Sunday, August 14

How has the ECB benefited Spain during the pandemic?

The quick and forceful reaction of the Banco Central Europea (ECB) from the early stages of pandemic has allowed the coronavirus not to cause a public and financial debt crisis in the euro zone, as happened in the previous crisis (particularly between 2012 and 2013). After a first erroneous and quickly corrected message from its president, Christine Lagarde (who assured that the monetary authority “is not here to close” the risk premiums), the monetary authority deployed a battery of unprecedented measures, which this Thursday will foreseeably begin to reverse before the advance of the economic recovery and the brutal spike in inflation. Spain has been one of the most benefited countries.

What can the ECB do according to the European treaties?

The mandate of the European Central Bank (ECB) is officially limited to achieving the price stability, defined since last summer as a level of 2%. In this it differs from Federal Reserve American, who must also try to achieve full employment, which legally gives him more leeway. However, although the ECB’s mandate does not allow it to finance directly to States (buy debt in Treasury issues), the European justice has determined that it can do it indirectly (buy public debt in private hands) to achieve its inflation target. The central bank of the euro, therefore, can act in this way on the risk premiums (differential of the interest of a country’s 10-year bond with respect to the German benchmark in the private market, indicator of the risk of default in the eyes of investors). This means that in practice it can facilitate that countries (public administrations, companies and individuals) are financed cheaper in times of stress, such as those experienced during the pandemic.

What is the ECB’s main measure to respond to the covid?

The main tool deployed by the ECB to combat the economic effects of the pandemic was to launch a unprecedented public and private debt purchase program, initially endowed with 750,000 million euros in March 2020, increased by another 600,000 million in June of that year and an additional 500,000 last December, to a total of 1.85 billion euros. In a novel way, in addition, he decided to allow himself to make those purchases in a “flexible” way and not strictly based on the weight of each euro partner in the capital of the ECB, so that they could temporarily focus on countries that were experiencing higher financing costs, as happened at the beginning of the year with Spain and Italy.

Why is it a beneficial measure?

The fact that the ECB makes massive purchases of debt in the secondary market (among private investors) makes the rates of said debt go down notably, by greatly increase demand of the titles. This causes, in turn, that the primary issues made by the States (the debt that national treasuries sell directly to investors) are also placed with minor interests. By lowering the cost of debt, governments have been able to seamlessly increase your spending to combat the effects of the coronavirus (with measures such as ertes, for example). They have been able, thus, keep getting money (the markets have not stopped lending them, as happened to several countries in the previous crisis) at a price they can afford to pay (In 2012, for example, Spain had to ask for a bank bailout because the interests demanded by investors were so high that they would have made public finances unsustainable, with the consequent suspension of payments by the State).

What effect has the measure had in Spain?

Spain, as one of the countries that initially had a more fragile public finances situation due to the consequences of the previous crisis, has been one of the main beneficiaries of the purchases of public and private debt by the ECB, which has acquired bonds for 170,306 million euros of Spanish issuers. The average cost of public debt issued in the year has passed from 0.49% in 2019 to -0.02% in 2021 (for the first time in history in negative, which implies that the Treasury returns less than what they lend), while the average cost of outstanding debt has fallen 2.34% to 1.65%. This reduction lowers the interest charge that must be paid by public administrations to investors, both in absolute terms of cash and in relation to GDP and public income. In addition, it also lowers the cost of financing of companies and individualsSince, except for minimal exceptions, the markets consider that the public sector is the economic agent with the least risk of default in a country and it serves as a reference for the interests that they request from the private sector.

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What other big action has the ECB taken?

The other great measure that the ECB has adopted to combat the economic effects of the coronavirus in improving the conditions of massive liquidity injections to banks conditional on giving loans to companies and families (TLTRO). Thus, entities can obtain financing with a interest up to -1% (they return less money to the central bank than they receive) based on the loans that grant. These conditions apply from June 24, 2020 to June 23, 2022. After the rounds of injections launched in 2014 and 2016, the last one started in September 2019, but its conditions were adapted in March, April and December 2020 to respond to the impact of the pandemic. The last operation will be executed in December 2021, but the market expects the ECB to announce a new round at the beginning of the year.

What effect has it had on Spanish companies and households?

Massive liquidity injections to banks under exceptional conditions have helped that, contrary to what is usual in crises, institutions have not only failed to reduce the credit the private sector during the pandemic but have increased. According to data from the Bank of Spain, the sector had been granted 1,213 billion from euros to companies and families Spanish at the end of September, 1.6% and 19,853 million more than in 2019. With data from June, the companies had 572,050 million, 6.9% more, and the homes 648,549 million, 0.16% (which is logical given that companies had to gather liquidity at the beginning of the crisis, particularly with loans guaranteed by the State through the ICO, to survive). The cheaper financing caused by debt purchases has also caused the average guy has fallen from 1.68% to 1.46% in mortgages and from 4.9% to 4.63% in consumer credit, as well as that it has remained stable in loans to companies (from 1.46% to 1 , 56%).

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