Newsletter: The real issue is whether Spain can wait until the European funds become available?

Newsletter: The real issue is whether Spain can wait until the European funds become available?

Monday, 26 October 2020

Funcas Europe

Good afternoon Future is blue readers,

This week we are analysing why Spain may not apply for an EU loan under the Next Generation EU programme. Before we get into details, let me advance that current borrowing costs are so low that incentives for extra borrowing under the new programme are missing. Other countries may face the same situation.

We’re also featuring Two crisis and a financial concern, a post written by Santiago Carbó Valverde, Full Professor of Economics at the University of Granada and Director of Financial Studies at Funcas. “As in Dickens’ Tale of Two Cities, the Great Recession and the Covid-19 are anticipating an enormous social change”, claims Carbó.

See at the end, as usual, some readings that will help you surf the week in good shape.


“The real issue is whether Spain can wait until the European funds become available”

As we’ve covered in previous newsletters, Spain is one of the main potential beneficiaries of the EUR 750 bn EU recovery programme launched in July in response to the pandemic. The funds, which could reach up to EUR 140 bn for Spain, are distributed in grants (slightly more than half) and the rest in loans. This is a huge opportunity for the country.

The economy is expected to shrink by around 13% this year and is in need of new fiscal stimulus in order to kick-start a strong recovery and tackle major economic and social imbalances.

Recent signals by the Spanish government that it will present a plan which draws solely on the grants part of the fund has provoked much commentary. However, such a move is not surprising given that the benefit of borrowing from the EU, as opposed to markets, is negligible in the present context.

Today, the Spanish Treasury can place bonds at negative interest rates for maturities of up to 5 years, and the yield of the 10-year reference bond comes close to 0 (see graph below).  This will continue to be the case as long at the ECB maintains its bond-purchase policies, i.e. at least until June 2021.

Today, the Spanish government is able to borrow at historically low interest rates

Note: the risk premium is the interest rate differential with German 10-year bonds.
Source: Eurostat

Instead, the real issue is whether the country can wait until the European funds become available – likely in the second half of next year.

The second wave of Covid-19 contagions makes it necessary for the government to consider new measures to limit the risk of enterprise insolvency and significant job losses, and to do so urgently.

The main anti-crisis programmes are expected to expire at the end of the year (public credit guarantees for ailing firms) or in January (job retention scheme). And, households are over-saving for fear of losing their job, thereby increasing the risk of a double-dip recession.

Two crises and a financial concern, Santiago Carbó Valverde

The world has crossed the red line that separates a great negative supply and demand shock and a fully-fledged economic crisis. With unpredictable consequences. As in Dickens’ Tale of Two Cities, the Great Recession and the Covid-19 are anticipating an enormous social change: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity.

Currently, any economic projection depends on a vaccine that may still take some time to arrive and to bring some more certainty to business activities. Even if the nature of the pandemic economic shock is very different from that of a decade ago, the negative impact is spreading its wings over almost every business sector. There are also some concerns that it may cause serious financial distress. Renowned voices as Carmen Reinhart - chief economist of the World Bank - suggest we are at the dawn of a new financial crisis.

Governments and the private sector in many countries have funneled resources more than ever before (the ECB included). However, we are reaching a critical point when surgery precision is needed. Extended financial resources should be only channeled to viable firms that are able to foster the recovery. Otherwise, delinquencies and non-performing loans would rapidly grow, and the recovery and exit would be substantially delayed.

Health control policies are the top priority, but financial stability should be also preserved by all means. Banks will have to be more proactive and add some disruptive and brave strategies to their prudent risk policies. Mergers can help but banks will need much more and will have to further adapt their structure and technology to the new reality.

What we are reading

High hopes, low expectations – Brussels’ perspective on the future of Europe after COVID-19 
The Konrad Adenauer Foundation and the European Policy Centre have surveyed Brussels insiders about the future of Europe after COVID-19. Worth reading.

A tale of batteries, Brexit and EU strategic autonomy
Leaked proposals suggest the EU wants to use the EU-UK trade deal to help on-shore an electric vehicle supply chain. But this heavy handed approach risks undermining its claim to be a world leader on climate change and green technologies, claims this Centre for European Reform report.

How to spend it? A digital investment plan for Europe
The EUR 750 bn stimulus package and 2021-2027 budget present a historic opportunity for a digital revolution in Europe. This report has some ideas about the kind of investments that can make a difference in the digital front.

What is the Green Deal?
Politico has done a good job putting together the key elements of the most important policy proposal that is currently on the agenda of the European Commission.

Have a nice week!

Raymond Torres
Funcas Europe Director


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