Quo Vadis Spain? A view on why we are falling behind in fighting the COVID19 impact on the economy.

This crisis is obviously first and foremost a healthcare one, but it is very rapidly evolving into a wide and deep economic crisis whose short and mid-term impact could be catastrophic if poorly managed by governments and central banks.

The world now observes how in the region where it all started, mainland China, normal life and economic activity slowly resume supported by monetary and fiscal policies and stimulus plans of unprecedented scale and speed, reaching, in the case of China, 1,2% of its GDP.

We will not delve into the health and scientific aspects of this pandemic, nor about its tremendous impact in the lives of millions around the globe and the human costs it is imposing, in particular there where average age of the population is high, where healthcare access scarce, the standards of living are poor, or a combination of these and other elements that will exacerbate the pandemic impact on different societies around the world. It is a mere guessing exercise for us, which we will avoid altogether, to try to estimate a timeline or the precise impact of this pandemic in our societies or economies.

We will focus, however, on the mechanisms that we strongly believe must be applied by governments and central banks in order to minimize the impact of this crisis on all levels of our economy. It is with plenty of worry and concern that we realize how timid the measures taken by the Spanish and other European governments are in comparison with the decisive and wide-ranging actions taken by the Fed and American government, which in turn may, as some economist argue, result in dangerous levels of inflation if overdone (in particular helicopter money – handing in money directly to people). It is our view though, that in this crisis, decisive, wide-ranging action is a far better option than falling short in helping society and businesses survive in this “desert crossing”.

At the time of writing this article, and in a bipartisan vote overcoming broad ideological disparities, US Senate has just passed a bill, 96 votes to 0 to approve a USD 2tn stimulus package to support its economy. The markets have welcomed the agreement with the strongest rally in equities for many years – the Dow Jones Industrial Average surged 11,26% in a single day on Tuesday March 24th, its largest intraday gain since 2008. The recent rally of the Dow has been the biggest one since 1933.

A summary of the monetary and fiscal policy measures undertaken in the US could be the following one, which we will then compare with the measures being put in place so far in Spain.

  • The Fed cut short-term interest rates to 0%, including an emergency cut of 100bps on Sunday March 15th, cutting rates a total of 150bps. It is a remarkably fast and strong reaction to the economic perspectives, however it is worth mentioning the significantly reduced room for action that the Fed had at this point of time, while at previous crisis rate cuts have amounted to ca. 500bps.
  • The Fed ensuring liquidity via the Federal Open Market Committee – FOMC that will purchase Treasury securities up to USD 500bn, and mortgage-backed securities up to USD 200bn.
  • The Fed will establish two facilities to support credit to large employers – the Primary Market Corporate Credit Facility – PMCCF- oriented towards new financing lines for issuers with a credit rating of BBB- or higher, and the Secondary Market Corporate Credit Facility – SMCCF to provide liquidity for outstanding corporate bonds.
  • The Fed committed to support to small and medium size enterprises and consumers with USD 300bn in new financing.
  • The Fed committed to the creation of different mechanisms to provide liquidity backed by less traditional and more flexible guarantees and collateral such as student loans, auto loans, credit card loans.

On the back of these measures taken by the Fed, the US Senate has approved the following stimulus package:

  • Direct money transfers to millions of Americans with checks of up to 1,200 USD per month per adult, for adults earning less than 75,000 USD per year. Plus, another 500 USD per month per child under 17.
  • USD 500bn in funds to help deteriorated sectors. The fund will be overseen by a board of experts and an independent inspector.
  • USD 350bn loans for small and medium size businesses.
  • USD 250bn to expand unemployment protection programs, including a Federal subsidy of up to 600 USD per week in addition to the State support programs.
  • USD 150bn in aid for hospitals and the healthcare system

Senate majority leader, republican Senator Mitch McConnell, defined this package of stimulus as:

“This is a wartime level of investment into our nation”

Actions taken by the Fed – adopting a “all it takes” approach to this crisis, coupled with the bipartisan agreements reached to support employees, consumers, and corporates are certainly the example of a group of regulators and policymakers who have understood that there is no time to be wasted in bureaucracy to take decisive action, and that the consequences of this economic crisis can be catastrophic if not countered with very aggressive monetary and fiscal policies.

By contrast, the situation in Europe looks very different. While the European Central Bank – ECB – has made it clear, by expanding its already ambitious asset purchase program, that it will ensure liquidity in the financial markets, Christine Lagarde has also made it clear that the solution to this crisis has to be first and foremost a fiscal one, with the ECB limiting its role to ensuring liquidity. Ms. Lagarde correctly finger-points governments as the responsible for creating and implementing as quickly and strongly as possible sufficient fiscal stimulus packages to help citizens, employees, and companies to make it to the “other end” of this crisis.

As Mario Draghi, former president of the ECB, points out in an article published on March 25th in the Financial Times:

“The priority must not only be providing basic income for those who lose their jobs. We must protect people from losing their jobs in the first place”

As we mentioned, the ECB has activated an aggressive monetary policy program to fight the economic impacts of coronavirus across European economies, ensuring liquidity and funding for the additional spending countries will incur to dampen the effects of the crisis on their economies. These initiatives could be summarized as follows:

  • Extension of the asset purchase program up to an additional EUR 750bn by the end of the year, in the form of a Pandemic Emergency Purchase Program – PEPP. This, together with the EUR 120bn announced earlier in March, amounts to 7,3% of the euro area GDP.
  • More importantly, it has implemented unprecedented flexibility in the deployment of those EUR 750bn, by allowing itself to buy more than a third of any country’s eligible bonds. Furthermore, the ECB has given itself increased room to maneuver and not to respect the standard proportions of the asset purchase programs among the different countries, limits that are typically established based on each country weight on the EU economy, and their contributions to the ECB capital. As the ECB put it:

“Purchases under the PEPP shall be conducted in a flexible manner allowing for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions”

  • Interestingly, the ECB has also expanded its criteria for eligible securities, making securities with as short as 70-day maturities eligible for this program – the previous limit for sovereign bonds was one-year maturities. We say interestingly because Germany´s planned additional debt of EUR 150bn was mostly expected to be issued with maturities below one year, which are now eligible for this purchase program by the ECB.

With this support from the ECB, the ball is now on governments´ camps to launch the corresponding programs to help individuals, employees and companies in this difficult context.

Although announced with much fanfare, the Spanish government has so far taken very timid measures to ensure that the productive capacity is not permanently lost. It has rather focused on trying to push the existing liquidity throughout the traditional banking system, or to slightly delay obligations of companies.

Spanish government measures, which we will describe here below, look more like a delaying of payments and obligations, rather than structural help for citizens to pay their groceries, for employers to pay their employees, and for companies to service its short-term obligations, which are all measures that the country needs.

Governments who do not assume that their debt levels need to grow significantly if they are to really maintain its productive capacity, are doomed in the current conjuncture, which calls for big and ambitious action and funding plans. As Mario Draghi brilliantly points out:

“Employment and unemployment subsidies and the postponement of taxes are important steps that have already been introduced by many governments. But protecting employment and productive capacity at a time of dramatic income loss requires immediate liquidity support. This is essential for all businesses to cover their operating expenses during the crisis, be they large corporations or even more so small and medium-sized enterprises and self-employed entrepreneurs. Several governments have already introduced welcome measures to channel liquidity to struggling businesses. But a more comprehensive approach is needed”

It looks like the Spanish government has not understood the urgent need for liquidity if we are to protect the industrial tissue in the country, an maintain as much as possible its productive capacity. Here is a summary of the measures taken so far:

  • EUR 100bn – of which only EUR 20bn have been released, in the form of guarantees for banks to keep lending.
  • EUR 600m in social services for the most vulnerable families, focusing on the elderly and other groups.
  • Insurance of the basic utilities and supplies – water, electricity, and gas during March and April for consumers considered as vulnerable and under risk of social exclusion.
  • All employees suffering from an ERTE – temporary layoffs with employers’ commitment to hire back – will have access to unemployment compensations – before only those who were eligible had access to it.
  • For self-employed workers, access to the equivalent to unemployment compensation has been slightly relaxed and is now accessible to those whose income level has fallen by at least 75% with respect to the previous semester.
  • Delaying of tax (IRPF and corporate tax) obligations up to 3 months, at no additional interest, for eligible entities – revenues under EUR 6m.

Observing these measures and dealing on a daily basis with companies from different sectors who struggle to cope with the short-term liquidity needs, makes us very concerned about the economic prospects for many businesses unless the government steps in with a much more aggressive plan to prevent people from losing their jobs and maintaining demand – via direct money transfers to individuals, debt refinancing programs for individuals, homeowners, self-employed people, companies, and bridge loans to cover short-term liquidity problems for businesses.

The incremental pile of sovereign debt resulting from the current situation is going to be big in any case, therefore we clearly advocate for aggressively making it even sufficiently bigger, thus supporting demand as much as possible, employment, and productive capacity, so that the recovery starts from a less compromised level, and not from a totally depressed economy, which may make it even more difficult.

Governments, as Mario Draghi points out, should be prepared to function with new higher levels of debts and deficits, but the alternative – not protecting jobs and the productive capacity and reducing the fiscal base as a consequence – looks even gloomier.


More information:
Media department at Liceo Capital Advisors
+34 91 022 77 29

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