Public Finance

Italy: debt sustainability supported by ECB as Covid-19 crisis brings rise in debt and funding needs

“We expect public debt to rise above a 155% of GDP level in 2020 with this debt ratio maintaining an upward trajectory longer term – remaining relatively unchanged in years of positive growth but adjusting significantly upwards in years of recession,” said Dennis Shen. “This unfavourable long-term trajectory reflects weak nominal growth dynamics in particular.”

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European sub-sovereigns mostly able to weather Covid-19 shock, but face medium-term challenges

“We expect European sub-sovereign issuers to be, overall, less affected by the Covid-19 crisis than sovereign issuers are, although the impact will vary across countries and levels of government,” said Jakob Suwalski. European sub-sovereign governments typically benefit from revenue structures that are less exposed to local economic activity and are thus less likely to be directly affected by first-round fiscal impacts to domestic economies.

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Turkey’s external-sector weaknesses in five charts: economy at risk as reserves decline

“Turkey faces severe challenges including the risk of an extended balance-of-payments crisis if macro-economic mismanagement is not speedily reversed or if inadequate foreign currency reserve levels decline further,” said Dennis Shen.

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Financial Institutions

Banking 2.0: investors will have to adjust the angle in the post-pandemic world

During the post-financial-crisis decade investors and analysts kept a sharp eye on the possible threat of supervisory intervention if a bank’s prudential metrics were challenged. “However, such fears are now less justifiable which also means that investors and analysts may have to shift the angle of their assessment to look at how focused, effective and risk-averse a bank is in pursuing its post-pandemic strategy - rather than merely relying on a ‘horse race’ peer-group comparison of prudential and financial metrics,” said Sam Theodore in his latest Wide Angle column.

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Structured Finance

Household financial resilience put to the test

As GDP contracts and households take on additional credit to fill gaps in income, consumer debt ratios are expected to increase. “Peripheral euro area economies could see consumer delinquencies double,” said David Bergman. In Greece, real incomes had only begun to recover as Covid-19 hit, implying a significantly reduced ability to service liabilities through the current crisis. The trend is similar though less drastic in Italy, Portugal and Spain.

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Covered Bond Quarterly: the curse of liquidity support

“Banks need to fund expanding balance sheets to reflect government guarantees for corporates and SMEs to help mitigate first-round effects of the Covid-19 pandemic,” said Karlo Fuchs. “Retained covered bonds are among the most efficient instruments to get access to central bank repo facilities. Eligible collateral is already on the balance sheet and it only needs to be encumbered into the cover pool to create tailor-made issuance.”

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