Luis de Guindos: Interview in Expresso
Interview with Mr Luis de Guindos, Vice-President of the European Central Bank, and Expresso,
conducted by Mr João Silvestre on 15 April 2020.
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Is this the greatest crisis in living memory?
According to the International Monetary Fund (IMF), this will be the worst downturn since the
Great Depression. There is a great deal of uncertainty and, given this degree of uncertainty, we
need to define and analyse several scenarios. The IMF's baseline scenario is very similar to
other public and private sector forecasts. It's important to bear in mind that the impact on the
economy, which will be huge, is concentrated in the second quarter of the year - as well as in
March - and that the impact will be severe, but temporary. This temporary aspect is important.
The calculations point to a contraction in the second quarter by as much as 20% compared with
the previous quarter. And it will also have an impact on public finances and the financial markets.
Despite the uncertainty you have mentioned, is a rapid recovery possible in 2021?
The key factor is the duration of the lockdown - the longer it lasts, the greater the impact. We
hope that the containment measures will start to be eased over the coming months, reducing the
negative impact on the economy, and that we will see a return to positive growth rates in the
second half of the year. But it will be hard for the recovery in the second half of 2020 and 2021 to
make up for this year's downturn.
Is the ECB's current monetary policy sufficient to deal with the economic impact of the
coronavirus (COVID-19), or can we expect additional measures soon?
We have taken a number of key measures. In terms of monetary policy, our response to the
situation has been very active, with three types of measure. First, we have provided liquidity to
the banks, adjusting the rules on collateral for accessing liquidity-providing operations. European
banks therefore have more liquidity at their disposal and at more favourable conditions. Second,
we have responded with the measures taken by the ECB Banking Supervision. To avoid a credit
crunch, we have eased the requirements on capital held by European banks, the classification of
non-performing loans and the accounting rules. And third, we have launched the €750 million
Pandemic Emergency Purchase Programme (PEPP), which will increase the total assets
purchased by the ECB to €1.1 trillion in 2020. This is a large sum in order to maintain financial
stability in the debt markets, in particular in the government bond markets, and to safeguard the
monetary policy transmission mechanisms. In addition, of course, we have the fiscal policies of
national governments and the European Commission, as well as the decision by the Eurogroup
last week.
Do you think that the measures adopted last week by the Eurogroup are enough to deal
with the severity of the problem, or should the finance ministers have gone further?
With coronabonds, for example, or similar solutions.
The agreement made was a commitment that goes in the right direction. It's important to
remember that. To reach a compromise, everyone has to give way a little and to believe in it. The
agreement is a sign of political commitment. As for other possible measures, such as
coronabonds, the ECB has always been in favour of the existence of a fiscal instrument at
European level that can complement monetary policy. It is just that this is a political decision. We
are in favour of it, we think it would be a good thing for the euro area, but we will see what
happens. The European Council meets on 23 April. We consider it to be a useful instrument, but
it is not up to the ECB. It's for the European governments to decide.
And what do you expect will happen? Do you think that it's possible to reach a political
agreement to take this step towards coronabonds or is it just a dream?
I couldn't possibly say what will happen. All I can say is that the current situation is difficult and
that the commitment made by the Eurogroup was positive, but let's see. The possibility of a
recovery fund being set up is a good idea. The size of the fund and how it is funded is left open to
discussion. That's why it depends on what the European governments decide.
Why did the ECB decide to launch a new programme, the PEPP, just a few days after
announcing that it was strengthening the previous programme. Was your initial
assessment of the situation too optimistic?
Within three or four days we saw a rapid deterioration in the situation. Containment measures
were taken in several countries, and we realised that the impact on the economy could be
enormous, with repercussions on the financial markets. It was a swift reaction on our part. It
helped to calm the financial markets and it was well understood.
Interest rates are falling in several countries, in particular in Italy. Is this something that
the ECB is concerned about?
We are concerned about a combination of problems: a deep recession, a huge impact on public
finances and an increase in funding needs. This causes tension in the financial markets and, in
particular, the government bond market. We are going to remain vigilant. As we have said on
several occasions in the recent past, we are not going to allow any fragmentation of the bond
market and we will act accordingly. We have a new instrument - the PEPP - and we can use it
flexibly in terms of timing and the assets we purchase. That's why I hope we can deal with this
situation.
Am I to conclude from your comments that the ECB is prepared to strengthen the
programme or take other measures in order to respond to any tensions that may arise?
We have a programme that we are implementing. The ECB's Governing Council has not made
any decisions regarding further programmes. We are keeping an open mind in terms of how to
respond to further developments and tensions within the markets. Because we are completely
committed to maintaining stability in the financial markets and to avoiding the fragmentation that
could prevent the functioning of the monetary policy transmission mechanisms.
In countries such as Portugal, Spain and Italy, people are concerned that we could see
another crisis, like the sovereign debt crisis in 2010-11. Can the ECB confirm that it will
do all that is needed to avoid such a scenario?
We have shown our commitment, with liquidity, by making capital requirements for banks more
flexible and with the asset purchase programme. We are extremely committed. The current
crisis is quite different to the one we saw in 2010-11. It did not originate in budgetary issues or
the banking system. It was a massive exogenous shock. This is a health emergency which has
become an economic problem. Our current efforts are focused on preventing it becoming a debt
crisis.
Are banks in Europe better equipped to deal with this crisis than in 2008? Or can we
expect to see banks fail in various countries?
Things are very different to ten years ago. Banks have more capital, they have more liquidity and
are more resilient. The bigger concern is profitability, which was already low. European banks
are solvent but I am aware that this crisis will have further impact on their profitability. In the
medium term, banks will need to continue to take steps to eliminate excess capacity and
consolidation could be a sensible way of dealing with profitability. From a solvency angle, this is
not a banking crisis. This time banks can be part of the solution, rather than the problem.
If the recession is worse than expected, is there a risk that some banks will lose money
on loans which they are currently granting?
All governments, Portugal included, have approved State guarantees. When there is this level of
uncertainty and a drop in GDP, these guarantees are very important and useful if a credit crunch
is to be avoided.
A number of economists have expressed the view that the euro area's response to the
crisis has been weak compared to the United States or the United Kingdom, where
central banks will even finance the State directly. How would you respond to these
criticisms?
Looking at the whole package of ECB measures, it is impressive. Then we have fiscal policy,
involving the various programmes of the national governments, and lastly there is the decision of
the Eurogroup. Europe's response is comparable to that of other world economies.
What advice would you give to euro area governments on how to deal with the economic
impact of this pandemic?
We need to be aware that this will lead to a significant drop in business revenues and the public
sector will need to fill this gap. The main factor in terms of ensuring the economy starts to
recover when the health situation improves is to try to "vaccinate", as best we can, the business
ecosystem of each country. What we need to do is try to keep the business system alive, as
much as possible, and to come through this period. That is what my advice would be. Keeping
this ecosystem going is also important in terms of safeguarding jobs and reducing the social
impact.