Public Finance

From loans and guarantees to grants: Europe’s forceful, evolving Covid-19 policy response

The EU recovery fund would be an important instrument to facilitate a faster recovery from the Covid-19 shock – and the size of the fund proposed by France and Germany at EUR 500bn is significant. “The Franco-German initiative, importantly, foresees direct grants to member states instead of loans. A productive use of such grants could help stabilise explicit public debt levels and thereby potentially reduce risks to sovereign ratings, especially for weaker member states,” said Alvise Lennkh.

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Scope Insights

The Wide Angle: bank resolution no longer a dreaded scenario for credit investors

Resolution has been the bugbear of many credit investors and a key driver of bank debt prices, but the likelihood of a large European bank ending up in resolution is more remote now than at any time since the last financial crisis.
“This is true not only in the middle of a pandemic, where regulators will be loath to initiate such a radical step even if a large bank were a candidate, but it will persist into the post-pandemic years, when banks will be expected to play a central role in the economic rebuild,” said Sam Theodore.

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Financial Institutions

Italian banks: positive trend in asset quality could be about to go into reverse

“Positive asset-quality trends remain intact for the time being, but we expect this trend to reverse,” said Marco Troiano. “We acknowledge the significant government efforts to cushion the impact of the lockdown on households and businesses, but while these may delay the onset of credit problems, we think the sharp deterioration in credit quality in some segments is unavoidable. We expect NPEs to start ticking up towards the end of the year and continue to increase through 2021.”

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Structured Finance

Scope upgrades to AAA(SF) all rated instruments of EIB’s Spanish SME initiative – SME ABS – SRT

Increased credit enhancement from solid reference portfolio performance increase the instruments' resilience to portfolio losses; Covid-19 will impact the Spanish economy negatively but is expected to have only a marginal effect on the rated instruments.

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