recovery – A creation of a eurozone-wide ‘bad bank’ would be positive for the banking sector and could be a potential game-changer for periphery banks, which are expected to suffer greatly due to the coronavirus. It would also be positive in terms of helping the speed of the eurozone recovery from a post-coronavirus era. The solution would help the supply of credit in the economy – a crucial failure in the 2008 crisis. This would mean governments and regulators have one less thing to worry about so they could focus on how to promote the demand of credit in the economy to generate economic growth. The benefit the scheme would supply to a European economy recovery would likely be a fundamental driver that garners political support for the scheme. If the ECB, governments and banks are on board, there should not be too many hurdles to stop the creation of the first eurozone ‘bad bank’.
A crucial time for European banks – Finally, the timing of the ECB discussion on a ‘bad bank’ comes at a crucial time. European bank Q3 earnings that have been released this week have shown good earnings that have largely beaten expectations. There is a huge focus on whether the ECB will allow shareholder distributions – dividends and buybacks – to be permitted at the start of next year. At present the ECB has prevented banks from paying dividends until the end of this year to keep capital within banks as they position to deal with the coronavirus crisis. The ECB is caught in a tough place – the strong earnings will add fuel to the fire that dividends should be resumed. However, a second and critical rise in coronavirus cases in Europe this week has led to a sudden uncertainty as to whether a ‘second wave of bank provisions’ may be needed for the European banking sector. If the ECB can convince some banks that an NPL backstop could be on the cards, then this could help them to placate some banks in their eagerness to pay-out shareholders fully. (Tom Kinmonth)
Euro Macro & Euro Rates: Impact of Recovery Fund may be downsized – Even though EU-leaders reached political agreement on the long-term budget and the Recovery Fund in July, the final shapes are not yet carved in stone. Multiple subjects of debate amongst the European Commission, European Council and European Parliament could cause serious delays to the implementation of the Recovery Fund. In addition, now that multiple member states have signalled that they are not (yet) interested in the take-up of loans, the economic impact of the Recovery Fund may be lower than previously anticipated. Finally, downsizing the fund would have a downward impact on the funding need of the EU.
Final size of EU budget and rule-of-law mechanism are main sticking points – The European Council, the European Commission and the European Parliament have failed to reach agreement on the final size of the multi-annual EU budget and a rule-of-law mechanism. Parliament members have criticized cuts that have been made in budgets of core EU-programmes to bring down the total size of the Recovery Fund, and demand a top-up of EUR 39bn. In addition, parliament members want to embed an easily available rule-of-law mechanism in the Recovery Fund, which would prevent disbursements under the Recovery Fund to member states from breaking the EU rule-of-law. Poland and Hungary have threatened to use their veto right to prevent such a mechanism from being implemented.
Loan take-up under Recovery Fund may disappoint – The EU Recovery Fund is split up between EUR 390bn in grants and EUR 360bn in loans. However, we judge that it will only be attractive for 14 out of 27 member states to borrow from the EU rather than fund themselves on the capital market. If those 14 member states will indeed borrow the maximum allowed amount of 6.8% of GNI, then 81% of total available loans will be used. However, Spain and Portugal have signalled that they are not yet interested in the loans, and may wait until July 2023 (the latest opportunity for member states to request loans under the Recovery Fund) or may not request the loans at all. If Spain and Portugal decide not to borrow under the Recovery Fund, then the total loan take-up would drop to about 54% of total available loans.
Lower loan take-up reduces the stimulus to eurozone growth – We expect that all the available grants under the Recovery Fund will have been used by the end of 2023. However, as explained above, we expect the total loan take-up to decrease from 81% to 54%. As a result, we judge that eurozone GDP will be lifted by 0.9% in total during the years 2021-2023, down from our earlier estimate of 1.1%.
We remain bullish on new EU bonds despite lower supply – We have revised our projection of EU issuance downward from EUR 309bn to EUR 270bn in 2021, as we expect the loan take-up under the EU Recovery Fund to be lower. Nevertheless, the outstanding amount of EU bonds will increase significantly from EUR 80bn to EUR 350bn by the end of 2021 (as is shown in the graph below). Combined with the expected size per bond of EUR 10bn, this will make the EU curve comparable with the Dutch sovereign curve at the end of 2021. Meanwhile, it will increase the market depth and liquidity of new EU bonds, which is likely to result in an on-the-run and off-the-run EU curve. Indeed, the new 10y as well as the new 20y EU bond trade well inside the issuers curve. Finally, we still see decent room for further performance of new EU bonds as we expect these bonds to trade between the Dutch sovereign curve and bonds issued by EIB in 2021. This will be driven by strong demand of investors as AAA rated paper is relatively scarce in combination with a crowding-in effect by investors which will re-enter the market. On top of this, we expect the Eurosystem to buy half of the EU supply which is coming to the market and liquidity to improve quickly. (Floortje Merten & Jolien van den Ende)
