The crisis may be even worse than expected in the worst scenarios and the recovery is under way. “Fragile”, “partial” and “uneven”. A scenario in which structural reforms have already become unpostponable. This is what the governor of the Bank of Spain has warned today in his appearance in the Congress of Deputies where he has sent a clear message to the Government and has demanded an “effective” and “efficient” use of European funds to rebuild the economy.
As he explained, it is not just a matter of selecting the best projects to boost the economy’s takeoff after the pandemic, but of financing the “transition costs” that many times the structural reforms that the economy needs. For this reason, De Cos has encouraged the Government to finance structural reforms with these funds that were already necessary before the crisis but have now become absolutely essential.
The truth is that there is a lot at stake. As Pablo Hernández de Cos recalled before the Economy commission, the Bank of Spain’s forecasts suggest that unemployment will climb to almost 20% in 2022, employment will sink above 10% and GDP between 10.5% and 12.6%. Figures, however, that do not take into account the positive impact that the use of these reconstruction funds can have, for which reason the governor has stressed that this debacle could be mitigated if a good use of these funds.
The governor has indicated that the ERTE have managed to contain the rise in unemployment in the short term, although he has been less optimistic about its resolution in the future. As he has said, an “excessively benign” interpretation cannot be made of the rebound that the economy has had in the third quarter of the year, after the progressive de-escalation, since throughout the summer there have been accumulated “signs that the rebound was losing intensity ».
“Especially since mid-August there have been no significant added advances in the recovery”, he warned and highlighted that in August only 77% of the hotel establishments opened that had done so in the same month of 2019 and only they covered 40% of the places. In September, according to his calculations, the evolution of tourist activity would have worsened. These scars will remain in our economy for a “relatively long time” since, in view of the outbreaks of the second wave, “it does not seem that we can discard the additional use of more severe containment measures than those contemplated in the scenarios.”
The impact of the crisis on the banking system will also be very significant. Hernández de Cos recalled that the arrival of the pandemic represents an added challenge for a sector that was already at very low profitability levels, which is why he has acknowledged that there is still “room” for more mergers in Spain, after the starting gun that has meant the union between Caixabank and Bankia. Meanwhile, entities must continue to be “very prudent” in the distribution of dividends and remuneration.
Although the financial reform launched in the previous crisis has allowed improvements in the quality of the balance sheets of Spanish entities and in their solvency, the governor has warned that bank accounts have already been affected for the pandemic. Specifically, he pointed out that the large Spanish banks, such as Santander and BBVA, do not now have the cushion of their geographical diversification because “in a global crisis like the current one, the diversification of the business of Spanish banks will be predictably less useful than in the past crisis for the containment and mitigation of its effects ”.
«The foreseeable deterioration of the assets is going to have, according to our analysis, a significant impact on the solvency of the entities. In addition, this impact will affect one and the other differently, depending on both their starting point and their different exposure to the sectors most affected by this crisis, “he warned. “The probability of occurrence of this scenario is low, but not negligible, so if it materializes, it would possibly be necessary to adopt additional measures to those already implemented,” he said.
For this reason, the governor has called on economic and supervisory authorities to maintain a “close” watch over financial institutions and markets so that do not close the tap on credit to the economy. Specifically, it has said that the objective of preventing the Covid crisis from causing a generalized tightening of financing conditions or seriously damaging the financial system must be an objective shared by all authorities.