Focus: Oil and what to do with non-performing loans in the eurozone

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Updated 20 April 2020

Focus: Oil and what to do with non-performing loans in the eurozone

What happened:

Major markets were up last week amid high volatility. It was the start of the earnings season, where Q1 results reflected the last quarter before the lockdown really hit Europe and the US.

There was a trend against emphasis on guidance, because of a lack of visibility on the full impact of the second quarter and inability to forecast the shape and pace of recovery as economies emerge from lockdown. Banks all shored up their loan loss provisions in expectation of a deterioration of their loan portfolios.

The President of the Cleveland Federal Reserve Bank, Loretta Mester, warned against the risk-on sentiment becoming too buoyant because the crisis was still ongoing and the shape and speed of any recovery unknown. She has a point. Several economists calculated that leaving major economies in lockdown could cost their gross domestic products 3 percentage points per month.

Mester explained the Fed’s interventions as a) ensuring a continued functioning of markets via the asset purchase program and b) mitigating the effects of the crisis on households and businesses by ensuring credit flows to them. They are inherently linked because functioning markets are the transmission mechanism enabling credit to flow.

Oil had a very bad start of the week with Brent having lost 6.8 percent on the day and WTI’s May forward contract at $11.05 down 39.52 percent on the day by mid-afternoon in Europe. The June contract is considerably higher.

The Bank of Spain forecast that Spain’s economy would contract between 6.8 and 12.4 percent in 2020.

Background:

The fall in the oil price reflects the world running out of storage capacity. The differential between Brent and WTI reflects the situation in the US. Some producers sell their crude at $2 per barrel. It is not beyond the imagination that producers must have to pay off-takers if the situation does not improve.

The OPEC+ deal, which takes 9.7 million barrels out of the market, only kicks in on May 1 and mostly affects Asia and Europe. It cannot compensate for the dramatic demand in decline which the International Energy Agency forecasts to stand at 23 million barrels per day during the second quarter. What it will do, however, is flatten the curve and extend the ability of stage facilities to take in crude.

We should not forget that what happens in the US shale space has big ramifications for some US lenders, if they are exposed to the traditionally highly leveraged producers in the shale space. This, and the effects the situation has on employment, explains why US President Donald Trump’s administration is considering paying oil companies to leave crude in the ground.

Going forward:

The chilling numbers out of Spain on Monday morning highlight the problems faced by the EU. Both Spain and Italy fail the loan/GDP criteria by far. Italy’s debt to GDP ratio may reach anywhere between 150 and 180 percent at the end of the crisis.

It brings to the fore how the EU will deal with the economic fallout of the coronavirus crisis. There is the problem of mutualization of debt in the eurozone which France, Spain, Italy and other southern countries favor and their northern counterparts like Germany and the Netherlands oppose.

One way around the problem could be to permit the EU Commission borrowing to fund an investment-led recovery plan under the Multiannual Financial Framework, the EU’s seven-year budget. This plan is still on the drawing board.

In the meantime, there is the non-performing loan (NPL) legacy of the 2008 financial crisis, leaving many eurozone countries with a mountain of NPLs. According to the Financial Times, the ECB is considering creating a “bad bank” to avoid NPLs clogging up the lending capacity of its banks, giving them headroom to lend as Europe emerges from the coronavirus-induced lockdown. This proposal is also still on the drawing board and there is no decision structure about the “bad bank” — national versus eurozone-wide — as of yet. However, it is crucial to find a solution to the NPL issue in order to support any recovery.

 

— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.

Twitter: @MeyerResources

 


Lebanese MPs fail to reach agreement on draft amnesty law

Updated 29 May 2020

Lebanese MPs fail to reach agreement on draft amnesty law

  • The Free Patriotic Movement tried to amend the law by excluding “perpetrators of crimes against public funds and terrorist crimes” from the amnesty

BEIRUT: The Lebanese Parliament on Thursday failed to approve a draft law on general amnesty, after tensions rose during a vote and the Future Movement, led by former prime minister Saad Hariri, walked out of the legislative session.

“They want to bring us back to square one,” he said. “Every party has its own arguments, as if they want to score points.”

The Free Patriotic Movement tried to amend the law by excluding “perpetrators of crimes against public funds and terrorist crimes” from the amnesty. Minister of Justice Marie Claude Najm, who is affiliated with the FPM, asked for “amendments to the draft law so that it does not include those accused of tax evasion and violating maritime property.”

The draft law was referred to the parliament despite disagreements between parliamentary committees over the basic issue of who should and should not be included in the amnesty. The former government, led by Hariri, proposed a general amnesty law before it resigned last October in the face of mounting pressure resulting from public protests.

There were a number of protests during the legislative session, some opposing the adoption of the law entirely, while others were directed at specific provisions within it.

The draft law includes an amnesty for about 1,200 Sunni convicts, 700 of whom are Lebanese. Some are accused of killing soldiers in the Lebanese Army, possessing, transporting or using explosives, kidnap and participating in bombings.

It was also covers about 6,000 Lebanese Christians, most of whom fled to Israel following the withdrawal of occupying Israeli soldiers from southern Lebanon in 2000, as well as nearly 30,000 people from the Bekaa region, the majority of whom are from the Shiite community and wanted for drug trafficking, drug abuse, murder, kidnap, robbery and other crimes.

Hezbollah appeared to agree to a pardon for entering Israel, but object to a pardon for anyone who worked or communicated with the enemy or acquired Israeli citizenship.

Before the session, the Lebanese Order of Physicians highlighted overcrowding in Lebanese prisons, and this health risk this poses during COVID-19 pandemic.

“There are 20 prisons for men, four for women and one juvenile prison holding a total of 8,300 inmates, 57 percent of whom are in the Roumieh Central Prison,” the LOP said. It added that 57 percent of prisoners are Lebanese and 23 percent are Syrian, one third have been convicted while the rest are awaiting trial, and the overcrowding is so bad each prisoner has the equivalent of only one square meter of space. The organization described the situation as “a time bomb that must be avoided.”

In other business during the session, as part of anticorruption reforms required as a condition for receiving international economic aid, the Parliament approved a law to increase transparency in the banking sector, with responsibility for this resting with the Investigation Authority of the Lebanese Central Bank and the Anti-Corruption Commission.

It also endorsed a draft law to create a mechanism for top-level appointments in public administrations, centers and institutions. An amendment was added to prevent ministers from changing or adding candidates for the position of director general. The FPM opposed this, while Hezbollah and the Lebanese Forces voted in favor. Hariri accused the FPM of having a “desire to possess the entire country.”

MPs rejected a draft law to allow Lebanon to join the International Organization for Migration because, said MP Gebran Bassil, “it’s unconstitutional and facilitates the accession, integration and settlement process.” Lebanon hosts about 200,000 Palestinian and a million Syrian refugees.

The session sparked a wave of street protests. Some of them, led by the Syrian Social Nationalist Party and the Lebanese Communist Party, opposed the approval of a general amnesty that includes those who fled to Israel.

Protesters burned the Israeli flag in Sidon in protest against a law that “affects Israeli agents who sold their land, fought their people, and plotted against them.” They set up a symbolic gallows on which they wrote: “This is the fate of Zionist agents who fled execution.”

Others, including the families of Muslim detainees, staged demonstrations in support of the amnesty.