Now it’s the banks’ turn to do right by all of us
MONETARY and fiscal authorities around the world have been quick to respond to the Covid-19 crisis with rate cuts and stimulus packages, but without an equivalent response from the commercial banking sector, none of these actions will work. We bailed them out when they needed it. Now it’s their turn.
In economics, we talk about demand and supply-side shocks to the economy.
Understandably, much of the focus has been on the supply side and within this on Chinese supply, since manufacturers every- where depend on parts produced in China.
However, this supply chain blockage is not limited to China and will occur in almost every country across the world. These blockages will continue to transmit to other countries in our highly interconnected world. While things have improved in China from a health perspective, it is going to take time for them to upscale production and restore their supply chains.
In Ireland, we measure the prevailing direction of economic trends in manufacturing with the purchasing managers index (PMI). The AIB Ireland Manufacturing PMI is compiled from responses to questionnaires sent to purchasing managers in a panel of around 250 manufacturers.
Growth will resume but lost consumption is gone for good
While the latest PMI published on 20th of February suggests that the sector is expanding, purchasing managers did express some disquiet. They reported concerns over a fall in new export orders and disruptions to supply chains. They also said that they’ve seen a considerable lengthening in suppliers’ delivery times. This is going to slow down production and dampen economic activity and will take time to rebound.
The demand-side shock to the services sector will be much tougher to recover from. While you might postpone buying a fridge or a car, you won’t double your meals out when things go back to normal. This will impact tourism, transportation and our domestic services economy. While growth will resume eventually, the lost consumption is gone for good.
Fiscal policy – that is, government tax and expenditure decisions – has a duty to respond to economic shocks. In Europe, government spending is constrained by the EU fiscal rules and could hamstring countries in their response to the pandemic.
Now is not the time to be squeamish about increasing budget deficits. The European Commission’s decision on March 13 to employ a more lenient interpretation of budget and state rules is welcome in this regard. It will allow countries like Italy more wriggle room to spend and thereby alleviate the economic impact of the shock. On March 10, the Irish government announced a suite of health and social welfare changes designed to protect workers. In total, this stimulus will amount to an estimated €3bn.
And on the monetary side, central banks around the world have reacted by cutting interest rates or ramping up quantitative easing.
For example, the Federal Reserve – the US central bank – followed up its 0.5pc cut on March 3 with a further 1pc cut just last Sunday. That brought interest rates to almost zero.
This latest action was part of a rare co-ordinated action by central banks across the world, from Canada to the UK and Japan.
The ECB has little room to cut interest rates. Their main refinancing interest rate is already at zero. Instead, they opted to boost the commercial banks’ capacity to lend to small and medium sized industries. The ECB also boosted their already large quantitative easing programme and will buy an additional €120bn of net asset purchases until the end of the year.
The important point here is that the central banks including the ECB are supporting banks to continue to finance households and businesses in these unprecedented times. But it will be up to the banks themselves to deliver on this additional capacity.
What if you run a café or bar and you have to close, how are you going to pay the lease? How are you going to pay your mortgage? If you are a café or bar employee and there is no work for you, how are you going to pay your rent? How will your landlord pay the mortgage?
Homeowners and businesses will need mortgage holidays
Banks are going to have to be patient and give mortgage holidays to homeowners, business and residential landlords and show forbearance on other forms of credit to the real economy. With no interest added or negative credit ratings.
It is not so long ago that Irish taxpayers bailed out the banks.
To remind anyone who might have forgotten, we provided €32.1bn (much of it borrowed from the troika) to AIB, Bank of Ireland and Irish Life and Permanent. AIB alone got €20.7bn.
The Irish State still owns 71pc of AIB and 14pc of Bank of Ireland. We dug them out of a liquidity hole then. Now, it’s their turn.
The banking sector has a crucial role to play, and rolling back planned fee increases will not be anything like enough.
Let’s hope they step up to the plate and do the right thing, for the economy and for society.