eco TV

Eco TV – April 2020

4/24/2020

TRANSCRIPT // Eco TV – April 2020 : April 2020

Hello everyone and welcome to this April 2020 edition of EcoTV.

Although we’re in lockdown, we’re still joined by economists from BNP Paribas.

We’ll be talking about how the world will look in the future, post-lockdown and post-Covid-19. We’ll talk to Laurent Quignon about the steps taken by the French government to support businesses.

In Chart of the Month, William De Vijlder will speak to us about debt levels, which are rising rapidly, about the sustainability of debt and about debt-to-GDP ratios. We’ll end the programme with François Faure, who will also be talking about debt, but in relation to the poorest emerging-market countries. We’ll discuss debt moratoria, and even debt cancellation.

See you again at the end of the programme.

 

FOCUS

 

François Doux: In France, to cushion the impact of the recession on businesses, the government has introduced State-guaranteed loans.

FNAC-Darty was the first company to take out one of these loans, to the tune of 500 million euros. Speaking to us about this, we have Laurent Quignon, head of banking economics at BNP Paribas Economic Research.

Hello Laurent.

 

Laurent Quignon: Hello François.

 

François Doux: Can you tell us how these State-guaranteed loans work in principle?

 

Laurent Quignon: The State-guaranteed loans are bank loans intended to secure companies’ cash flow. Payments are deferred for one year, and companies can extend the deferral period by 1 to 5 years, taking their maximum potential term to 6 years.

The State will guarantee up to 300 billion euros of loans in total. Banks have been distributing these loans since 25 March 2020, and will continue to do so until 31 December 2020. With a few exceptions, they are available to all non-financial businesses, whatever their size or legal form, including shopkeepers, sole traders and independent professionals, all the way up to listed companies. The exceptions relate to companies in insolvency proceedings that have not yet entered a safeguard procedure or receivership, and companies undergoing court-ordered liquidation.

 

François Doux: What is the maximum amount of the loan that a business can obtain?

Laurent Quignon: The maximum is a quarter of their annual revenue, or two years of payroll costs for recently founded or innovative companies.

 

François Doux: Since these are bank loans, how much remuneration are the banks getting?

 

Laurent Quignon: The borrower pays a commission to BPI France Financement, which collects it on behalf of the State. The commission varies according to the total term of the loan, and is lower for SMEs.

The banks waive all remuneration during the deferral period, and so the cost of the loan is basically the cost of the guarantee.

 

François Doux: Is there a risk for banks granting these State-guaranteed loans?

 

Laurent Quignon: The risk is shared with the State. The State assumes 70% of the risk for large corporations and 90% for SMEs.

 

François Doux: So the banks still have some residual risk?

 

Laurent Quignon: Exactly. The banks do retain some residual risk. If a credit event occurs within two months of the loan being disbursed, the State guarantee will not apply and banks are not authorised to take additional guarantees or collateral for State-guaranteed loans.

 

François Doux: What is the impact on banks’ solvency ratios, which you monitor closely in the banking economics team?

 

Laurent Quignon: For banks, the State guarantee limits the amount of capital they use as regards the solvency ratio, but not as regards the leverage ratio. This means that banks will have to set aside capital equal to between 3% and 3.75% of the amount lent, regardless of the proportion guaranteed by the State.

 

François Doux: Have many loan requests been accepted so far?

 

Laurent Quignon: According to the French Banking Federation, around 95% of all requests have been accepted. Companies that have been refused a State-guaranteed loan can refer the matter to the credit mediator. There are also other arrangements companies can use instead of or as well as State-guaranteed loans. There’s a 7-billion-euro solidarity fund for very small companies, sole traders and independent professionals. There’s an economic and social development fund, which has been increased from 75 million to 1 billion euros, for larger companies that are struggling. Finally, a 20-billion-euro fund is about to be set up to allow the State to take larger financial stakes in strategic companies.

 

François Doux: So there are a lot of financing possibilities as well as these State-guaranteed loans. The total amount, as you just said, is 300 billion euros. Can you put that figure into context, Laurent?

 

Laurent Quignon: It’s a large sum, equal to almost one year of loans granted to non-financial companies. Between March 2019 and February 2020, banks granted 330 billion euros of new loans to non-financial companies.

 

François Doux: How much support has been given to date?

 

Laurent Quignon: As of 15 April 2020, banks had granted 22 billion euros of State-guaranteed loans, and were processing another 40 billion of loans. This shows that banks have got behind the plan enthusiastically and have acted extremely quickly, because 22 billion is 15% more than the normal three-week amount of new loan production, and these new State-guaranteed loans are on top of banks’ other new lending.

 

François Doux: My last question, Laurent Quignon, is the one that everyone is asking. Will these State-guaranteed loans be effective?

 

Laurent Quignon: It’s a solution that’s very well suited to businesses that will see their business levels bounce back fairly strongly in the second half of 2020, if the public health situation allows. For example, companies that sell durable goods, cars, household equipment and so on.

 

François Doux: But that’s not the case for all companies.

 

Laurent Quignon: Yes, you’re right François. For hotels and restaurants, for example, additional support will be needed. The decision that’s just been taken to cancel 750 million euros of tax and social-security charges in this sector is a step in the right direction.

 

François Doux: Thank you, Laurent Quignon, for this update on State-guaranteed loans, which should make the recession a little more comfortable for businesses in France. In a moment, we will talk about countries’ debt-to-GDP ratios in Chart of the Month with William De Vijlder.

 

 

 

CHART OF THE MONTH

 

François Doux: For this April 2020 Chart of the Month, we’re going to talk about the relationship between debt and GDP. William De Vijlder, hello.

 

William De Vijlder: Hello François.

 

François Doux: William, why did you choose this topic at the moment, when we’re preparing for the post-lockdown, post-Covid-19 era?

 

William De Vijlder: Obviously, this is a time when we’re rediscovering the need for fiscal stimulus, fiscal support. We’re reading a growing number of articles mentioning a debt explosion, so it’s a subject that I find fascinating and important and that’s why I chose it this month.

 

François Doux: So can you describe the chart for us? What does it show?

 

William De Vijlder: Firstly, time is on the x-axis, and there are three lines. One line shows, for a hypothetical country the level of public sector debt in relation to GDP, another shows its borrowing requirement and therefore its budget deficit, and the third line shows the primary balance, i.e. the budget balance without interest expenses.

 

François Doux: Clearly, movements in the very short term don’t look very positive.

 

William De Vijlder: Indeed, that’s right. The country in question is being squeezed from both sides. That’s because GDP falls sharply because of the pandemic and the lockdown. At the same time, there’s a big increase in the budget deficit following the measures taken to mitigate the pandemic’s adverse effect on the economy. The result is that the deficit increases, and so the level of debt relative to GDP increases sharply.

 

François Doux: So does this mean that when the country moves out of the pandemic phase, it’s going to have to make efforts to bring it down to a more suitable level?

 

William De Vijlder: That rather depends on the government’s political priorities. A government could say, for example, that it’s happy to stabilise the debt/GDP ratio at the level reached after the pandemic. The drawback and the risk of a policy like that, obviously, is that it increases the sensitivity of the public finances in the event of another recession in a few years’ time.

A government could also decide to adopt a policy of trying gradually to bring the debt/GDP ratio down to its pre-pandemic level. That would require a primary surplus, i.e. a budget surplus before interest charges, which would have to be quite a bit higher than the surplus needed to stabilise debt before the pandemic, and that’s what the chart shows.

 

François Doux: Doesn’t that create a conflict with other fiscal requirements in future?

 

William De Vijlder: Firstly, we see that over time, it’s possible to bring the ratio down, but it requires a real effort that must be maintained for a long time. But yes, it may create a conflict, and this is the major challenge for fiscal policies next year and the year after. Governments will need to spend more on healthcare for example, or invest in order to tackle climate change. And at the same time, they would have to cut their budget deficits. So difficult but necessary choices will have to be made in my view. Governments will have to strike the right balance to bring down the public sector debt ratio gradually.

 

François Doux: Thanks very much, William De Vijlder, for that presentation. Next up, Three Questions about debt and emerging markets. I’ll be talking to François Faure about whether we should be cancelling debt or deferring it.

 

 

THREE QUESTIONS

 

François Doux: This global recession is naturally affecting emerging-market countries, particularly the poorest ones that have huge borrowing requirements.

François Faure, hello.

 

François Faure: Hello François.

 

François Doux: First question: For the poorest countries, how large are these financing requirements caused by the global recession?

 

François Faure: A study by a network of NGOs (Eurodad) calling for debts to be cancelled estimates this financing requirement at USD 94 bn. There are 45 countries in dire need of funding because of the pandemic. Financing requirements would push up their debt/GDP ratios by 14 percentage points, which is a lot for very-low-income countries.

 

François Doux: The G20 has now announced a debt moratorium for some countries. Is that a good thing?

 

François Faure: Yes, it’s a good thing. A moratorium can be applied very quickly, whereas cancelling debt requires negotiations. When you defer repayments, all those resources can very quickly be spent on healthcare, and as I said you don’t have to negotiate with creditors.

 

François Doux: My third and final question, François Faure: Why not just cancel all the debt?

 

François Faure: In the medium term, cancelling debt is better than a moratorium, because it improves countries’ solvency. However, it still has two potential short-term drawbacks. Firstly, cancelling debt inevitably requires negotiations.

If international, bilateral and multilateral creditors such as the World Bank or development banks were involved in debt negotiations, it could prevent them from granting new funding to countries.

The second drawback relates to the policies of rating agencies. If only debt owed to public-sector creditors – whether they be bilateral or multilateral – is cancelled, this is good news for those countries’ credit ratings if they need to raise debt in the markets.

However, if private-sector creditors are asked to put their hands in their pockets, to ensure equal treatment, then rating agencies could be forced to downgrade countries’ ratings, or even place some of them in default.

 

François Doux: So a very interesting topic that we’ll naturally be following in the months to come. François Faure, thank you very much.

See you again in a few weeks’ time for another edition of EcoTV, under lockdown or perhaps not.

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