ECB’s Costa: Corporate, Household Debt Could Become Unmanageable

8 July 2020

By David Barwick – FRANKFURT (EconoStream) – The economic fallout from the pandemic could leave companies and households unable to handle their debt burdens and thus at risk of insolvency, European Central Bank Governing Council member Carlos da Silva Costa said Wednesday.

In an article for Reuters news agency, Costa, according to a text made available by the Bank of Portugal, which he heads, wrote that the duration and the degree of the economic crisis triggered by the pandemic ‘are still surrounded by great uncertainty. Although temporary, this shock risks leaving long-lasting scars if policymakers and authorities do not coordinate their responses.’

The burden of funding policy measures will exacerbate existing financial weaknesses, he warned.  ‘Corporate and household debt burdens risk becoming unmanageable in case of severe economic contraction, putting at stake their solvency’, he said. Room to maneuver should be used to mitigate the threat of insolvency, he urged.

Costa praised the European Commission’s €750 billion recovery plan proposal as ‘timely and [going] in the right direction.’ However, he criticized, ‘it raises important challenges to companies and banks’ asset quality as it aims to reorient the economy but fails to timely support the repair and recovery stages: we will not be able to reorient business models if in the meantime companies go bankrupt.’

Increasing non-performing loan ratios will demand ‘[s]ystemic TARP-style solutions … at European level, even if implemented at national level’, he said.

The situation of European banks is not the same across the area, he asserted. ‘As asset quality and profitability deteriorate, over-capacity will reveal itself amid a renewed push for digital solutions fast forwarded by the lockdown period’, he said.