Thread by @VMRConstancio

Besides the increasing virus infections and the dangerous volatility coming from the US, two main points became more visible, augmenting downside risks for Europe: likely insufficiency of fiscal policy and possible credit supply deceleration due to a stressed banking sector !/7

The first stems from the delay of the Recovery Fund (NGEU) disbursements and the possible caution of national fiscal policies, after a year of big deficits in 2020. The regrettable protracted timetable for the NGEU payouts is in this ECB chart 2/7 ecb.europa.eu/pub/pdf/ecbu/e…

The recovery depends mostly on fiscal policy staying expansionary, as consumers increase their savings and investment suffers from unused capacity and lack of demand. The suspension of the Stability Pact for 2021 was welcomed, but we need a deep revision of the Pact 3/7

Second, European banks are under market pressure with their stocks at the lowest values ever (STOXX Europe 600 banks chart). Criteria and standards of credit supply were slightly tight for NFCs and a lot for households, though credit increased 4/7 ecb.europa.eu/stats/ecb_surv…

Indeed, new NFC loans increased yoy because of monetary policy but mostly due to public guarantees (see yellow bars below). However, guarantees may start to unwind because of fiscal policy, and standards for credit decisions may not ease enough .5/7 ecb.europa.eu/pub/pdf/ecbu/e…

There will be capital erosion when loan losses step-up next year. Low profitability, and lowest ever Price-to-Book ratios, make it more difficult to raise capital. See @Schuldensuehner“All listed German banks have a combined mkt cap of ..€21bn” 6/7

Public policies will have to support the banks later next year to keep-up needed credit supply, including the use of financial stability reasons existent in the legislation or, in the still unlikely worst-case scenario, even tweaking or temporarily suspending the BRRD. 7/7