DAX outlook: mood barometer cloudy outlook

Frankfurt In the past weeks there have been repeated attempts to recover the course, on some days one could believe that the corona pandemic has already been overcome. But on Friday, disillusionment returned – the collapsed ifo business climate index made the whole dilemma clear.

The course of the mood barometer looks like a “Highway to Hell”, was the analysis of the VP Bank. The index is now significantly below the values ​​of the crisis year 2009. The simple message for the future was: “Massive income losses are imminent. We will all get poorer. This applies not only to Germany, but to all economies. ”Sometimes it is better to hear the unvarnished truth.

Other analysts and experts are also skeptical about the weekly outlook. Cautious savings by consumers and companies create a completely different economic and inflation environment than one knows from the post-war period, the analysts at MFS Investment Management believe.

They expect the earnings recovery to be weaker than the market and point to the possible dilution of earnings through capital increases. They particularly highlight 2008 as a comparison.

“When the extreme risk of the international financial crisis subsided, companies were no longer concerned with distributions, but with recapitalization. To this end, new shares were issued – at the expense of existing shareholders, whose capital was heavily diluted, ”said the investment professionals. The new wave of recapitalization has probably just started. In the past few weeks, leisure companies and service providers in the United States and Europe have already offered new shares.

Warning to bargain hunters

The BLI – Banque de Luxembourg Investments is also cautious. “The financial markets are currently giving the impression that they are underestimating the extent of the economic damage and are counting on a rapid recovery as soon as the containment measures are reversed,” is the BLI’s assessment.

Many investors are conditioned to view any decline as an opportunity to buy. However, the analysts recall that while the fall in share prices in February / March was dramatic, the valuations were also very high. As a result, the markets today are anything but cheap, especially after the recent price recovery.

Quality companies with a very solid balance sheet, one or more sustainable competitive advantages and the ability to self-finance should be preferred. The main factor that will continue to speak for stocks remains the low interest rate level and thus the lack of alternatives. At the same time, gold will become an “indispensable part of a balanced portfolio because of the inflation risks.”

After the significant recovery since mid-March, the European stock market has recently lost some momentum, the Weberbank experts believe. In addition, the balance sheet season that is already underway shows significant impacts on corporate balance sheets due to the global “lockdowns”.

Correspondingly, the analysts have also significantly lowered their profit expectations for industrial companies, but also for the banking and energy sectors. Due to the economic slump, banks faced increased write-downs on their credit books and the massive drop in yields clouded interest income. Most recently, they also negatively impacted the rating agency Standard & Poor’s (S&P).

The Deutsche Bank and the Commerzbank were therefore particularly under pressure on Friday “We continue to distance ourselves from these sectors and prefer creditworthy pharmaceuticals or companies from the non-cyclical consumption. In addition, titles from the technology sector are promising in our eyes, ”said the Weberbank experts.

Central banks meet worldwide

If the economic situation continues to be poor, the states and central banks will have to take further support measures. Robert Greil, chief strategist at Merck Finck Privatbankiers, sees an opportunity for this next week because the European Central Bank, the US Federal Reserve and the Bank of Japan are meeting.

“As a result of the unprecedented economic downturn caused by the Covid 19 consequences, all central banks will reaffirm their willingness to support,” says Greil. The economic downturn left neither governments nor central banks a choice but to take further measures to support and recover the economy.

The gross domestic product for the first quarter of 2020 will be published in the euro area on Thursday, and new growth figures will come in the US on Wednesday. Further important economic data in Germany are the preliminary inflation figures and the labor market report for April.

According to DZ Bank, the next quarter should bring an improvement in the economy, but there does not have to be a “V” or “I” recovery. This is not ignored on the stock market, many stocks are up to 80 percent down.

A large number of “mega-caps” hold up against this, mainly in the USA. Amazon, Google, Microsoft, Netflix and Facebook, but also Adobe or Comcast, be stable on the way. Things are also going well for the great values ​​of the “old economy”, including Pepsico, Johnson & Johnson, Procter & Gamble, Home depot and Pfizer. The German Leading index Dax the strategists from DZ Bank see 11,200 points by the end of the year, and the S & P-500 for US equities at 2,800. This would at least stabilize in the medium term.

More: Yield in Corona times: With which investments you can still make money


The central banks are doomed to rescue in an emergency

Swedish Reichsbank

The world’s oldest central bank was founded because of a crisis.

(Photo: Sveriges Riksbank)

Walter Bagehot’s 1873 Lombard Street, an analysis of the British money market, is a kind of unofficial Bible for central bankers. Bagehot describes that in the event of a “panic” the central bank, in this case the Bank of England (BoE), should make money available as freely as possible. “Such loans should be made in a way that is most likely to cure panic,” he wrote. And added on the topic of “security”: “Everything that should be considered good bank security in normal times should serve this purpose.”

This is exactly what the European Central Bank (ECB) has now decided: Securities that are considered safe in good times are also valued during the crisis. For this reason, they will be accepted as security until September 2021, even if by then they should have received a weaker rating than “scrap paper” due to the corona crisis. The open question is whether and when the ECB will actively buy these papers.

Central banks were created to prevent crises. The Swedish Reichsbank was founded in 1656 to create order after a financial crisis. The Bank of England, when it was created in 1694, had the task of rebuilding the declining financial system and, moreover, of financing the bankrupt government. The history of the Fed, founded in 1913 in the United States, included the collapse of Wall Street in 1907, which could only be slowed down by the intervention of banker John Pierpont Morgan.

And that is exactly what central banks still do today: intervene in crises, lend money and, if necessary, finance governments. Ultimately, history defines their mandate more authentically than the legal framework to which they are subject.

The danger is that the role of saving angel will be expanded in every crisis. Partly because the financial system has become so complicated that no one else can stabilize it. But partly also because the central banks step in where politics fail. In Europe, this is clearly evident again in the dispute over construction aid in the corona crisis.

More: The ECB is now also accepting scrap paper


Bank of England now has to finance British government debt

Bank of England

The British central bank goes into direct public finance in the corona crisis.

(Photo: REUTERS)

London The Bank of England goes into direct funding for the UK state budget. The Treasury announced on Thursday that it would increase the overdraft facility at the central bank. So far it stands at £ 400m. Now it should be expanded as needed. An upper limit was not mentioned.

The move shows how large the government’s financial needs in the corona crisis are now. Finance minister Rishi Sunak has pledged hundreds of billions of loans and emergency aid. It supports companies, freelancers, the unemployed, non-profit organizations and the NHS.

The Bank of England is already pumping billions into the UK economy by providing banks with money on favorable terms. Now she is also helping the state directly.

“This temporary measure will give the government an additional short-term source of liquidity to support smooth cash flow and orderly market functioning,” the ministry said.

On March 18, central bank governor Andrew Bailey said that direct government funding was not necessary because the government could continue to get its money on the bond market.

Handelsblatt Morning Briefing - Corona Spezial

Now the government seems to need the additional buffer. In the 2008 financial crisis, it had expanded its overdraft facility to £ 19.9 billion. How high the overdraft facility will be this time is unclear.

The primary source of finance remains the bond market, the Ministry of Finance assured. The Corona programs would be funded entirely through normal new borrowing. Any use of the MRP will be offset by the end of the year.

But apparently the bond market should not be flooded with new government bonds. The overdraft facility allows the issue to be extended over a longer period of time.

More: Rishi Sunak – the true UK crisis manager.


How the exit can succeed without falling into the debt trap

Frankfurt The world is experiencing the biggest monetary policy experiment since World War II. The central banks are producing billions of dollars in new money to support the global economy and governments in the corona crisis.

All taboos have fallen because the pandemic has no regard for fundamental concerns. At the moment, the concern about health outweighs the fear of the immediate effects of the economic standstill, but investors are already wondering: can this work?

With the help of central banks, already heavily indebted countries are accumulating ever higher debts. Chris-Oliver Schickentanz, investment strategist at Commerzbanktherefore fears a “political test” in the euro zone.

His colleague Ulrich Stephan von der German bank is already calling for structural reforms after the crisis so that monetary policy can normalize again.

Italy is particularly worried: the country is already in debt with 130 percent of its annual economic output, is very badly affected by Corona, and politicians in the euro area cannot agree on the aid instruments.

It will be difficult to get out of crisis mode. The decisive questions for the period after the acute crisis has subsided are: Which conditions must be observed so that a way out is possible at all? What are the risks? And: Who pays the bill in the end?

Exit can succeed

There is good news and bad news for the world. The bad news is that the route is likely to be long and difficult, and there are a lot of dangers lurking on the route. The good news is: the exit can still succeed.

For decades it had been agreed that monetary policy had to hold back in order not to upset the financial world. But there is hardly anything left of moderation at the moment.

The US Federal Reserve (Fed) has inflated its total assets to more than five trillion dollars. Commerzbank analysts fear that the value could double again – it would then correspond to approximately half of the United States’ gross domestic product (GDP). The Fed is now also a state financier, major investor in almost all areas of interest rate markets and America’s largest commercial bank.

The European Central Bank (ECB) had already increased its balance sheet to around 40 percent of the gross domestic product (GDP) of the monetary union through the purchase of interest-bearing paper, mostly government paper, before the corona crisis. The current value is just under five trillion euros. And things continue to go up: the latest purchase program alone has a volume of at least 750 billion euros.


At the same time, government debt will rise rapidly: tax revenue will drop and new expenditure will be incurred to save households and businesses. Germany has announced measures to protect the private economy of around one trillion euros after calculating the alliance.

That is 30 percent of GDP. Germany is still in a relatively good position due to its low public debt. Other countries, such as Spain, have been hit harder by the disease and have also announced large spending programs starting from a weaker position.

Newly produced money

In all likelihood, the high debts can only be financed by the central banks buying up a large part of them. Monetary policy measures and rising government debt are therefore two sides of the same coin.

The regulatory “monetary state financing”, ie fiscal policy with the help of newly produced central bank money, is frowned upon in terms of regulatory policy and is forbidden in Europe in a direct form. To a certain extent, it has actually been a reality since the central banks began buying government bonds after the financial crisis and the euro crisis. And for the time of the crisis it becomes normal.

Katharina Utermöhl, the European economist at Allianz, puts it a little more cautiously: “In this context, a close interplay between fiscal and monetary policy has clearly gained in importance.”

The central banks would have to “ensure that the refinancing conditions of the government remain at a tolerable level”. But this raised the question of how central banks can get out of this mechanism.

“The national debt will go through the roof”

First of all, many economists emphasize that there is hardly a viable alternative to current politics. Utermöhl, for example, says: “In order to slow the spread of the virus, the European economy has to take a necessary respite.”

Jörg Krämer, chief economist at Commerzbank, argues in a similar way: “The first step is to fight the virus yourself.” And as long as the economic crisis persists, the finance ministers would need the central bank as a “stable anchor investor”.

Peter Hooper, who heads Deutsche Bank’s global economic research from New York, is also convinced: “Decision-makers must do everything necessary to ensure the liquidity and stability of the markets in the crisis.”

So waiting and watching are not a solution – neither in the fight against viruses nor in containing the economic consequences. The sometimes cherished fantasy that the pandemic could simply be sat out has evaporated everywhere with the increasing overcrowding of the hospitals.

At the same time, the lockdown in the economy has already made it clear that a recession cannot be avoided – it is happening directly by government order. But Utermöhl believes that this does not “necessarily have to lead to a financial or banking crisis”.

Basically, there are several ways to return to normal after the crisis.

Possibility 1: The haircut

Theoretically, there could be a haircut. But the breadth is hardly conceivable. Should the debt become unsustainable for the capital market, it can at least be taken over by large central banks. The situation is different in emerging countries – especially if they borrow in foreign currency: the central bank may be powerless.

Possibility 2: inflation

The central bank could put so much money into circulation by buying the government debt that it triggers inflation. During the acute crisis, stronger inflation is hardly imaginable – because the demand, for example for oil, is falling massively, prices are even falling in many areas. But after that a higher price increase would be conceivable.

In the worst case, this can be hyperinflation – the fear of it is still deep in Germany due to the experience after the world wars. But it doesn’t have to be this way: if the economy grows again, a gentle price increase over a longer period of time is enough to bring debt and gross domestic product (GDP) back into a reasonable relationship.

Stefan Bielmeier, chief economist at DZ-Bank, shows a scenario of how an exit from this situation can be achieved: through “high nominal growth” so that economic development becomes “self-sustaining”.

An important ingredient in this is inflation “somewhat above trend”. So growth doesn’t have to be real at all – after deducting inflation. The nominal value is enough: this results in higher government revenues, so that the debt can be reduced slowly.

In real terms, debt levels and central bank balance sheets shrink over time, along with a somewhat higher devaluation of money. Bielmeier is an optimist: This path, also known as “financial repression”, is probably the most harmless.

He manages without hard cuts and without excessive currency devaluation. Instead, it spreads the negative effects over a longer period of time. Great Britain has mastered its wars and crises – the country was never broke and never had hyperinflation.

Like Bielmeier, Peter Hooper believes that at least for the euro area, a little more inflation would even be helpful to keep the economy going: it also eases the burden on private debtors and makes it easier to adjust real wages, because after inflation has been deducted hidden wage cuts are possible. Harvard economist Jason Furman fears as he says on Twitterthat inflation remains too low in the US to help alleviate the problems.

Option 3: Central bank shrinks its balance sheet

A third possibility would be for the central bank to sell its interest-bearing paper to private investors, thereby shrinking its balance sheet again. Kramer has this path in mind. However, this would tend to lead to rising interest rates for governments and would not help to reduce debt.

Kramer therefore emphasizes: “The economy has to run again.” He can imagine a period of five to six years for such a shrinking of the ECB’s balance sheet. In his view, it is important that the central bank announces this beforehand in a credible manner so that the states can adapt to it through a disciplined spending policy.

Option 4: Everything stays the same

A fourth option would be quite simple: the central bank keeps its large balance sheet and the governments keep their high debts. If a large part of these debts are with the central bank, they do not burden the capital markets and the interest payments flow back to the governments.

In other words, economically speaking, the central banks belong to the states. So you are in debt to yourself. Therefore, the debt stashed there is in principle of no importance.

In addition, Olivier Blanchard, former chief economist of the International Monetary Fund, has repeatedly pointed out that interest rates are low worldwide anyway and therefore have little impact on government budgets.

The example of Japan shows that something like this can work: there the national debt is 250 percent and the central bank’s balance sheet is over 100 percent of GDP. Even so, prices are not coming up and the yen is relatively highly valued.

There are deep reasons for this, for example in the age structure of society and a high savings surplus; most of the debt is domestic. Nevertheless, the example shows that the fourth option is not a pure fantasy.

Hiroshi Ugai from JP Morgan explicitly refers to Japan in a study to prove that high levels of debt are also possible without sharply rising yields or “sustainability risks”.

But Krämer warns: “A large central bank balance sheet is not without problems.” Because it would be associated with the fact that the banks “float in the money and no longer operate in a disciplined manner,” he fears. This could keep zombie companies alive that should better exit the business world.

In order for monetary government financing to be recaptured, conditions must be met. Utermöhl mentions the most important point: “The rescue measures should be proportional to the further course of the crisis: comprehensive and broad, but also temporary.” The new ECB program for the purchase of bonds with a volume of 750 billion euros considers them “a good one.” Example”.

Ugai also points out that the “coordination” of monetary and fiscal policy should be limited to exceptional situations. He also demands: “The exit scenario must be decided in advance.”

Households pay the bill

None of these ways is without risk. Utermöhl warns that the close coordination of monetary and financial policy should not become a “permanent condition”. Otherwise the independence of the central banks and thus also the price stability would be called into question. She adds: “We should not have any illusions: the exit should prove to be lengthy and tough.”

Bielmeier sees a risk that the government’s fiscal programs could only ignite a “flash in the pan” instead of really helping the economy get back on its feet. Hooper, in turn, sees risks particularly in the euro zone.

He does not address the current dispute as to whether there are so-called corona bonds or whether the rescue package (ESM) should be activated. He fears that “unprecedented differences in economic development, growth and unemployment” will open up to the end of 2021, thus deepening the North-South conflict in the euro zone. He sees the problem that Italy of all things has to go into debt to survive the consequences of the disease.

Another important question is who ultimately pays the bill. The households and businesses, says Hooper. Utermöhl believes that ultimately “higher inflation will be accepted, which is justified with lower unemployment and higher growth”. This would particularly burden low-wage earners because their purchasing power is falling and could lead to calls for more redistribution.

In addition, Utermöhl’s opinion will be “the temptation to ask the rescued private sector to pay for the relief operation, for example in the form of higher taxes”. It is also clear that real interest rates, which may have been low for a long time – i.e. nominal interest rates minus inflation – continue to burden savers. This is not surprising: only those who have something can pay.

Conclusion: There are ways to absorb the economic burden of the crisis and spread it over a longer period so that there is no catastrophe. But it is not easy, and there is no way to just make the costs go away.

More: How the pandemic exacerbates the problems we already have.


Interview: Economist Obstfeld: “We have to avert a social breakdown”

The former IMF chief economist warns of a severe economic downturn due to the spread of the corona virus. He accuses the US government of leadership failure. .

“I have never experienced anything comparable”

Frankfurt Larry Fink began writing his letter to Blackrock shareholders in his New York office. The boss of the world’s largest asset manager ended him in his home office. Since January, the corona virus has also directed Blackrock. It represents an “unprecedented medical, economic and human challenge”, which will continue to shape the future, as Fink writes. After the crisis, the world would be different, he concludes in the eleven-page letter that is available to the Handelsblatt.

For the 67-year-old, the virus has “dramatically changed our lives and put financial security at risk”. Governments would have had to face unprecedented quarantines of the infectious disease while responding to the economic and financial failure. “In my 44 years in the financial sector, I have never experienced anything comparable,” writes Fink.

The outbreak of the disease had moved the markets at a pace and scale that was otherwise only seen in financial crises. As dramatic as it is: Fink believes that “the economy will recover, partly because some of the obstacles that characterize a typical financial crisis are missing”.

What Fink says has weight. Blackrock had $ 7.4 trillion in investment funds at the end of December, more than any other fund company. The volume is thus twice as high as Germany’s economic output. As in other regions of the world economy, Blackrock is also involved in the entire corporate elite in Germany and is often even the largest shareholder.

According to data from the financial regulator Bafin, the US fund holds 7.62 percent of the shares in the real estate group Vonovia, with the insurers alliance and Munich Re it is 6.44 and 6.68 percent. At the financial service provider Wirecard the asset manager holds 5.57 percent. The asset manager holds the largest share package at German bank with 5.15 percent and at Bayer with 7.44 percent.

Fink, an avowed supporter of the Democratic Party, was surprised by the speed with which stock indexes fell from record levels. For the first time since 1997, he writes, he took a break on trading on the New York Stock Exchange to offer brokers a break and to slow down price fluctuations. At the same time, record low liquidity in US government bonds has exacerbated the situation. These US Treasuries normally serve as the foundation for the capital market.

Long term view

Fink draws its confidence in a steady recovery of the economy from the quick reaction of the central banks to get the problems of the credit markets under control quickly. In addition, governments would “act aggressively to provide fiscal incentives”. Fink is once again campaigning for a long-term perspective. It is more important than ever. “Companies and investors with great determination and a long-term perspective have better chances of navigating through the crisis and the aftermath,” Fink hopes.

According to analysts from the Italian bank Unicredit The protective screens in industrialized countries have already triggered a bear market rally despite paralyzed economies. They refer to the $ 2 trillion rescue package in the United States and the Federal Government’s measures, which added up to more than a third of its gross domestic product.

In addition, the European Central Bank has announced a massive expansion of bond purchases through its pandemic emergency program. Defensive sectors already showed a drop in earnings estimates and price losses similar to those of the 2008/09 financial crisis. However, cyclical companies’ earnings estimates may still have a long way to go before they bottom out.

According to Esty Dwek, Head of Global Market Strategy at Natixis Investment managers, the stock markets have already largely priced in the damage from the corona pandemic. Nevertheless, the re-entry into the stock market seems premature at the current time. As long as the number of infections around the world continued to rise and the peak had not yet been reached, prices could continue to decline across the board.

According to the motto “First in – first out”, the courses in Asia are likely to recover most easily. America, on the other hand, could have been dealing with the consequences of the virus longest. At the moment there is hope that the restrictions imposed on society and the economy in most industrialized countries could be relaxed significantly by the end of June.

While the real economy will take longer to process the corona shock, the recovery in the financial and capital markets should start earlier.

Despite all the measures, Fink warns against too much optimism. The world is no longer without risks, and there is no clarity as to whether the ground has already been reached for the markets. “Knowing that is impossible,” says the financier. The world is facing major challenges in the face of heavily indebted companies and governments who have not carefully planned their aid programs.

The “economic pain of the outbreak will be disproportionately heavy”, especially on the shoulders of the economically most vulnerable.

More: Life insurance policies remain safe


Heavy burdens on the job market and the economy

Robert Kaplan

The US central banker expects a massive economic downturn in the spring.

(Photo: Reuters)

Washington According to a leading US currency keeper, the virus crisis will cause the economy and the labor market to collapse. He expects the unemployment rate to rise to low to mid-range between 10 and 20 percent in the spring, Dallas Fed chief Robert Kaplan said on Friday Bloomberg TV.

By the end of the year, it should then level off at seven to eight percent. For comparison: in the end it was 3.5 percent, which practically means full employment.

However, data presented on Thursday, unemployment claims now rose to a record high, indicating a wave of layoffs as a result of the corona crisis.

The head of the St. Louis Fed District, James Bullard, recently put the number of high-risk jobs at 46 million. These are above all jobs with public traffic, i.e. jobs that come into contact with the public.

Kaplan also anticipates a massive economic downturn in the spring. The gross domestic product is expected to shrink in the 20% range over the course of this period, according to his bleak forecast.

Fed chief Jerome Powell expects the economy to pick up again in the second half of the year. In view of the impending economic downturn, the Fed recently decided on a broad-based program to secure, among other things, the credit flow to households and companies.

Kaplan said the Fed is working “wildly” to implement the program. His colleague Raphael Bostic, who heads the Fed branch in Atlanta, told the same broadcaster that he hoped that the Fed’s current measures would boost public confidence.

More: 3.3 million new unemployed: The historic US aid package could be too late. Read more here.


British central bank leaves key interest rate close to zero

Bank of England

The British central bank leaves its key interest rate close to zero.

(Photo: Bloomberg)

London In the virus crisis, the Bank of England leaves the key interest rate close to zero and at the same time leaves the door open for further emergency measures. Custodians around central bank chief Andrew Bailey did not touch the key monetary policy rate of 0.1 percent on Thursday, which they recently lowered out of line as part of a crisis package to this record low.

They now signaled that they could expand their securities purchases to support the economy if necessary. As part of the crisis package, bond purchases have already been increased by £ 200 billion to £ 645 billion.

In the meantime, the virus crisis has brought the British economy to a standstill in many areas. The Bank of England (BoE) therefore believes that an economic downturn is likely.

The consequences of the virus crisis, according to the monetary authorities, pose the risk that the economy could suffer long-term damage. It also fits that the industry on the island is more pessimistic about the economy than it has been since the financial crisis over a decade ago.

The BoE also assumes that the inflation rate will drop below the 1.0 percent mark in the wake of the corona crisis and against the backdrop of the recent fall in oil prices in the spring. It was recently 1.7 percent and thus already well below the BoE target, which is aiming for a value of 2.0 percent as ideal for the economy.

More: Will inflation come with the giant bailout packages?


The central bank wants Europe’s countries to share risks

Madrid The Spanish central bank chief Pablo Hernández de Cos calls for extensive support measures by the European partners in the corona crisis, which he describes as “unprecedented in modern history”. “That is why an ambitious and coordinated response at European level is needed. Issuing Eurobonds is one way of giving this European answer. If not now, when? ”He told the Handelsblatt.

“For both solidarity and efficiency reasons, I think it is imperative that we share the budgetary risks of the Member States arising from the corona crisis among European partners,” said Hernández de Cos.

Spain’s central bank boss is also open to the fact that the ECB is raising the self-imposed limits for bond purchases. So far, it has been unable to buy more than a third of a country’s outstanding bonds. “The monetary authority has imposed these limits on itself and should be reviewed if they make it difficult for the ECB to fulfill its mandate,” he said.

He also does not rule out a rate cut by the European Central Bank. So far, the ECB has refrained from doing so. “Our decisions are based on forecasts that are subject to a high degree of uncertainty in this crisis. The consequences of the crisis are temporary, ”said Hernández de Cos. “Against this background, the measures we have now taken appear to be the most effective. Nevertheless, we in the Governing Council keep the option open to cut interest rates should it be necessary. “

Read the full interview here:

Mr. Hernández de Cos, many economists expect economic output to plummet by more than six percent in 2020 due to the corona crisis, and some even speak of up to 20 percent. Do you think the crisis is more dangerous than the financial crisis?
The effects of this crisis will indeed be serious in the short term. Although, in my opinion, it is still too early to assess the exact extent of the effects on gross domestic product. Of course, there is a real danger that the entire euro area will slip temporarily into a recession – quite comparable to the downturn in 2009. But there is still hope that the crisis will not last as long as it did then. That is precisely why we now urgently need strong and coordinated economic policy measures.

With its high level of public debt and unemployment, Spain is one of the most vulnerable countries alongside Italy. How bad will 2020 be?
The private sector debt in Spain is no longer particularly high; it is around the average of the euro zone. It is true that Spain has not used the recent good years to reduce public debt. The main thing now is to ensure that all public and private actors find comfortable financing conditions – not only in Spain, but throughout the euro area. When this crisis is over, we should return to the path of fiscal consolidation.

Vita Pablo Hernández de Cos

Spain has put together a huge aid program worth over 200 billion euros, which corresponds to 20 percent of its economic output. The majority of these are loan guarantees. Will the country face bankruptcy if it is actually used?
As I said before, we now need a quick, vigorous and coordinated approach by the various economic policy makers to overcome the crisis. The financial crisis has taught us one thing that can be of great value even in this crisis: if we make financing more difficult for the private sector, we will exacerbate the crisis and end up with even greater public debt.

What do you mean specifically? Do you see the time for euro bonds, that is, a common debt raising, to come?
This crisis affects all countries in the euro zone. It is time for solidarity and efficiency in the use of EU resources, many of which are there, and therefore an ambitious and coordinated response at European level is needed. Issuing euro bonds is one way of giving this European answer. If not now then when?

The ECB has adopted new, extensive measures this week. Isn’t that enough to calm the markets and improve the refinancing conditions for the southern countries?
The response from the markets following the announcement of the new purchase program was positive, and in the days following the announcement there could be a significant impact on the financing conditions of the euro economies, which have been more severely affected by the virus. However, we are ready to increase the volume or duration of our purchases from the ECB and to adjust their composition if necessary.


There are concerns in the federal government that an application for help from the ESM could panic the markets. Do you share this opinion?
What could trigger even more panic would be the inaction of the European institutions. The fact is that the ESM has a wide range of instruments. Some are meant to be used in the event that member countries threaten to lose market access. The European Union also has complementary tools, such as the European Investment Bank, which provides guarantees and sureties for credit programs.

There is still hope that the crisis curve will run like a V, so that a rapid recovery follows the slump. Do you believe in it?
The prerequisite is that economic policy plays a crucial role. It must prevent this short-term shock from destroying companies and jobs. The current situation is unprecedented in modern history. Monetary policy has already responded and we also welcome the national stimulus packages. These measures must also be accompanied by determined measures at European level. For reasons of solidarity and efficiency, I think it is imperative that we share the budgetary risks of the Member States arising from the corona crisis among our European partners.

With the OMT (Outright Monetary Transaction) program, the ECB can selectively buy bonds from individual euro countries. Wouldn’t this program be the cleanest way to help individual countries face problems in the bond market?
The coronavirus crisis is not a local shock in two or three countries in the region, nor has it originated in previous macroeconomic imbalances. It is a global health shock that, in the case of the euro zone, requires action in all areas of economic policy, including the ECB’s monetary policy. The OMT program was created for individual countries that have no market access due to their macroeconomic imbalances. This situation is completely different. In any case, the OMT program remains an essential element of our possible instruments.


In its recent decisions, the ECB has also signaled flexibility with regard to its own limits for bond purchases. In fact, it is not allowed to buy more than a third of a country’s outstanding bonds. These limits have almost been reached for some countries. Should they be raised?
The monetary authority has imposed these limits on itself and should be reviewed if they make it difficult for the ECB to fulfill its mandate.

While other central banks cut interest rates massively in the corona crisis, the ECB refrained from taking this step. Some economists say that a further cut in interest rates in the euro zone would do more harm than good. Do you share this view?
Our decisions are based on forecasts that are subject to a high degree of uncertainty in this crisis. The consequences of the crisis are temporary. Against this background, the measures we have now taken appear to be the most effective. Nevertheless, we in the Governing Council keep the option open to cut interest rates should it be necessary.

How do you rate the stability of the banking system? Do you expect problems here?
Certainly, some of the banks’ customers will find it difficult to service their loans in this crisis. But overall, Europe’s banks have capital buffers and are able to refinance these loans. The national aid packages with government guarantees and sureties and the new supervisory reforms of the ECB have also had a stabilizing effect in recent weeks.


Do you think this crisis could change the relationship between the state and the central banks?
I think it is too early to take stock and learn the right lessons from this crisis. We’re still too busy coping with the shock instead of focusing on the long-term perspective. But this experience should lead us to think carefully about the role our institutions – and of course the central banks – should play in order to best serve our citizens. It is clear that we have to strengthen our common European institutions. And we also need more coordination and cooperation on a global level.

Does the shock of the corona virus mean that the global economy is at a turning point? Is there such a thing as a new fragility?
The corona virus knows no borders and is a problem for everyone, not just for southern Europeans. We can only get out of this situation if we act together. This applies not only to monetary and fiscal policy, but also to other areas such as health care.
Mr. Hernández de Cos, thank you very much for the interview.

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ECB & Co simplify access to the world’s leading currency, the dollar


The European Central Bank announces, together with the world’s largest central banks, the coordinated provision of dollar liquidity.

(Photo: Bloomberg)

Frankfurt The European Central Bank (ECB) and other large central banks want to secure the supply of money houses with cheap dollar loans in the virus crisis through a new coordinated action.

The ECB, the US Federal Reserve, the Canadian Central Bank, the Bank of England, Japan’s central bank, and the Swiss National Bank have now agreed to offer the world’s leading currency with a seven-day term instead of just weekly. This applies from Monday and should be the case by at least the end of April, the ECB announced on Friday. The already agreed weekly transactions with a term of 84 days are also to be continued.

With this step, the central banks want to ensure that banks and companies can access the US currency at favorable conditions. In doing so, they want to help alleviate tensions on the global financing markets. Negative consequences for the credit supply of companies and households are to be cushioned. The dollar had recently risen significantly in the wake of the increasingly severe effects of the virus crisis.

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