ECB’s de Guindos: Economic Impact of No-Deal Brexit Should Be Contained

16 November 2020

By David Barwick – FRANKFURT (EconoStream) – European Central Bank Vice President Luis de Guindos on Monday said that although the economic repercussions for the Eurozone of a no-deal Brexit should be limited, financial risks could augment as a result.

Opening the 23rd Euro Finance Week, de Guindos, according to a text of his remarks provided by the ECB, warned yet again against withdrawing policy support too soon.

The containment measures taken to deal with the second wave of the pandemic are ‘weighing on current growth’, he said. ‘With the future path of the pandemic highly unclear, risks are clearly tilted to the downside.’

Geopolitical risks like a possible no-deal Brexit are adding to the uncertainty, he said. Though the economic impact on the euro area of this particular event ‘should be contained, such an outcome could amplify the macro-financial risks to the euro area economic outlook’, he said.

On the other hand, the possibility of a medical solution to the pandemic ‘fosters hope of a faster return to pre-pandemic growth levels’, he said.

By no means for the first time, de Guindos warned that ‘abrupt and premature termination of the ongoing schemes could give rise to cliff-edge effects and cool the already tepid economic recovery.’

Corporate insolvencies have been limited to date because of various measures that have ensured the availability of liquidity, he said, but bankruptcies next year are seen increasing. SMEs are at particular risk, given their relative dependence on banks, he said.

‘A premature withdrawal of loan guarantee schemes may induce banks to tighten credit standards’, he said. ‘This would result in a credit crunch for non-financial corporations and translate into a sharp rise in company defaults.’

De Guindos predicted weak bank profitability, with no return to pre-pandemic levels before 2022.