INTERVIEWInterview with KathimeriniInterview with Fabio Panetta,
Member of the Executive Board of the ECB, conducted by Eirini
Chrysolora and published on 17 October 202017 October 2020
pandemic emergency purchase programme (PEPP) has so far secured low
interest rate borrowing, especially for countries in need such as
Italy and Greece. What do you expect to happen regarding the bonds of
these countries when the programme ends? Are you worried that they
will fall off a cliff?
The pandemic has driven the euro area
economy into its deepest economic downturn. The GDP contraction hit
double digits in the second quarter, with disinflationary effects. The
ECB has therefore taken decisive measures to protect productive
capacity and stabilise markets, providing favourable financing
conditions for all economic sectors throughout the euro area. This, in
turn, has sustained the flow of financing to households and firms,
supporting aggregate demand and avoiding a more pronounced fall in
But we need to continuously monitor the evolution
of the pandemic and its economic implications. The resurgence of
infections we are seeing in a number of euro area countries is
weakening the recovery, especially in the services sector, where the
business activity index contracted in September.
reinforces the need for prolonged economic support from macroeconomic
policies. The ECB will conduct net asset purchases under the PEPP
until at least the end of June 2021, and in any case until the
Governing Council judges that the coronavirus (COVID-19) crisis phase
is over. We will reinvest the principal payments from maturing
securities purchased under the PEPP until at least the end of 2022.
And any subsequent roll-off of the PEPP portfolio will have to be
managed to avoid interfering with monetary policy. In any case, we
will not allow any tightening of financing conditions that gets in the
way of our aim.
Is there a possibility that the PEPP will be
extended beyond June 2021? Could its size be increased beyond €1. 35
The key driver of economic developments is the
evolution of the pandemic, which is depressing investment and
consumption. According to European Commission survey data, in
September euro area households’ savings intentions stood at their
highest level on record since the start of the series in 2000. The
current pandemic developments are not positive. On top of the direct
impact on spending, uncertainty is likely to increase significantly,
with adverse effects on both the economic outlook and the balance of
Both actual inflation and expected inflation are
already too low. In September the euro area headline inflation rate
was negative for the second month in a row (-0. 3%), while inflation
excluding the volatile energy and food components was 0. 2%. ECB staff
have projected that inflation will rise to only 1. 3% in 2022, but the
most recent inflation data show that there is a risk of inflation
dynamics being weaker than projected. Market-based inflation
expectations are subdued, and consumers’ inflation expectations have
also declined continuously since April.
In view of the sheer
size of the downside risks, there should not be any doubt about our
determination to preserve price stability. We stand ready to adjust
all of our instruments, as appropriate, to achieve our objective of
bringing inflation back to our medium-term aim in a sustained manner.
During the pandemic we have already adjusted some of our instruments,
and this has proven to be effective.
Do you feel that the ECB
has once again done more than its share during this crisis? Will
monetary policy be able to return to normal after such extensive
The monetary policy and fiscal policy
responses have been essential to protect households and businesses
during the crisis, thereby facilitating the necessary public health
The mistakes that have characterised past episodes
have been avoided. Monetary policy and fiscal policy reacted rapidly
to the shock and have mutually reinforced each other. Together,
monetary policy and fiscal policy have increased confidence.
shy policy attitude at the present juncture would have the opposite
effect. Our bank lending survey suggests that banks would tighten
credit standards considerably if public loan guarantee schemes were
not maintained. This could make otherwise viable companies and
creditworthy households insolvent. Similar consequences could emerge
from a tightening of financial conditions.
The only way to
normalise monetary policy in the future is to forcefully support the
Does the Federal Reserve’s change in inflation-
targeting pressure the ECB to follow a more accommodative policy?
Our own strategy review is under way and will be an important
focus for our work over the next year. Its aim is to make sure our
monetary policy strategy is fit for purpose, both today and in the
Some global developments that the Federal Reserve has
taken into account in its review are also relevant to our current
monetary policy. In particular, the marked decline of the “natural”
rate of interest – i. e. the rate at which the monetary policy stance
is neutral – observed in advanced economies complicates the task of
monetary policy, as it reduces the scope for conducting expansionary
policy through rate cuts. This has three key implications.
First, it should reduce our tolerance for inflation drifting
downwards away from our aim and prompt us to treat our inflation aim
as perfectly symmetric. Second, the instruments we have activated in
recent years – such as asset purchases and targeted lending to banks –
have been key to containing the risk of deflation and should remain in
our toolbox; this would have a stabilising effect and reduce the
probability that we have to use those instruments again in the future.
And third, it indicates that in extreme situations, such as when
interest rates are close to the lower bound, it is essential that
fiscal and monetary policy reinforce each other.
extent does the €750 billion Next Generation EU (NGEU) package
facilitate the ECB’s monetary policy?
NGEU can significantly
improve the future path of the European economy. The mere announcement
of the recovery fund has contributed to a further decline in
fragmentation and supporting sentiment.
But now we need to
activate NGEU quickly and use it for productive spending – in other
words, to finance investment in a context of growth-enhancing reforms.
It is crucial that the funds become available in early 2021, to avoid
any fiscal cliff effects. And that the resources are allocated to the
sectors that can be powerful drivers of growth in the long term. The
link between recovery funding and reforms will further empower the
multipliers associated with the recovery spending.
How long do
you think it will take for the European economy to return to pre-
coronavirus levels? What should Europe’s priorities be in this
In the first half of the year euro area GDP declined
by 15%, and according to the latest ECB staff projections it will
return to pre-crisis levels only by the end of 2022. However, the
return to more stringent containment measures that we are observing in
a number of euro area countries may push this horizon even further
Moreover, there is a risk that a slow recovery will
exacerbate divergences across sectors and countries: the longer it
takes to return to pre-crisis levels, the greater the impact on
divergence and inequality. The European fiscal policy response
mitigates this risk, but it cannot eliminate it. We need to quickly
return to growth.
How could Greek bonds become eligible under
the public sector purchase programme (PSPP), and not only under the
PEPP, given that they are still not investment grade?
follows a clear set of rules about the eligibility of marketable debt
securities and implementation modalities; based on the minimum rating
requirements, Greek government bonds are not currently eligible for
the programme. But we intervened to fight the effects of the COVID-19
crisis with a variety of instruments. The inclusion of Greek
government bonds in the PEPP has stabilised financing conditions in
Greece. The Greek ten-year sovereign bond yield has dropped markedly
since the start of the PEPP, and currently stands at 0. 8%, i. e.
below pre-pandemic levels.
Greece, an already heavily indebted
country, will be burdened with additional debt by the pandemic. Will
its debt be sustainable?
Greece has a high debt burden, but
the maturity of its debt is very long and the cost of debt servicing
continues to be low, as also indicated by the successful recent
issuances. The preliminary debt sustainability assessments by the
European Commission on the eligibility of euro area countries for the
European Stability Mechanism’s Pandemic Crisis Support concluded that
Greece’s debt is sustainable.
Measures adopted by the Greek
authorities, as well as those agreed with the European Commission,
will have to support the recovery of the Greek economy, allowing debt
ratios to abate over time. Looking beyond the short term – where
fiscal policy has to manage the impact of the crisis – it is crucial
that all resources are devoted to increasing the Greek economy’s
growth potential and that appropriate investments are accompanied by
reforms which support potential growth and long-term debt
How do you think the problem of higher non-
performing loan (NPL) ratios due to the pandemic crisis should be
addressed? In particular, will Greece, which already had a large stock
of NPLs before the pandemic, be able to deal effectively with the
problem with “Hercules” [the Greek asset protection scheme] or will it
need to take additional measures? The Governor of the Bank of Greece
has already proposed establishing an asset management company as a
next step, a proposal which seems to be viewed positively by the OECD.
The Greek banking sector had an average NPL ratio of 36. 7% in
the second quarter of 2020. Such high levels of NPLs weigh on banks’
solvency and profitability. This, in turn, hampers banks’ ability to
provide new credit to the economy, with negative consequences for
The Hercules asset protection scheme will
continue to contribute to sustainable NPL disposals and support Greek
banks’ efforts to achieve more sustainable NPL levels in the medium
term. Nevertheless, even with these accelerated NPL disposals, the
resulting NPL levels of Greek significant institutions are likely to
remain far above the average for banks under European banking
supervision. Against this background, all avenues for NPL reduction
need to be examined. First of all, financial sector reforms should
facilitate the process of NPL reduction. Further potential additions
to the NPL resolution toolkit should also be thoroughly analysed.
The ECB is cooperating closely with all relevant stakeholders
on these issues, including the Bank of Greece.
government recently published its proposal for the new bankruptcy
framework, the so-called Debt Settlement and Second Chance Code. What
are your views on it? Is it satisfactory? Would it help to put an end
to the phenomenon of strategic defaults and restore the payment
culture in Greece?
We are currently preparing our formal
opinion on this topic. The ECB has had very constructive discussions
with the Greek authorities about this major reform. Work is still
ongoing on both primary and secondary legislation and on the IT
infrastructure, as a significant number of the foreseen processes are
envisaged to be conducted electronically. It is crucial that the
reform increases the effectiveness of judicial and non-judicial
procedures, improves the efficiency of bankruptcy proceedings and
simplifies their procedural requirements, and strengthens the payment
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