Critical moment for national economies and banks will be reached when Covid-19 support measures are phased out - ECB

RIGA - The critical moment for the national economies and banks, including in the Baltic countries, may be reached when the Covid-19 support measures are phased out, as Isabel Schnabel, member of the Executive Board of the European Central Bank, said in an interview with LETA.

"Job retention schemes, which have kept around ten million people all over the euro area in work, have been crucial to prevent a sharp increase in unemployment. Another important component has been the support to corporates to avoid that firms that would be viable in normal times would be forced to file for bankruptcy. These were some of the most important steps taken and they have worked very well, particularly in combination with monetary policy, which has provided favorable financing conditions for firms, households and governments - thereby reinforcing the fiscal response," said Schnabel.

On the fiscal side, there have been loan moratoria and guarantees, while central bank measures provided ample liquidity at highly favorable terms, which enabled banks to continue lending.

"Due to the support measures, the number of insolvencies is currently very low. The critical point will be reached when these measures are phased out. There is the risk of a cliff effect that could spill over to the financial sector, and we could see an increase in non-performing loans," added Schnabel.

The Baltic states are facing the same risk of a cliff effect. Many firms are experiencing rising indebtedness, and not all of them are going to survive. The pandemic creates challenges in all euro area countries, said Schnabel.

"Our analysis shows that euro area banks should be able to cope with this as long as the support is not withdrawn too early and too abruptly, and as long as the overall conditions remain favorable, including the financing conditions provided by the ECB. But we should expect many firms to come out of this crisis with much higher debt levels," Schnabel pointed out.