klaas knot : from intensive care to full recovery - finding the way out of the covid crisis speech by mr klaas knot, president of the netherlands bank, at the eurofi high level seminar 2021, 16 april 2021. * * * thank you for having me. eurofi is an important forum for high - quality discussion between policymakers, regulators and representatives from all parts of the financial world. as all these stakeholders hold a piece of the covid recovery puzzle, it ’ s good eurofi was able to go ahead with this event. even if we can ’ t be physically together in the same room. today i want to make some observations relating to the exit path from the covid - related economic crisis. where do we stand? what can we expect this year? and how should policymakers proceed, as the european economy gradually recovers? we could compare the european economy with a patient recovering from a severe accident. so far, our efforts have been directed at stabilizing the patient. i would call this the emergency phase. with the vaccine roll - out underway, i think we can say we are approaching the end of this phase. this means we can now gradually begin to focus on the second phase, which i would call the recovery phase. the patient is stable, but is still dependent on life - support systems and medicine. as the doctors consider the rehabilitation program, their task is to slowly reactivate the patient, closely monitor progress, and make sure medical care is not scaled down prematurely. only when recovery is clearly underway can we start focusing on allowing the patient to leave the hospital, and to build up resilience to possible future adversities. this is the third phase, which we might call ‘ rebuilding resilience ’. let ’ s first see how the patient is doing, now that we are approaching the end of the emergency phase. the euro area economy is forecast to rebound by more than 4 % this year, after contracting by over 6 % in 2020. insolvencies and unemployment have been relatively subdued until now. strange as it may sound during the worst economic downturn since world war ii, the economy has done consistently better than we anticipated about a year ago. of course, massive fiscal, monetary and prudential support made all the difference here. for example, some studies suggest covid - related failure rates of smes in europe would have been between 9 % and 18 % in the absence of government support. nevertheless,

longer viable due to post - covid changes in consumer preferences. but covid - related legacy debt should not be a reason for firms that are intrinsically viable to go out of business. in a market economy, normally bankruptcy is an important agent for renewal, but it is also a costly one. if applied indiscriminately and 2 / 3 bis central bankers'speeches unnecessarily, it is bad for employment, bad for creditors, and bad for the economy. so under the current circumstances, we should look for more targeted and less costly solutions where possible. that might involve corporate debt restructuring where banks and other private creditors, and also tax authorities agree to provide some relief. this could help stem the build - up of non - performing loans. that is why i welcome the commission ’ s npl action plan. what i like about the plan is that in addition to cushioning the blow for corporates and banks, it supports a european market for bad debt. it is good to see the progress that ’ s being made in several places and it ’ s important to take further steps here. this is a good moment to say something more specific about the banking sector. as insolvencies are expected to rise, banks will see their non - performing loans increase. fortunately, banks have strengthened their buffers in the preceding years and have taken provisions against the incoming covid impact. these now constitute two solid lines of defense. but still banks are bracing for impact. under these circumstances prudential authorities should monitor developments closely. there is a myriad of non - fiscal support measures in place at the moment, that enable the financial sector in continuing to provide credit to the real economy. a careful exit requires that we first get a clear view of what individual measures are in place and what the impact, both individually and in combination, would be if they were lifted. in other words, we should be able to look through the various kind of support measures, and be able to see what is going on below the surface of banks ’ balance sheets. for instance, what is the effect of the ifrs9 transitional arrangement on capital ratios? mapping the impact of non - fiscal support measures will help to design a smart exit path without material cliff effects, and should support authorities to provide clear guidance to financial institutions. only when the recovery is clearly underway is it time to start restoring the buffers in the economy that have been used to absorb the covid shock. this is the