Financial Times Europe - 23.03.2020

Monday23 March 2020 ★ FINANCIAL TIMES 17

Opinion

F

or the eurozone, this is not the

2010-2012crisisalloveragain.

It is far worse. The coronavi-

rus will prove to be an

economic shock, a corporate

solvency crisis and a political crisis all

foldedintoone.

The good news is that it will probably

not become a sovereign debt crisis. The

European Central Bank last week did

the right thing and has reduced that

probability. Itspandemic emergency

purchase programme ill help govern-w

ments raise money for healthcare and a

first set of economic measures. What it

will not, and cannot on its own, address

is the wider macroeconomic impact of

coronavirus. That will require a differ-

entsetoftools.

eurozone annual GDP. Alternatively,

but with less immediate impact, the

funds could be used to generate a huge

post-crisisinvestmentprogramme.

WhatIhavealreadynoticedisthatthe

debate about the future of the eurozone

is back.Not everyone will want to be

locked in a monetary union with coun-

tries like the Netherlands, whose prime

minister is ideologically opposed to

mutual risk-sharing. Thissort of unwill-

ingpartnershipisnotsustainable.

It is not just the scale that is different

between today and the crisis of 2012.

The politics have also changed. Arecent

poll egistered a rise in the number ofr

Italians who regard belonging to the EU

as disadvantageous, from 47 per cent in

November 2018 to 67 per cent now.

Italy, at thecentre ofEurope’s coronavi-

rus outbreak, has more pressing prob-

lemstodealwithatthemoment.

But be prepared for more in-out

debates as a direct result of this crisis.

And that is another reason why we

shouldthinkaboutstimulus,notcredit.

[email protected]

This could take the form of a one-off

fiscal facilitypartially bankrolled by the

ECB. The key characteristics should be:

money, not credit; direct cash payments

to citizens, households and companies;

and, yes, the liability should be mutual-

ised.Itshouldbebacked,withoutlimits,

bytheECB.

Thebiggesteconomicriskrightnowis

not just the steep decline in output, but

alsothepermanentshockitcouldsuffer

afterwards. The primary purpose of a

discretionary stimulus should be to

ensure that the recovery is V-shaped.

But there are a number of reasons to

fear that the recovery will peter out.

Some of us will be travelling less. Some

mightseekadifferenttrade-offbetween

work and leisure. European car manu-

facturersmightuseCovid-19asanexpe-

dientmomenttoreducetheirstructural

overcapacity.

As to size, if you expect an economic

shock of up to 10 per cent of GDP, a dis-

cretionarystimulustothetuneof5to

per cent of GDP is hardly disproportion-

ate. A payment of €1,000 for each citi-

zen would cost just under 3 per cent of

hazard. So is the economic concept of a

helicopter drop, or the US idea of stimu-

lusbymailingchequestohouseholds.

European countries do have well

functioning fiscal stabilisers such as

unemployment insurance. These eco-

nomic shock absorbers are designed to

deal with normal fluctuations. But they

are notbig or strong enough for emer-

gencieslikethisone.

The fiscal framework of the eurozone

has some built-in flexibility, but it is not

set up for discretionary stimulus. A 10

percentfallinGDPwillrequireit.Ifgov-

ernments cannot do this on their own, it

willhavetobedoneatEUlevel.

Wecouldemploysomecreativefinan-

cial wizardry involving one or several

EU institutions and the ECB together.

The German government willtoday

agree a supplementary budget or justf

under 5 per cent of gross domestic prod-

uct, and will set aside additional funds

for equity stakes in companies and

loans.

But beware. What is often oversold as

a bazooka tends to come with awkward

conditionsinthesmallprint.

Much of the money is credit, not

grants. If a business borrows money

while profits fall, solvency deteriorates.

This was Italy’s problem after the euro-

zone crisis. Austerity left the economy

inaweakerpositiontopaydowndebt.

This crisis could easily end up adding

20 to 50 percentage points to Italy’s

debt-to-GDP ratio over a number of

years.Ifanotherepisodeofausterityfol-

lows, Italy will be trapped in a vicious

cycle. This is why I do not see any merit

in a programme of credits by the Euro-

pean Stability Mechanism, the euro-

zone’srescueumbrella.

What the eurozone needs is cash, not

credit. But credit is what it is good at.

Bailouts are frowned upon on the

grounds that they constitute moral

Europe requires a new scale of stimulus

The eurozone needs cash

not credit to cope with

the current crisis. But the

latter is what it is good at

europe

Wolfgang

Münchau

A

sthecoronaviruspandemic

shuts down international

commerce, central banks

must act decisively to pre-

vent it from triggering a

global financial crisis. So far, they have

cut interest rates, expanded asset pur-

chases and pumped trillions of dollars

into short-term debt markets. But

flooding the financial systemwith

liquidity, while important, is not

enough. They also need to shore up the

capital base of the banking system. To

helpdothat,theyshouldrequirethatall

global systemically important banks

suspend discretionary bonuses, divi-

dends, and share buybacks, as recom-

mended by theSystemic Risk Council fo

formerregulators.

Big banks throughout the world are

substantially exposed to the pandemic,

particularly as ithurts corporate bor-

rowers. At approximately $70tn, debts

owed by non-financial businesses have

rocketed. These “real economy” com-

panies span every industry, including

the hard-hit energy, transportation,

retail, and hospitality sectors. To sur-

vive, they are increasingly hoarding

cash and tapping into their massive

back-up lines of credit, placing addi-

tional strain on the banking system. As

bond markets seize up, access to bank

credit may be their only source of

financing to support operations and

avoidwholesalelay-offs.

Big banks need to be positioned to

absorbimpendinglosses,whilesimulta-

neously expanding their balance sheets

to support the real economy. They need

to remain solvent so that they can con-

tinuetolendasthecrisisunfolds.

As an important first step to achieve

this, the US Federal Reserve and other

central banks should take co-ordinated

action to require systemically impor-

tant banks to build their capital buffers

by retaining their earnings. This means

that such banks would suspend all capi-

tal distributions, including discretion-

ary bonuses to top executives, until the

globaleconomystartstorecover.

Thissimplestep,whichwouldinclude

dividends and share buybacks, would

potentially free up trillions of dollars of

additionalloancapacity.

To give a sense of the magnitudes

involved, last year big banks globally

paid out about $325bn in share buy-

backs and dividends. In the US alone,

regulators have approved buybacks and

Force global banks to suspend bonuses and payouts

business

Rana

Foroohar

Sheila

Bair

T

he EU was meant to be a

world power that stood as a

beacon for human rights

and respect for the interna-

tional rules-based order.

But unless something is done about

Greece’s treatment of refugees, and the

frenzied support it still receives from

theEU,thatclaimwillcollapse.

I have longwarned the EU to not be

complacent about the challenges it

faces, including the rise of extremism,

xenophobia, Islamophobia and anti-

Semitism. In Turkey, we have called for

a revamped international system to

manage the huge displacement of peo-

ple fleeing conflicts such as Syria’s. We

have painstakingly tried to convince the

EU to help us resolve such conflicts and

address the fragilities that surround

Europe. If we cannot prevent these

calamities at source, everyone will suf-

fer. Yet the latest episode in this saga,

whichbeganwiththeoutbreakofSyria’s

war, shows the EU has not advanced an

inchtowardsamatureunderstandingof

theproblemorinproducingsolutions.

Nine years into the conflict, the prov-

ince of Idlib has become a “new Gaza”,

where3.5mpeoplearesequestered.The

de-escalation zone created in 2018 has

suffered a assive military offensivem by

the Syrian government,backed by Rus-

sia and Iran. Since last May, over 1,

people have been killed, to use UN fig-

ures. When Turkish soldiers were

attacked in February, we retaliated

forcefully and showed what it means to

attack a Nato country. However, before

wecouldstoptheonslaughtonIdliband

muster a cessation of hostilities, 1m

people had begun marching towards

Nato’s and Europe’s south-eastern

boundary, the Turkish-Syrian border.

We already host more than 3.6m Syri-

ans, and help directly or indirectly

another 5.5m inside Syria. This has cost

us over $40bn. Only last year, our secu-

rityforcesapprehendedalmost455,

people rying to migrate illegally. Wet

cannot continue to protect the borders

ofNatoandEurope lone.a

That is why we declared last month

that Turkey could not absorb any more

refugees, either from Syria or beyond,

and we would no longer stop those

already in our country from leaving.

Turkeywasneverintendedastheirfinal

destination; we cannot force them to

stay. Our unheeded calls for the EU to

takethiswaveofmigrantsseriously,and

tocomplywiththe efugeedealr tstrucki

with Turkey in 2016,reached boiling

pointwiththelatestIdlibdisplacement.

What followed is a disgrace to the EU

and a stain on human conscience. The

EU and its parliamentarians didlittle

more than watch on s Greek forcesa

sprayed tear gas and fired on people at

their border. Greece alsoillegally sus-

pended refugee applications. The UN

was critical; the EU not. People died,

scores were wounded and European

prestigewasdamagedglobally.

All this because the EU has consist-

ently failed to develop a policy that

projectspeace,prosperityanddignityto

its near-abroad, and has not worked

earnestly with Turkey to achieve that.

Severalcountriesinourcommonneigh-

bourhoodareonfire,andthisisproduc-

ing one of the greatest human exoduses,

andeconomicandenvironmentalcatas-

trophes, since the second world war. We

cannot solve problems in source coun-

tries with wishful thinking and by pat-

ronising the only country, Turkey, that

takessubstantiveaction.

Building fortresses does not stop peo-

ple running for their lives. Solidarity

with a wrongdoing EU member, Greece,

also cannot trump sound policy. The EU

and Turkey have to find common

ground to address these problems. If the

EU really is striving to be a geopolitical

union,thisishowitcouldbedone.

In the year of Brexit, alienating the

onlymajorEuropeancountrystillaspir-

ing to join the EU — moreover, one that

walks the talk as a responsible actor — is

the biggest policy folly in generations.

Turkey, the UK and the EU must come

together to stabilise our common neigh-

bourhood, while the EU also expedites

Turkey’smembershipprocess.

The writer is Turkey’s foreign minister

EU inaction

on Syria is a

stain on human

conscience

Mevlut

Cavusoglu

Turkey, the UK and

the bloc must come

together to stabilise our

common neighbourhood

according to a Goldman Sachssurvey.

They should be given rants, notg

loans. Many run tight margins as it is,

and would not be able to survive any

additional debt burden. These small

and midsized businesses, which make

up 83 per cent of US payrolls, should

come first. Unlike large companies,

theircapital expenditure has also risen

inrecentyears.Thesearethebusinesses

thatweneedtosavenow.

On that note, lawmakers should be

ashamedthatthevirusaidbillpassedby

Congress ave big companies, but notg

smaller ones, a free pass when it comes

to givingworkers paid sick leave. To the

extent that Washington does provide

corporate bailouts, they must not let big

companiesoffthehook.

If these companies want government

money, they need to protect their work-

ers too. Washington should also con-

sider taking preferred equity stakes in

such companies. Unlike the bank bail-

outs of 12 years ago, let’s socialise not

justthelossesbutalsothegains.

[email protected]

many economists. In an ideal world, we

would do that by means testing. But

there is no time. We can recapture

unnecessary payments the other side of

the crisis, via the tax code. Meanwhile, I

would encourage those who don’t need

their cheques to give them to those who

do: workers such as my cleaning lady,

whocannotworkfromhome.

I would also love to see a federally

underwrittenthree-monthmoratorium

on all rent, mortgage payments and stu-

dent debt payments, as well as govern-

ment reimbursement for all healthcare

costsassociatedwiththevirus.

“Themostimportantsteprightnowis

debt forbearance,” says credit expert

RichardVague,whohasstudiedthefall-

outof past financial crises. “I don’t

believe this will be detrimental to the

economylong-term.”

When it comes to corporate bailouts,

small and midsized businesses should

come first. Over 96 per cent of them say

that they are already feeling the pain of

Covid-19, and over half claim they won’t

be able to stay in business for more than

three months in the current situation,

mistaken “socialise the losses, privatise

thegains”approachusedadecadeago.

We have to start by protecting indi-

vidual citizens and consumers.Corona-

virushasexposedhowvulnerablemuch

oftheAmericanpopulationis.

My children attend the New York City

public school system, along with 1m

others. One reason the schools waited a

while to shut down for virus mitigation

is that three-quarters of itsstudents live

atorbelowthepovertyline.

One in 10 are homeless. Many get the

majorityoftheircalorieseverydayfrom

free school breakfasts and lunches.

(Schools are still operating a grab-

and-gomealoperation).

This is one of the many reasons why I

am for the immediate cash payouts to

individuals that have been suggested by

allowed to jump to the front of this very

long queue, let’s stop for a minute to

considerhowwegottothisposition.

In 2008, the subprime meltdown trig-

gered a systemic financial crisis that

required a bailout of banks to prevent

whatmighthavebecomeasecondGreat

Depression. But the strongest of these

banks then thrived, becomingricher

and more concentratedthan they were

beforethecrisis.

Meanwhile, millions of Americans

had their homes taken from them

because they couldn’t make their mort-

gage payments. Many of these homes

were in turnbought-up by private

equity groups, which could pay cash for

them on courthouse steps. Blackstone

became the country’s largestowner of

familyhomes.

Over the ensuing decade, tech firms,

tax cuts, low rates and easy money also

madeequity markets rise. But this

“recovery” benefited mainly the asset-

owning class. For most people,weekly

earnings, after adjusting for inflation,

remained roughly where they were in

1974. The anger this fuelled, directed at
      themainstreamofbothparties,washow
      the US ended up with President Donald
      Trump. It’s also what has kept the Dem-
      ocratic socialistpresidential candidate
      BernieSandersgoingforsolong.
      Bailouts will again be needed now,
      given amarket downturn that mirrors
      1929 ndaneconomiccontractionlikelya
      to be sharper than during the previous
      financial crisis. But if we want capital-
      ism and liberal democracy to survive
      Covid-19, we cannot afford to repeat the

I

n theprevious crisis, Washington

bailed out banks. Today, it’s about

tobailoutbigbusiness.

The corporate sector looks a lot

like the financial sector did pre-

2008: debt-laden, with some sectors

highly leveraged, and most of them reli-

ant on financial engineering to create

theillusionofgrowthandinnovation.

American companies used to reinvest

their earnings to boost productive

capacity. Now, they mostly generate

“value” bydownsizing and distributing

moneytotherichestintheUS.

The question, now that the entire

economy is collapsing at once, is who

willbefirstinlinetogetbailedout?

Will it be the airlines, who spent the

majority of their copious free cash in

recentyearsonbuybacks?

OrmanufacturerssuchasBoeing,one

of the greatoutsourcers f all time,o

which says it needs $60bn to preserve

jobs in its supply chain? Or should the

first cheques be written to Big Oil, the

cruise industry, hotels, hospitals, casi-

nos or restaurants? Even pork produc-

ers, drug companies and drone manu-

facturers see an opportunity to get on

thefiscalstimulusbandwagon.

Before considering who should be

This time, small

guys should get

the bailouts

Coronavirus has exposed

how vulnerable much

of the American

population is

FT series

Coronavirus: the economic cure

dividends at the eight largest banks for

the 12 months beginning 1 July 2019

totalling approximately $155bn. As a

rule of thumb,$1 of capital supports $

oflending.Ifthat$155bnwaskeptonUS

bank balance sheets, it could increase

lendingcapacityby$2.4tn.

These eight banks recentlysaid hatt

they will suspend share buybacks until

at least the end of thesecond quarter of

2020. This is a welcome gesture, but it is
      too little too late — and it only applies to
      sharebuybacks,notdividendsorexecu-
      tivebonuses.Moreover,itonlylastsfora
      few short months, with each bank free
      toreinstatebuybacksatanytime.
      We should be wary of such voluntary
      measures given the relentless (and suc-
      cessful) lobbying by big banks in recent
      years to chip away at capital rules. A
      longer, comprehensive and co-ordi-
      nated central bank-directed suspension
      ofcapitaldistributionsisnecessary.
      Calls to increase bank capital and
      curbbonusesarenothingnew.Foryears
      current and former regulators — includ-
      ing former Fed chair Janet Yellen and
      myself, a former chair of the US Federal
      Deposit Insurance Corporation, plus
      many others — have urged the US cen-
      tral bank to trigger so-called countercy-
      clical capital buffers. This is a financial
      stability tool that requires banks to hold
      higher levels of loss-absorbing capital
      towardstheendofaneconomiccycle.
      HadtheFeddeployedthistool,thebig
      US banks would now have a stronger
      capital base to support the economy.
      Instead, the Fed has allowed them to

reduce capital ith shareholder distri-w

butionsexceedingearnings,onaverage.

In fact, just this month, the Fedfinal-

ised a rule hat relaxes certain stresst

testing standards, substantially reduc-

ing current minimum requirements,

including a $100bn reduction in

required tier one capital. With astonish-

ingly bad timing, the Fed eliminated a

requirement that banks have sufficient

capital to expand lending in a period of

economicstress,suchasthisone.

In the years leading up to the 2008

financial crisis, big banks were among

corporate America’s most generous div-

idendpayers.Indeed,Citigroup—which

received the biggest bailouts among the

largebanks—didnotevenhaltdividend

payouts until it was forced to do so by

thegovernmentinNovember2008.

This time around, central banks

shouldactbeforebanksstartfallinginto

trouble. Requiring them to retain their

earnings will be an important step in

ensuring that the banking system does

notletthepublicdownagain.

The writer is a former chair of the US

Federal Deposit Insurance Corporation.

Gaurav Vasisht contributed to this article

MARCH 23 2020 Section:Features Time: 22/3/2020- 15:28 User:alistair.hayes Page Name:COMMENT USA, Part,Page,Edition:USA, 17, 1