Transcript

Transcript of April 2020 European Department Press Briefing

April 15, 2020

Poul Thomsen, Director, European Department, IMF

Andreas Adriano, Senior Communications Officer, Communications Department, IMF

MR. ADRIANO: Good morning and welcome to our European Press Briefing with European Director Poul Thomsen, in our virtual 2020 Spring Meetings. As you might have seen since yesterday in this unique and extraordinary times we are living, all IMF activities during the 2020 Spring Meetings are virtual, so this press briefing has no journalists in the room and all questions are submitted either through the IMF Press Center, or if you are watching us on the IMF website or on social media you can send us questions through the email media@imf.org. That's M-E-D-I-A at I-M-F dot org. I encourage you to send your questions soon so we can have time to receive and answer them. And thank you to those journalists who have already sent us some questions. We will get to them in a minute. But before that the European Director Poul Thomsen will have some opening comments. Poul?

MR. THOMSEN: Thank you Andreas, and good morning ladies and gentlemen. I hope you are all well. Welcome to the European Department's press briefing. As Andreas said, I will first make a short introduction before taking your questions. These are truly unprecedented times. For the first time in modern memory we are taking the unprecedented step of deliberately shutting down large parts of our economies to protect lives and stop the spread of a virus. And the accompanying recession is likely to be equally without precedent in generations.

We estimate that nonessential sectors subject to lockdowns account for about one-third of the average European economy. This means that just one months of closure will lead to a reduction in annual GDP in Europe by about 3 percent. We assume that the outbreak will be contained and that significant parts of economies can reopen around mid-year. In that case, we project European GDP will contract by 6.5 percent in 2020, exceeding the impact of the global financial crisis 10 years ago -- more than 10 years ago.

The recession will be slightly more pronounced in advanced Europe. Here GDP growth will be minus 7 percent compared to a forecast last autumn for 2020 of plus 1.5 percent. For emerging Europe, we will see GDP growth of minus 5 percent compared to a previous forecast for 2020 of plus 2.5 percent. However, these projections do rest on the assumption of a gradual normalization starting mid-year. We don't know if this is realistic. We don't know how long it will take to contain the spread of the virus until we have a treatment or a vaccine.

As you know, there is a concern that a second wave of infections could necessitate renewed shutdowns later in the year, in which case the recovery would be delayed. It is, of course, also possible that the recovery could begin earlier than mid-year. But given where we are in the calendar, you will understand why I am more concerned that our forecast of a drop in European GDP of 6.5 percent is subject to downside than to upside risks.

One particular concern is the risk of negative spillovers to the financial sectors. As you know, the global financial crisis more than 10 years ago originated in the financial sector and then spread to the real economy. This time, it's the other way around as the crisis has first hit the real economy and the concern is to avoid a spread to financial sectors. We know from history that if that happens when balance sheets are affected in a material way then the post-crisis recovery tends to be much slower and protracted. We don't see that just yet, but this is something that we are following closely.

Let me turn to economic policies. The policy response to this unprecedented crisis has been equally unprecedented both in scale and swiftness. Country authorities have appropriately deployed the whole policy arsenal in the fight against the pandemic. As the fiscal policy health spending has been ramped up, and large-scale targeted support is being provided to household and business. While the bulk of the support to business takes form of loan guarantees, households are being protected by means of strengthened unemployment insurance and direct income support.

Fiscal deficits in Europe are set to increase by about 6 percent of GDP in 2020. This is large, but it's entirely appropriate in the circumstances. As for monetary policy, central banks have reduced policy rates and, more importantly, announced further large asset purchase programs involving asset classes previously excluded. This has helped counter the sharp tightening of financial conditions that has accompanied the crisis. Concerns that monetary policy would be ineffective because of the already low interest rates going into the crisis have clearly proven unfounded.

Financial regulators have lowered capital requirements by releasing cyclical buffers, and in some cases, temporarily eased other regulatory norms. We in the IMF, fully support this very strong policy response. It is of course important that it is well targeted, temporary and avoid socializing pre-existing losses. But the time is of essence, and this is, above all, about saving lives and mitigating social hardship.

In addition, the strong support of incomes and liquidity in household and enterprises is also welcome because it will help facilitate an early recovery once the medical emergency has been overcome, by reducing the aforementioned risks of balance sheet impairments. If this is not the time to use available buffers and policy space, when is it?

Looking to the next coming months, the immediate focus is ensuring that all countries have the policy space needed to maintain a forceful response until the medical emergency is under control. Generally, countries in advanced Europe with their deeper and more liquid financial markets, stronger integration into global financial and foreign exchange markets, and more established policymaking frameworks, have more policy space than countries in what we call emerging Europe.

In advanced Europe the main focus has been, as you know, on ensuring that EU countries with relatively high debt can put in place the necessary measures -- the necessary response to the medical emergency -- without unsettling markets and causing an increase in spreads. In this regard, we strongly support the ECB's forceful measures, not least its large asset purchase program and its announcement that it stands ready to provide targeted support by temporarily deviating from its capital key when making purchases. We also strongly welcomed the decision by European leaders to ensure that national fiscal efforts are strongly supported financially through measures at the European level. It is important that there is a European supplement to national efforts.

We see the least policy space at this stage in smaller, emerging economies outside the European Union. Not surprisingly, we already have requests for support under our Rapid Financing Instrument from six of these countries. Three of these requests have actually already been approved last week. We are less concerned at this time about policy space in emerging economies inside the EU. They have generally reduced their vulnerabilities since the global financial crisis, not least by significantly reducing external current account deficits and by reducing their banking systems' reliance on foreign funding.

Let me conclude by stressing that we are, of course, fully aware that this crisis has important medium-term implications, not least a significant increase in public indebtedness. At this time, the uncertainty about the medium-term outlook is just too big for us to have anything meaningful to say about it. In any case, the overarching concern at this stage must be focused on what can be done here and now to save lives and mitigate social hardship. I'll stop here and be happy to take your questions.

MR. ADRIANO: Thank you, Poul, and thank you to those journalists who have already sent some questions. Please send us your questions through the Press Center or on email. I'll start with a couple of questions from Paul Gordon with Bloomberg. Paul, nice to hear from you. Paul asks: In Europe, countries like Germany were previously called upon to use available fiscal space for investment, but they didn’t. Now that we are in a crisis, would these countries be in a better position to -- whether if they had spent, or where they wise to save for a rainy day? And an additional question from Paul: Is now the time for some countries to consider early universal basic income?

MR. THOMSEN: You will remember that during the years of strong growth one of the recurrent themes in our discussions was that it’s important to repair the roof while the sun is shining. Yes, indeed, saving for a rainy day during the good years is always important. In this regard, as I mentioned, you can look, for instance, at the Central and Eastern European countries, inside the EU.

As I mentioned, many of them took strong measures during the good years to increase their resilience, to build buffers, to build policy space, to make themselves less vulnerable to external shock, not least by dramatically reducing their external current account deficits, and by reducing their banking systems’ loan-to-deposit rations; meaning that loans were mainly funded by domestic deposits. As a result of this, they have significantly more policy space now that they had going into the global financial crisis.

And while the region was one of the most severely affected during the global financial crisis, we don’t see today that the impact on this region would stand out in any negative way. So that’s a good example of how helpful it is to build policy space and buffers during the good years.

But let me stress that all countries in the European Department membership group have the space to do what it needs to do now. And for the few that have very limited space, we are rapidly deploying assistance to help them be sure that they can react. I repeat, all countries have the space needed to react forcefully and appropriately to the pandemic.

MR. ADRIANO: A couple of questions on euro area and the fiscal response; Paul Gordon again asks: was the package agreed by the Euro group enough to tackle the economic impact of the virus. And Silvia Amaro from CNBC: does the Eurozone need more fiscal stimulus? The Euro group agreed to a package last week, but some ministers still want to discuss a recovery fund.

And Gianlucca di Donfrancesco from Il Sole 24 Ore adds: if this shock might not be symmetric, given that countries react to it in different ways, should the European Union use different tools to counter the emergency, and shouldn’t countries accept them as soon as possible?

MR. THOMSEN: Let's start with the last part of the question, on the impact, of whether the impact is different in the South of Europe and in the North of Europe. Right now, the impact on GDP is a bit stronger in countries like Italy and Spain, than in Northern countries. In part, because they have clearly been more affected, as we know, immediately, but also because of their dependence, for instance, on tourism.

But beyond the immediate impact, once we get into the recovery phase, it is difficult at this stage to say who will be most impacted. We know that some of the Northern economies are very export-dependent, and the outlook will depend very much on the trajectory for the post-recovery economy. As to your question about the adequacy of the European support, the package that was approved last week totals 500 billion euros. That’s a very strong support.

And leaders have underscored, of course, that if the situation proves more difficult than expected at this stage, if it takes longer to overcome the medical emergency, then they stand ready to do more. And as we have seen in the past, European leaders will, in the end, do what it takes.

MR. ADRIANO: Thank you, let's move to another topic of questions, which is the so-called Corona bonds, Maria Vasileiou, from TA NEA and others ask what our views on Corona bonds are. Maria asks: Corona bonds, to which Europeans would share the debt linked to the crisis, is currently a bone of contention. Would you suggest they are necessary to overcome the crisis?

MR. THOMSEN: So, on this issue of Corona bonds, first and foremost, the question is, the issue is to be sure that all countries, including countries with relatively high debt can take the necessary action without unsettling market, and without risking an increase in spread. I think from that perspective, the 500-billion package is the right answer.

There is a question of how it should be done. There are various instruments, Corona bonds is one of them. We have not taken a position on that. Our position is that it's important that there is an adequate strong response at the European level, and I think we have seen that. There is a whole set of issues here that we are not addressing at this stage. Of course, there is going to be a notable increase in indebtedness, and there are a number of medium-term issues, and we know inside the Eurozone it's a familiar issue to you. We have a common monetary policy, but we don’t have a common fiscal policy, and that raises a while heap of issues. It is too early, as I said, to get into this because we simply do not know the scale of the increase in public debt. It is very much dependent on how long it takes to get control of the pandemic.

So, at this stage, we are not -- and you heard in my opening remarks -- we are not going to get into medium-term issues. It is just too early, too much uncertainty, we don’t have the information. It's all about making sure that countries have the space here and now to forcefully react to the pandemic. Thank you.

MR. ADRIANO: Thank you, Poul, moving to country-specific questions, let's start with a few questions on Italy. Stefania Spatti from Class CNBC, she also asked about Corona bonds, and her other question is: Since the IMF believes countries should invest more in their healthcare systems, does it think that EU countries, and especially Italy, should draw from the Eurozone bailout fund, the European Stability Mechanism, even if limited to health related programs? Roberto Petrini from La Repubblica, asks about our views on Italy resorting to the ESM, and asks our views on Italy’s outlook in general.

MR. THOMSEN: So, as I said, Italy has been among the hardest hit and we do expect negative impact on GDP would be somewhat higher than in some of the similarly large countries in the North, looking beyond the immediate impact, in part because of Italy’s dependence on tourism. I think the reaction, the fiscal policy reaction to the crisis, has been strong and entirely appropriate. We support that. How to fund it, whether Italy should avail itself of the possibility of using the ESM, that is entirely up for Italy and Italian policymakers to decide.

MR. ADRIANO: Thank you, moving to Spain now, Daniel Viaña with El Mundo asks: Why do you think Spain will suffer such a strong recession, much bigger than other European economies, and when do you expect Spain will recover to last year’s unemployment rate. And Silvia Amaro with CNBC adds: the IMF is forecasting unemployment rate of about 20 percent in Spain this year, an increase of 7 percentage points from October, why is the deterioration even worse than Italy?

MR. THOMSEN: So, Spain will be hard hit for a number of reasons. I mean, they are hard hit by the pandemic, but looking beyond the immediate impact, Spain’s dependence on tourism is, again, a special vulnerability. Spain has a large number of small and medium sized enterprises, and that’s a further vulnerability because such enterprises often do not have the financial resources and the buffers to withstand significant shocks.

I would not go into a discussion of why some countries might be a bit more affected by others when you look at the aggregate numbers like GDP, because it depends so much also on the dynamics of quarter-to-quarter output changes, going into the crisis. So, it might very well be that countries that are equally affected, one would have a somewhat higher negative impact on growth because the quarter-to-quarter dynamic was a bit more negative before the crisis came.

MR. ADRIANO: Bear with me one moment. A couple more questions from Spain, from Jesus Aguado with Reuters. He asks, is this crisis going to finally spur cross-border consolidation among banks in the Eurozone, as a defensive strategy? Or are we still going to see national consolidation?

MR. THOMSEN: In the banking system?

MR. ADRIANO: In the banking system in Spain and in the Euro area.

MR. THOMSEN: Well, that's frankly a difficult question to answer. It's -- the issues are very much -- were, very much, you know, with us, as you rightly point out, going into the crisis. In Europe as a whole, the banking system is suffering from relatively low profitability. You could say that Europe is overbanked too -- banks with too many branches and that there is a need for rationalization, including true consolidation.

And I don't think these issues have changed. The shock here could obviously increase the momentum behind -- you know, momentum for consolidation that would possibly happen, but I cannot speculate on to what extent it would be more optimistic or also involve more cross-border consolidation. This would also depend very much on other issues that were very much with us going into the crisis relating to capital markets union and banking union in Europe. Both issues where Europe still needs to improve its architecture. And what happens in this regard will affect very much the extent of how consolidation takes place.

MR. ADRIANO: Thank you. Moving to Portugal, Jorge Eusebio, with the Lusa News Agency, first asks about our general views on Portugal's outlook and whether some of the comments you made about Spain, on the importance of tourism, for example, also apply to Portugal. And he also asks: To highly indebted countries in southern Europe fear of what happened in 2008 crisis is coming back, how do you see the different approaches between Southern and Northern Europe?

MR. THOMSEN: I do think that, yes, Portugal will -- the implications in Portugal will to a large extent be shaped by some of the same factors that I mentioned for Spain and for Italy, the dependence on tourism, the dependence on, you know, service sectors and small, medium-size enterprises that have limited buffers and, therefore, could be more strongly affected in the short run. There are also here some, labor market inflexibilities compared to other countries might also come into play.

MR. ADRIANO: Thank you, Poul. Again, send us your questions through the IMF Press Center. I would like to move now to Greece. A number of questions on outlook and debt sustainability. Maria Vasileiou with TA NEA asks: This was going to Greece's best year in more than a decade, but according to your predictions, the country will suffer the steepest recession of all European economies this year. What course of action do you recommend to the Greek government and does the crisis call for a rethink of Greece's debt relief measures? And Thanasis Koukakis with CNN Greece adds, do you believe the crisis will affect sustainability of Greek debt, and under what conditions could Greece maintain its current low-cost debt financing?

MR. THOMSEN: So, Greece was, as you know, starting to see the fruits of many years of consolidation and was beginning to see the build-up of a growth momentum. It will be particularly hard hit because of a number of factors. Again, tourism, but here also the strong dependence on shipping and transportation, which is one of the very vulnerable sectors in this situation. Again, the presence of a large number of small family-owned enterprises with limited ability to absorb shocks, is going to be a negative. And Greece, despite much of the progress achieved, of course, has limited space including because of weakness in banking, where Greece has still one of the largest levels of non-performing loans. There are no risks -- acute risks -- but it means that the banking system will have a more difficult time supporting the recovery when it gets underway.

So, again, I want to emphasize one should not put too much effort into comparing whether one country is a percentage point or two lower or higher than other countries. All countries had different dynamics going into the crisis. And even if they are affected equally by the crisis, because of this quarter-on-quarter dynamic going into the crisis, we could have differences in the annual GDP.

On the issue of debt, as I said before, there are a number of medium-term issues. It's too early to really have an articulated and well-informed view on it simply because it makes such a big difference for the post- -- for the impact of the closures whether the closures and the shutdowns last for a month, two months, or three months. That has a major impact on the trajectory, not least because the longer it lasts, it dramatically increases the risk of balance sheets problems in households, in enterprises, in banks. And, as I said, once we have these balance sheets issues, once we have this, you know, contagion into the financial sector, then we know from experience that it takes much longer for a recovery to take hold. The post-crisis recovery will be slower and significantly more protracted.

So, as long as we don't have a better view on how much does it take to control the pandemic, what does it really take in the next couple of months to control this medical emergency, it is really not very meaningful to go into a long discussion about medium-term implications of this -- including implications for foreign debt. So, this is why I think this -- you will understand why it is not meaningful to have this discussion at this stage.

MR. ADRIANO: Thank you, Poul. And, again, send your questions to the Press Center. We have a couple of questions on Ukraine, and these are the last ones that I have here today. Yaroslav Dolgopolov with Ukrinform asks: the parliament of Ukraine is working on the legislative package that is important for further cooperation with the IMF. How do you assess the prospects of the new IMF program for Ukraine, as well as other assistance to fund the COVID-19 crisis more effectively?

And Interfax News Agency asks: the IMF has already made first decisions to provide emergency assistance in the fight against COVID-19. What are the chances for Ukraine to quickly receive such assistance in connection with the delay in the program?

MR. THOMSEN: So, Ukraine is being severely affected by the pandemic. The government is taking measures that will result in a very significant increase in the fiscal deficit. We fully support this. Fortunately, during the last several years in the context of the IMF's supported program, Ukraine has achieved significant measures of macroeconomic stability. The banking system stability has improved. Inflation has come down. External deficits have come down. Fiscal deficits have come down significantly. Public debt has come down and foreign reserves are significantly higher, well over 20 billion. And that gives, certainly, Ukraine the buffers it needs to undertake the immediate policy reaction.

Now, we are in discussions with Ukraine on a new program. These discussions are well advanced and I think they are going well. There is a number of -- a few issues outstanding, and I am confident that they will be overcome soon and that we can recommend a program to our Board. Say we are well advanced and that will, of course, give Ukraine more resources to enlarge its policy space in dealing with this crisis.

MR. ADRIANO: Thank you, Poul. I see no more questions in the Press Center, so this concludes our briefing today. Thank you very much for following us and stay tuned for more. We have a very busy program of presentations and briefings today. Up next, Middle East and Central Asia Director Jihad Azour at 6:15. At 7:30, African Director, Abebe Selassie, will present the outlook for the region, for Sub-Saharan Africa. At 8:30, we have the presentation of the Fiscal Monitor, one of our flagships, with Director Vitor Gaspar. And last but not least, at 10:00 a.m., the press briefing with our Managing Director, Kristalina Georgieva. These are all Washington times.

Thank you very much for watching. Stay well, stay safe, and have a great day.