W/C Monday, 27 April – European Commission to work on recovery fund after receiving mandate from EU leaders but ECB likely to remain the only show in town
As noted in previous reports, the ECB’s pandemic emergency purchase programme (PEPP) has enabled EU leaders to avoid making difficult decisions around significantly increased EU budget contributions or mutualised debt issuance. This was further demonstrated last Thursday when EU leaders agreed only “to work towards establishing a recovery fund”. The European Commission has been tasked with analysing what is required and work will begin on this in earnest this week with a view to presenting a proposal by 6 May.
We remain highly sceptical that EU leaders will agree much that will ease the ECB’s burden. Initial reports from the European Commission suggest it will propose a €323 billion recovery fund consisting of a mixture of loans and grants. The idea that this will trigger over €1 trillion in investments seems unlikely, particularly in the midst of a global recession where private sector demands for lending are likely to be low.
As ever, therefore, it will be up to the ECB to save the day. Its measures thus far have bought some time but we would anticipate that it will have to expand the terms of its PEPP – not this week but possibly as soon as the 4 June Governing Council meeting.
W/C Monday, 27 April - Work on restarting the Italian economy to speed up
PM Giuseppe Conte and his government will focus this week on two crucial challenges, namely the implementation of a re-opening strategy - announced on Sunday - and the approval of a new economic decree. Needing something to present to an increasingly Eurosceptic Italian public, Conte has portrayed the description of the recovery fund as “needed and urgent” in Council President Charles Michel’s statement as a victory but it remains to be seen whether this will help ease tensions within government.
While the work of the ad hoc taskforce chaired by former Vodafone CEO Vittorio Colao has not been considered satisfactory, the intention of the government is to gradually restart work in factories, offices and shops. A gradual re-opening of the economy will occur, with factories opening from today, building sites from 4 May, retail stores from 11 May, and bars and restaurants from 18 May.
This week will also be crucial for the preparation of what has been labelled the “April decree”, which may by necessity be renamed the “May decree”, as the need to wait for a decision at European level and the never-ending mediation between coalition partners have delayed the process.
Thursday, 30 April - Further data releases to underline economic impact of Covid-19
Flash estimates for Eurozone GDP in Q1 2020 are to be released on Thursday. The results will confirm the damage to the European economy in the year to end March, capturing the initial effect of mitigation measures in the early stages of the health crisis. A more complete picture of the effects of the crisis on GDP will become clear on the release of the data for Q2 later in the year. Analysts have posited drops of 3.2% on the quarter or 2.7% on the year.
EU unemployment statistics will also be released on Thursday. While some countries are taking measures to reopen parts of their economies this week, the results will show the devastation wrought by efforts to contain the virus on the labour market, which has seen millions of people across Europe in reduced employment.
Thursday, 30 April - ECB governing council to hold next monetary policy meeting
The governing council of the European Central Bank will hold its next monetary policy meeting on Thursday. The meeting comes after the governing council announced last Wednesday that it would temporarily accept junk bonds as collateral for its lending operations, provided the bonds had an investment grade rating on 7 April. According to the OECD, around $275bn of non-financial corporate bonds could be downgraded below investment grade within the year. Haircuts on the valuation of the collateral have also been reduced which should further ease pressure on banks looking to tap ECB lending operations.
Contrary to some media speculation, there is no suggestion from the ECB that this means they will buy sovereign junk bonds as part of its QE programme. Should Italy, for example, lose investment grade status, a waiver will be required in order for its debt to continue to be included.
A potential "bad bank" for the Eurozone might also be discussed. The development of such a body, which would help to remove toxic non-performing loans from the balance sheets of European banks, was suggested by the head of the ECB’s Single Supervisory Mechanism Andrea Enria in 2017 when he was head of the European Banking Authority. The success of such "bad banks" in reducing banking exposure to NPLs in countries badly affected by the Eurozone crisis, such as Ireland and Spain, has prompted the idea, along with a fear that the current health crisis may prompt a flood of such assets in the near future.
The Governing Council will also likely discuss the outcome of the ECB's quarterly Bank Lending Survey, providing information on lending conditions in the Eurozone, which will be released on Tuesday.