ECB’s de Cos: Crisis’ Duration Could Cause Liquidity Problems to Become Solvency Problems

18 March 2021

By David Barwick – FRANKFURT (Econostream) – The duration of the crisis is increasing the risk that liquidity problems will turn into solvency problems, European Central Bank Governing Council member Pablo Hernández de Cos said Thursday.

In a presentation within a banking supervision report of Banco de España, which he heads, de Cos said that ‘it is important to recognise that the final impact of the crisis on the banking sector will depend both on its magnitude and duration and on the effectiveness of economic policies to mitigate its effects on households and firms.’

With the economic recovery ‘incomplete, uncertain and uneven’, he said, ‘it is justified to maintain a large part of the exceptional measures to support the economy, in particular for certain sectors and individuals.’

In this context, he continued, ‘one of the most worrying consequences of the persistence of the crisis is that the initial liquidity difficulties of the non-financial firms most affected by the crisis may turn into solvency problems.’

If that were to occur, such solvency problems would destroy productive capacity and jobs as well as impact banks, potentially triggering a credit crunch that would further impede the recovery, he said.