ECB’s Makhlouf: ECB Discussing Implications of Pandemic Savings

16 June 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank is very interested in what the accumulation of savings during the pandemic means for economies as they reopen, Governing Council member Gabriel Makhlouf said on Wednesday.

Speaking at the launch of the latest Financial Stability Review of the Central Bank of Ireland, which he heads, Makhlouf said of the issue that ‘[w]e’ve been discussing it a lot at the ECB Governing Council, trying to understand what the implications are going to be of using those savings for the real economy.’

‘I’m not sure it’s necessarily going to be euro for euro or cent for cent’, he added.

Central Bank of Ireland Deputy Governor Sharon Donnery, also participating, observed that the outcome would be influenced by differences in savings across economic groups and by the fact that savings arose both from an inability to spend and from precautionary behaviour.

‘All of those things combined give rise to that uncertainty’, she said. ‘It’s also possible that given what we’ve been through, there will remain a certain level of precautionary saving.’

Ireland’s economic recovery could turn out ‘bumpy and uneven’, Makhlouf said. Many firms in different sectors are financially weak and could struggle as government support is withdrawn, in addition to which a more generalised setback is also possible if vaccination efforts encounter difficulties or new virus mutations force a renewal of containment measures, he said.

‘A number of global headwinds also give us pause for thought’, he said. ‘Global financial conditions remain extremely accommodative, which has meant that risks have been building in many key global financial markets. A range of factors could lead to a sharp repricing of global risk premia, something which would lead to much disruption globally given the level of risk-taking both preceding and during the pandemic.’

Still, vaccination progress ‘has meant that social and economic reopening is now a welcome reality’, he said, though ‘the understandable caution on the pace of reopening will have implications for the degree of economic activity that will be possible in some sectors for much of the rest of the year.’

The current situation is characterised by less uncertainty and reduced downside risks, he said.

Thanks to substantial policy support, ‘financial distress has yet to crystallise through defaults or insolvencies’, he said, but probably ‘any latent distress will become more visible in some sectors over the coming months as the economy reopens and supports taper off.’

Lenders need to help manage this by facilitating agreements that allow viable businesses to continue without piling up arrears, he said. As for those businesses that are not viable, Makhlouf called for ‘an orderly liquidation process … that can allow capital, labour and entrepreneurial talent to be reallocated.’

Irish banks remain resilient enough to face even ‘scenarios that are considerably worse than current baseline projections’, he said, and their capital position exceeds what had been expected six months ago.