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

 


Interpol warns of ‘alarming’ cybercrime rate during pandemic

Updated 5 min 59 sec ago

Interpol warns of ‘alarming’ cybercrime rate during pandemic

  • Cybercriminals are increasingly using disruptive malware against critical infrastructure and health care institutions
  • There was also an increase in the spread of fake news and misinformation which sometimes itself conceals malware
LYON: Global police body Interpol warned Monday of an “alarming” rate of cybercrime during the coronavirus pandemic, with criminals taking advantage of people working from home to target major institutions.
An assessment by the Lyon-based organization found a “significant target shift” by criminals from individuals and small businesses to major corporations, governments and critical infrastructure.
“Cybercriminals are developing and boosting their attacks at an alarming pace, exploiting the fear and uncertainty caused by the unstable social and economic situation created by COVID-19,” said Interpol Secretary General Juergen Stock.
“The increased online dependency for people around the world is also creating new opportunities, with many businesses and individuals not ensuring their cyberdefenses are up to date,” he added.
The report said cybercriminals were sending COVID-19 themed phishing emails — which seek to obtain confidential data from users — often impersonating government and health authorities.
Cybercriminals are increasingly using disruptive malware against critical infrastructure and health care institutions, it added.
In the first two weeks of April 2020, there was a rise in ramsomware attacks, in which users have to pay money to get their computer to work again.
There was also an increase in the spread of fake news and misinformation which sometimes itself conceals malware, said Interpol.
From January to April, some 907,000 spam messages, 737 incidents related to malware and 48,000 malicious URLs — all related to COVID-19 were detected by one of Interpol’s private sector partners, it said.
The agency warned the trend was set to continue and a “further increase in cybercrime is highly likely in the near future.”
“Vulnerabilities related to working from home and the potential for increased financial benefit will see cybercriminals continue to ramp up their activities and develop more advanced and sophisticated” methods, it said.
Once a COVID-19 vaccine becomes available, Interpol said, “it is highly probable that there will be another spike in phishing related to these medical products as well as network intrusion and cyberattacks to steal data.”