Ever since the coronavirus threat has become real, the focus has been very much on the impacts of day to day life for citizens and mostly on measures that Member States have been taking. Slowly, slowly the impact on the economy has also become a concern. Some Member States have decided to launch their own measures to support the economy in these economically and financially disrupting times. The European Union has not been standing around idle either.
Indeed over the last week, the EU started to launch different initiatives to face the risks of an economic crisis due to the Coronavirus outbreak. With a big splash the ECB launched a new temporary asset purchase programme, the Pandemic Emergency Purchase Programme (PEPP), amounting to €750 billion of private and public sector securities. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP), but purchases under the new PEPP will be conducted in a flexible manner. Policymakers in Frankfurt hope the initiative will counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area.
Another major response to the crisis came by the European Commission: its coordinated response to counter the socio-economic impact of the Coronavirus crisis provided different instruments. First and foremost, member states will be allowed to use the full flexibility in the Stability and Growth Pact to implement urgent measures to contain the outbreak. Then, the Commission advanced a proposal to provide liquidity into the economy: Executive Vice-President Valdis Dombrovskis announced €37 billion to support the health sector, SMEs and workers. The Coronavirus Response Investment Initiative will make available Cohesion funds to member states, of which €8 billion of investment liquidity will be released from unspent pre-financing in 2019 and €29 billion from structural funding across the EU for 2020. The Council approved its position on this legislative proposal, which will be now scrutinized by the European Parliament.
Moreover the Commission adopted a temporary framework for member states to help them direct state-aid to businesses. This temporary framework for State aid measures is based on the same premises as the framework issued during the financial crisis. It includes a number of safeguards and will enable four types of aid: i) direct grants and selective tax advantages, ii) State guarantees for loans taken by companies from banks, iii) subsidized public loans to companies, iv) safeguards for banks that channel support to the real economy, and v) short-term export credit insurance.
However, the ECB was the first to provide liquidity support to banks: the decision on additional long-term refinancing operations (LTROs) aimed at providing an effective backstop, if necessary, to safeguard money market conditions. The ECB also decided to modify some of the key parameters of the third series of targeted LTRO to support the continued access of firms and households to bank credit.
The ECB plays also the role of supervisor to the Union’s most significant banks. In that capacity the ECB Banking Supervision announced several measures to ensure that its directly supervised banks would be able to continue funding the real economy in the current exceptional circumstances. It authorized banks to fully use capital and liquidity buffers, including Pillar 2 guidance, and also to benefit from relief in the composition of capital for Pillar 2 requirements. Furthermore, the ECB announced its intention to consider operational flexibility in the implementation of bank-specific supervisory measures.
In the same vein, the European Supervisory Authorities did their part in mitigating the effects of the crisis. The European Banking Authority (EBA) decided to postpone the EU-wide stress test exercise to next year to allow banks to focus on and ensure the continuity of their core operations. The stress tests will be replaced by an additional EU-wide transparency exercise that would help to provide updated information on banks’ exposures and asset quality.
The EBA also encouraged competent authorities to make, where appropriate, use of the flexibility provided by the existing regulatory framework. The European Securities Markets Authority (ESMA), after having examined the market situation and contingency measures taken by its supervised entities, issued recommendations to financial market participants regarding business continuity planning, market disclosure, fund management and financial reporting. For instance, in the latter case, ESMA recommended issuers to provide transparency on the actual and potential impacts of Covid-19, based on both a qualitative and quantitative assessment on their business activities, financial situation and economic performance of their 2019 year-end financial report.
The European Investment Bank (EIB) as well played its part by proposing a plan to mobilize €40 billion, in cooperation with the Commission and its national promotional banks, in support of European companies, health expenditure, and the EU economy as a whole. The proposed financing package consists of i) dedicated guarantee schemes to banks based on existing programs for immediate deployment, ii) dedicated liquidity lines to banks to ensure additional working capital support for SMEs and mid-caps, iii) dedicated asset-backed securities (ABS) purchasing programs to allow banks to transfer risk on portfolios of SME loans. This financial help could arrive at short notice and will be backed up by guarantees from the EIB Group and the EU budget. The EIB also called for significant, scalable additional guarantee from member states to ensure access to finance for SMEs and midcaps.
The immediate impact of the above has been to calm financial markets to a certain degree. It remains to be seen what the effect will be in the weeks and months ahead whether more will be necessary in a rather unpredictable environment.
By Silvia de Iacovo