Exclusive: ECB prepares bad bank plan for toxic wave of coronavirus-related debt
LONDON / FRANKFURT (Reuters) – European Central Bank officials are drawing up a plan to deal with hundreds of billions of euros in unpaid loans in the wake of the coronavirus outbreak, two people familiar with the matter told Reuters .
The project, which comes as Europe mobilizes trillions of euros to support the region’s economy, aims to protect commercial banks from any second fallout of the crisis, if rising unemployment stifles needed income. repayment of loans.
One of those familiar with the plan said that the ECB had set up a task force to examine the idea of a “bad bank” to store unpaid euro debt and that work on the program was under way. were accelerated in recent weeks.
The ECB declined to comment on whether it was working on a bad bank system.
The amount of euro area debt that is considered unlikely to be fully repaid already stands at over half a trillion euros, including credit cards, car loans and mortgages, according to official statistics.
This is expected to increase as the COVID-19 outbreak puts pressure on borrowers and could even double to $ 1 trillion, weighing on already fragile banks and hampering new loans, said people familiar with the loans. ECB plans.
While the idea of a bad bank for the euro area was discussed and abandoned more than two years ago, the ECB, under the leadership of its new president Christine Lagarde, consulted the banks and officials of the EU about a program in recent weeks, one of the people said.
As the most powerful institution in the eurozone, the ECB’s support for the project is essential, but it would also require the blessing of Germany, the biggest economy in the bloc.
Berlin has long opposed programs that accept shared responsibility for debts in other countries although it recently had an unexpected turnaround, agreeing to pool EU borrowing for a coronavirus recovery fund.
A project under discussion would involve the European Stability Mechanism, an EU institution that can provide financial assistance to eurozone countries or lenders, vouching for the bad bank, people said.
The bad bank would then issue bonds that commercial banks would buy in exchange for portfolios of unpaid loans, neutralizing the viral shock for European lenders. Banks could then deposit those bonds with the ECB as collateral for central bank funding, one of the people said.
Major European commercial banks could be called upon to join forces to support the program, the second person said.
As European countries now focus on launching a € 750 billion plan to help economies hit by COVID-19, the idea of a bad bank and the ECB’s project could be the focus discussions between governors and central bank ministers later this year.
Asked about bad banks on Tuesday, Andrea Enria, the ECB’s chief banking supervisor, said he supported the concept, but it was “premature” to discuss it now because it was not clear at which point the impact of the coronavirus epidemic would be serious.
“I have been very supportive of asset management companies. I think they are useful, ”he told reporters, highlighting the success of failing banks in Spain and Ireland in the aftermath of the financial crisis. “A lot of these ploys ended up in the dark, making a profit.”
Enria said the ECB was studying how banks might cope if the crisis worsened. He said banks have over 600 billion euros ($ 680 billion) in capital and that would likely be enough, unless there is a second wave of infections.
Yet any pan-European agenda to address the bad debt problem would likely meet political objections from Germany, which has long resisted attempts to back banks in weaker countries for fear of becoming encumbered. unpaid invoices.
Markus Ferber, a German member of the European Parliament, said Berlin remained opposed to such mutual guarantees. “Bad national banks could be a first step,” he said.
Marco Zanni, an Italian lawmaker in parliament, said the EU’s decision-making process was too complicated and too slow.
“Looking at past crises, the experience is that European solutions come too late,” he said. “When you face a crisis… you have to act in days or weeks, not months or years. “
Banks in Italy and Greece, for example, were still recovering from the fallout from the financial crisis more than a decade earlier when the pandemic struck.
But while the problem of bad loans has been concentrated mainly in the poorest countries in the EU since the 2008 crash, the widespread impact of the coronavirus, which has hit Germany hard, could see borrowers around the world fall apart. discuss.
The European Commission, the EU’s executive arm, said it had described how bad banking systems work, but that no “formal work” was underway. He said banks had been given more regulatory leeway, but could “explore all relevant possibilities” if necessary.
“European banks are already bracing for a new wave of bad debt,” said Andrew Orr of accounting firm Deloitte.
“Having a bad European bank would help. For the bad debt itself, nothing changes. The debts have yet to be paid and the money has yet to be repaid. “
Writing by John O’Donnell; Editing by David Clarke