European central banks have little ammunition with which to deal with the COVID-19 pandemic. Governments will soon be forced to balance the health of their citizens with economic stability and their own debt.
After more than a decade of unprecedented economic growth, the world is facing another global economic recession. Since the 2008 crisis, governments have had time to accumulate enough wealth to prepare for the next crisis.
But to keep the economy going, most European governments and central banks have largely exhausted their toolsets (quantitative easing and low to negative interest rates).
According to ECB data, only three EU member states (Germany, the Netherlands and Malta) have better debt-to-GDP ratios than before the 2008 crisis. The ability of some countries to dash out massive aid programmes is limited at best and will quickly spur new debates about mutualising debt in the European Union.
Government Aid Packages Are a Risky Call
In the past two weeks, European governments have been introducing aid programmes to ease the economic pressure brought about by the COVID-19 outbreak and the inevitable economic downturn that will follow.
The size of those programmes is astronomic. Germany plans an €822 billion economic aid package — amounting to 26% of annual German GDP — and says it will make more available if needed.
The UK Treasury introduced a £330 billion package — 15% of annual GDP. The Czech Republic plans to guarantee loans to business to the tune of 19% of GDP.
But the aid bridges only a limited and unknown period. Governments are making a risky call. If the pandemic triggers a full-blown recession causing widespread defaults, mass unemployment and severe loss of life, the relief and stimulus funds could fail to revitalise the economy and even larger amounts will be needed.
This could pave the way for the next sovereign debt crisis given the prevalence of debt-financed government responses in Europe.
Impact on the Banking Sector
Though banks are not being hit by the novel coronavirus as directly as other retail institutions, they are at the forefront of public attention.
Banks sit at the heart of the economy and provide funding to corporates and individuals. Their stability is crucial to keep the system up and running.
Tens of thousands of consumers are now being placed under quarantine or lockdown. As a result, they might lose their ability to pay for credit, particularly mortgages.
Also, business loans, especially to small and medium enterprises, are at risk due to the forced shutdown. But entire industries such as travel and F&B will be hard hit, as they will have no way to make up for the lost revenues in the future.
Other industries, such as manufacturing and retail, will suffer now but may see increased activity once things go back to normal.
How Banks Should Respond
Banks have already started waiving fees, increasing credit card limits, and granting mortgage payment holidays and access to fixed saving accounts to those impacted by the virus.
At this difficult time, it’s important to make the impacted clients feel that a bank has their back and to offer payment holidays or short-term cash-flow support. This is clearly also in their own interest, but this is only a temporary fix.
Generally, banks should not have a problem with liquidity and offering clients a mortgage payment holiday due to record low interest rates. But they should be reassessing the risk profiles of their customers and particularly reclassifying borrowers impacted by the coronavirus as high risk.
If the COVID-19 crisis lasts longer than one or two months, this option will increasingly become untenable. Of course, unless the state steps in and forces a moratorium on debt or lends directly to the customer, banks themselves will begin to struggle.
For example, interest rate payments are essential income for banks. Without it, banks will see liquidity shortages themselves, at a time where the cost of loans is going up due to the lack of liquidity in the interbank market.
Cybersecurity and Fraud Risk
A considerable concern is the rise in cyberattacks and fraud, as consumers, businesses and employees adapt to this new environment. Crisis and rapid change always create an opportunity for bad actors, and COVID-19 will be no different.
Banks must be aware of new types of attacks and fraud, particularly as more staff work from home and therefore open new threat vectors. The risk of vital team members being sick or unavailable or less efficient because they are working from home will become a challenge.
Some regulators, such as the Monetary Authority of Singapore, have already mandated split team arrangements. This means that different teams split so that if an infection cluster appears in one, the business unit can still carry on operating.
For FinTech, the Future Is Contactless
Despite the negative outlook, economic uncertainty creates opportunities for new business models powered by emerging technology. Firms built on solid ground will win clients and the best talent from those that won’t adapt.
In the coming years, consumers will fear infection. This will accelerate the switch to a cashless society and the adoption of alternative integrated payment features powered by mobile wallets.
Personal mobile devices will become a user’s central operating device, enabling payments to peers and to businesses. Consumers will use mobile devices to operate ATMs and terminals remotely without touching the screen. Technology providers should be focusing on alternative authentication methods through biometrics.
The War with Coronavirus Might Drive Technological Advancement
Some European countries are now in a state of emergency that would usually only be introduced during wartime. Fighting the novel coronavirus is a war as well.
Despite the tragic losses that a war usually brings, a war always drives technological advancement. In 10 years’ time we will look at the pandemic as a trigger that enabled us to spend our time more efficiently and to focus more on activities that matter.
The advancements in digital technology are making the crisis more bearable and are enabling businesses to keep working with access to key services (communication, payments, credit, collaboration, etc.), while enabling social distancing and helping to fight COVID-19. We expect digital technology to experience another boost during and after the crisis.
At the same time, consumer adoption will increase, given the lack of other options at the moment, and this will enhance familiarity. COVID-19 could stay with us for months (even years) and it’s unlikely to be the only pandemic in the future.
Every few years the world sees new outbreaks of infections (SARS, H1N1, Ebola, Zika, etc.), but the global impact of COVID-19 could lead us to rethink how we prepare for such disasters. Digital technology and the cloud will play a vital role.
IDC is closely monitoring the impact of COVID-19 on the ICT industry. Over the next few weeks, IDC Financial Insights will be publishing more reports, so please check out our global and regional programmes.