ECB’s de Guindos: Dangerous to Withdraw Fiscal Support Too Soon or Fast

12 November 2020

By David Barwick – FRANKFURT (EconoStream) – European Central Bank Vice President Luis de Guindos on Thursday warned that a premature or abrupt withdrawal of fiscal support would cause a ‘severe’ shock to companies.

Speaking at the online Annual International Conference 2020 on Major Trends in Financial Regulation, organised by a Portuguese research centre, de Guindos, according to a text of his remarks provided by the ECB, said that various financial sector vulnerabilities required close watching.

Although considerable fiscal aid to companies has kept productive capacity intact to date, it has also caused ‘sizeable’ deficits, he said. With the second wave of the pandemic holding back the economic recovery, this support needs to be ‘maintained and, in some areas, even scaled up in the coming months’, he said.

‘If support measures end too soon or too abruptly, the shock to firms and businesses would be severe’, he said. Ensuring long-term debt sustainability will require a cautious exit from this support, ‘balancing the risk of cliff edges against the risk of overly prolonged support’, he said.

The pandemic is still having a ‘major disruptive impact on the economic and financial environment’ and threatening financial stability, de Guindos asserted. Growing public and private debt; potential credit losses and reduced bank profitability; and riskier behaviour of non-bank financial institutions are all vulnerabilities that ‘warrant close monitoring’, he said.

De Guindos suggested that despite efforts to reduce costs, further consolidation of the banking sector may remain necessary. Meanwhile, investment funds and insurers have been observed taking greater risks, he said.

‘These vulnerabilities remind us that we cannot afford to be complacent’, he said. ‘We need to take bold steps to support the recovery and further develop and integrate our financial system, thereby also relieving public finances, helping banks with their profitability issues and boosting financial system resilience.’