ECB View: Less confidence in growth and inflation outlook – The ECB published the account of the Governing Council meeting of 23-24 October today. It shows that the members of the Governing Council wanted some more time to be able to digest the impact of its September policy easing package, including its possible side effects. According to the account, this supported a “wait and see” posture at the current juncture. Still, the account also suggests that the ECB’s confidence in its own projections for growth and inflation had declined. It states ‘regarding the outlook and risks for the external environment, it was noted that the pace of global activity and trade growth remained weak and that global trade could turn out to be weaker than had been anticipated in the September 2019 ECB staff projections’. Moreover, ‘incoming data for the eurozone suggested that the weakness was likely to persist and raised the question as to whether it would continue for longer than had been anticipated in the September projections, while there were no signs as yet of the acceleration in growth anticipated in the projections’. With regards to the outlook for core inflation the account states ‘an increase in underlying inflation might not readily materialise given the current weaker macroeconomic outlook’. All in all, the account suggests that the ECB will lower its forecasts for growth and inflation in its December projections. Indeed, our own forecast for growth and inflation have been below the ECB’s projections for a considerable time. We remain of the view that the case for further monetary stimulus remains strong. Our base case is for another 10bp cut in the deposit rate in March 2020 and an increase of the monthly asset purchases to EUR 40bn from EUR20bn starting in April. (Aline Schuiling & Nick Kounis)
Financials View: Greeks stand next in line to see a collapse in bad loans – The future looks significantly brighter for the Greek banking system. Last month, the European Commission approved the use of government guarantees to assist Greek banks to offload huge portions of bad loans. The scheme is aptly named ‘Hercules’. The Italian banks were given the green light to use the same type of scheme in February 2016 and the benefits have been dramatic. In Italy, overall non-performing loans (NPLs) have nosedived by over EUR130bn since the scheme begun, bad loans had represented 18% of total loans and they have now fallen below 8%. It has been one of the most recent successful bank projects in Europe. A reduction in these soured loans makes a banking sector more resilient and crucially, enables banks to continue to facilitate lending to an economy in bad times.
The fundamental situation in Greek is far worse than that of Italy. At the start of 2018, Greek banks were saddled with roughly EUR108bn of bad loans – approximately 47% of their assets. Nonetheless, this week, we have the firsts glimpse of how banks in Greece intend to use the Hercules scheme to significantly improve their balance sheets. The second-largest bank in Greece, Alpha Bank, has announced that it plans to remove almost 60% of its non-performing exposures with the help of the scheme, a reduction of roughly EUR12bn. Indeed, the bank hopes to cut non-performing exposures to less than 10% of total loans by the end of 2022, from over 45% at present. As such, the newly approved Greek NPL scheme opens to the door to a huge reduction in risk in a banking sector which has an incredibly high proportion of bad loans. One could argue that, in the avoidance of moral hazard, banks who have demonstrated such bad lending capability should not be able to make use of a government-backed scheme to assist them. However, the takeaway is that the scheme will: reduce risk in the system, make the Greek banking sector stronger, and ultimately help reduce risk across the eurozone. (Tom Kinmonth)