The Slovenia Times

Concerted monetary, fiscal policy action needed


"It is clear at this moment that the effects of coronavirus on our economic growth will be enormous," Banka Slovenije governor Vasle said, adding that estimates about the scope of the contraction will only be possible once the health situation calms down.

Vasle said monetary policy measures in the eurozone had been taken with the awareness of how serious the situation is. "Their most important message is that they are adjusted to the scope of damage that will occur. This will remain so in the future."

The European Central Bank (ECB) and national central banks in the Eurosystem have increased asset purchases in the framework of existing programmes and added a EUR 750 billion asset purchase instrument last week.

"Add together the value of these measures and we're talking about almost a thousand billion euro at the level of the eurozone. For comparison, Slovenia's GDP is around EUR 46 billion."

This is a clear signal that monetary policy is aware of the gravity of the crisis and that central banks are capable of fast and effective action. The ECB's governing council will keep a close eye on the situation and use all instruments at its disposal for additional action if necessary, he said.

If the response to this health crisis is to be successful, coordinated action of all economic policies in a country is necessary along with concerted action by domestic and EU institutions.

The ECB's governing council therefore believes that fiscal policy must respond with equal determination and perhaps even more decisively than monetary policy, according to Vasle.

"Slovenia must bear in mind the experience of the previous crisis. This experience says countries which had reacted fast were more successful and in some cases subject to fewer of the restrictions that were put in place after the initial period of action."

Slovenia's fiscal policy action is constrained by a constitutional fiscal rule. The government has repeatedly said it would take advantage of the built-in flexibility of the constraints and Vasle likewise noted that the existing rules have exemptions for extraordinary circumstances. "It would not make sense not to take advantage of that."

Turning to the state of the Slovenian banking system, Vasle said that banks were in better shape than they had been when the financial crisis erupted.

They are sufficiently capitalised and the structure of their financing is significantly different in that it is based on deposits; equity is seven times the size of non-performing loans, which improves resilience to the current shock.

Neither do banks have packages of non-performing loans on their portfolios - which had been a part of the reason why the previous crisis was so deep - while companies are financially stronger and better equipped to absorb the crisis.

Overall the liquidity of the banking system is good, with EUR 5.7 billion in primary liquidity and EUR 7.7 billion in secondary liquidity that banks may activate by selling liquid investments or by leveraging them for monetary policy measures.

"Despite the good starting point, the crisis will of course reflect on banks as well," said Vasle, adding that the impact would strongly depend on the duration of the extraordinary circumstances and the effectiveness of mitigation measures.

The fundamental objective of Banka Slovenije action within the eurozone system and in the framework of cooperation with the government is therefore to design measures that will make it possible to quickly overcome the crisis and return back to normal operations as soon as possible.

The Slovenian parliament last week passed an emergency law deferring loan payments. Banks will be obligated to grant creditors deferral, which Vasle said would eliminate uncertainty among companies and households as to how they can act in the event they are unable to meet their loan obligations.

Asked about the financial impact of this measure on banks, Vasle said it would depend on how the pandemic develops and how long it lasts. Banka Slovenije has tested even exceptionally unfavourable scenarios and determined that even in this case the measures would be financially acceptable.

But Vasle stressed that this was merely the first tier of action as coordination efforts were already under way at eurozone level to make sure such deferral of interest and principal payments do not affect bank operations.

"It is important here to assure all banks that the measures which they adopt during the crisis will affect all eurozone banks the same way. This is the only way to avoid banks in an individual country having an advantage," he said.

The third tier of action involves additional guarantees that the state could provide, for example via SID Banka, the Slovenian export and development bank, which would additionally reduce uncertainty for the people and companies.

"It is my estimate that a solution will soon be presented to the public. At this moment a legislative solution that would make this possible is already being prepared."


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