Transcript of April 2020 European Department Press Briefing
IMF News, April 15, 2020
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- Published: April 15, 2020
Economic impact and IMF projections
- Nonessential sectors subject to lockdowns account for about one-third of the average European economy.
- One months of closure will lead to a reduction in annual GDP in Europe by about 3 percent.
- Assumption: outbreak will be contained and significant parts of economies can reopen around mid-year.
- Under that assumption, projected outcomes for 2020:
- European GDP will contract by 6.5 percent in 2020.
- Advanced Europe: GDP growth will be minus 7 percent (previous forecast last autumn for 2020 was plus 1.5 percent).
- Emerging Europe: GDP growth will be minus 5 percent (previous forecast for 2020 was plus 2.5 percent).
- These projections rest on the assumption of a gradual normalization starting mid-year; forecast is subject to downside risks (e.g., a second wave necessitating renewed shutdowns) and upside risks (faster-than-expected reopening), with a greater concern for downside.
Key risks and transmission channels
- Main near-term risk: negative spillovers from the real-economy shock to financial sectors.
- Historical lesson: when balance sheets are materially affected and contagion hits the financial sector, post-crisis recoveries are slower and protracted.
- As of the briefing: no widespread financial-sector contagion observed, but it is monitored closely.
- Uncertainty about duration until treatment or vaccine affects medium-term outlook and public indebtedness trajectory.
- Specific sectoral vulnerabilities highlighted:
- Tourism-dependent economies (e.g., Italy, Spain, Greece, Portugal) face larger impacts.
- Large shares of small and medium-sized enterprises with limited buffers increase vulnerability.
- Banking-sector weaknesses (e.g., non-performing loans in Greece) limit policy space to support recovery.
Policy response — fiscal, monetary, regulatory
- Fiscal policy:
- Countries have ramped up health spending and provided large-scale targeted support to households and businesses.
- Bulk of business support has taken the form of loan guarantees; household support via strengthened unemployment insurance and direct income support.
- Fiscal deficits in Europe are set to increase by about 6 percent of GDP in 2020.
- IMF view: large fiscal response is appropriate, should be well targeted, temporary, and avoid socializing pre-existing losses.
- Monetary policy:
- Central banks have reduced policy rates and announced further large asset purchase programs, including asset classes previously excluded.
- These measures have helped counter sharp tightening in financial conditions.
- Concerns about monetary policy ineffectiveness due to low pre-crisis rates were proven unfounded.
- Specific support: strong endorsement of ECB's large asset purchase program and readiness to provide targeted support by temporarily deviating from its capital key when making purchases.
- Financial regulation:
- Financial regulators have lowered capital requirements by releasing cyclical buffers and, in some cases, temporarily eased other regulatory norms.
- IMF operational support:
- IMF has received requests under its Rapid Financing Instrument from six smaller, emerging economies outside the EU; three of these requests have already been approved last week.
Euro area coordination, instruments, and fiscal capacity
- European-level support:
- The Eurogroup package approved last week totals 500 billion euros.
- IMF view: the 500-billion-euro package is a "very strong support."
- Leaders have signaled readiness to do more if the situation proves more difficult than expected.
- Corona bonds:
- IMF has not taken a position on Corona bonds specifically.
- IMF emphasizes importance of ensuring countries, including those with relatively high debt, can take necessary action without unsettling markets or increasing spreads.
- Medium-term discussions on common fiscal solutions are premature given current uncertainty about the pandemic’s duration and ultimate increase in public debt.
- Policy space:
- Advanced Europe generally has more policy space due to deeper and more liquid financial markets and stronger policymaking frameworks.
- Emerging Europe inside the EU has generally reduced vulnerabilities since the global financial crisis (smaller external current account deficits, reduced banking reliance on foreign funding).
- Least policy space seen in smaller emerging economies outside the EU; IMF is rapidly deploying assistance.
Country-specific assessments and questions raised
- Italy:
- Among the hardest hit; negative impact on GDP expected to be somewhat higher than similarly large northern countries, in part due to dependence on tourism.
- Fiscal response is strong and appropriate; decision to use the ESM is up to Italian policymakers.
- Spain:
- Expected to suffer a strong recession; vulnerabilities include dependency on tourism and large numbers of small and medium-sized enterprises.
- IMF forecast referenced an unemployment rate of about 20 percent in Spain this year, an increase of 7 percentage points from October.
- Portugal:
- Similar vulnerabilities to Spain: reliance on tourism, services, and many small and medium-size enterprises; possible labor market inflexibilities.
- Greece:
- Will be particularly hard hit due to dependence on tourism, shipping and transportation, prevalence of small family-owned enterprises, and remaining banking-sector weaknesses (high non-performing loans).
- Greece had been building growth momentum pre-crisis; medium-term debt and sustainability implications are too uncertain to assess until pandemic trajectory is clearer.
- Ukraine:
- Severely affected by the pandemic; government measures will result in a very significant increase in the fiscal deficit and IMF support is fully endorsed.
- Progress under prior IMF-supported program has improved macroeconomic stability: banking stability improved, inflation down, external and fiscal deficits down, public debt down, and foreign reserves "well over 20 billion."
- Discussions on a new IMF program are well advanced with a few issues outstanding; IMF is confident recommendations to its Board can follow soon.
Financial sector structure and consolidation questions
- European banking system challenges pre-date the pandemic:
- Low profitability and indications that Europe may be "overbanked" (excess branches).
- Need for rationalization and potential consolidation — national and/or cross-border — remains an open question.
- Pace and nature of consolidation will depend on broader policy architecture progress (capital markets union, banking union).
IMF priorities and timing
- Immediate priority: ensure countries have the policy space needed to maintain forceful responses until the medical emergency is under control.
- Emphasis on saving lives and mitigating social hardship in the near term; medium-term issues (debt trajectories, structural fiscal arrangements) are deferable until uncertainty about pandemic duration dissipates.
Transcript of April 2020 European Department Press Briefing, April 15, 2020 — IMF Communications Department; Poul Thomsen, Director, European Department