Europe Urged to Prepare Exit From $2.9 Trillion in Covid Help

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Feb 16 2021, 8:30 PMFeb 16 2021, 11:23 PMFebruary 16 2021, 8:30 PMFebruary 16 2021, 11:23 PM

(Bloomberg) -- European governments must find the right moment to wean the economy off unprecedented crisis support so they don’t harm growth in the long run, financial supervisors warned.

While a wave of liquidity stabilized lending and kept businesses and households afloat during the virus shutdowns, extending such stimulus for too long could complicate its removal and make an eventual restructuring more painful, the European Systemic Risk Board said in a report Tuesday.

“If fiscal support is withdrawn prematurely, economic recovery and financial stability might be at risk, but if it is maintained for too long beyond the emergency, fiscal sustainability and longer-term growth may be jeopardized,” the ESRB said. “Managing this trade-off effectively requires timely and reliable information on the state of the economy and the effects of policy measures.”

As of September 2020, governments put 2.4 trillion euros ($2.9 trillion) on the table for loan guarantees, public lending, grants and tax relief, according to the report, which covers the European Union as well as the U.K., Norway, Iceland and Liechtenstein. The uptake of these measures amounted to more than 700 billion euros at that time, while about 840 billion euros in bank loans were subject to moratoria.

The question of how quickly to reduce fiscal support is a priority for euro-area officials in the coming months. While keen on avoiding a cliff effect that would threaten the rebound from current lockdowns, they must also weigh concerns over public finances and debate outdated rules on how to manage them.

The ESRB cautioned against a general extension of payment holidays as this bears the risk of masking underlying weaknesses in banks and borrowers. “Targeted loan restructuring” may in some cases be a better way of dealing with struggling firms, it said.

It also warned that the usual metrics to monitor risks, such as solvency indicators, aren’t working in the current situation, making it hard to assess actual restructuring needs. Authorities should make sure banks recognize losses without delay to avoid “undue forbearance and evergreening,” according to the report.

On top of that, policy makers were urged to prepare for a sharp rise in bankruptcies, which they’ve so far managed to contain through temporary support.

“It is important that the institutions administering the restructuring and insolvency processes do not reach capacity constraints and that they do everything they can to avoid value destruction,” the ESRB said. “Addressing the issue of non-performing loans as early and decisively as possible is essential to ensure the financial system is strong and stable and supports sustainable growth.”