EU sets out ‘quick fixes’ to boost bank lending during pandemic

Banks should rein in bonuses to boost their capacity to help businesses and households hit by the coronavirus crisis, the European Union’s executive said today. 

The European Commission set out a fresh package of temporary “quick fixes” offering capital relief that would support extra lending potentially worth up to €450 billion to companies struggling as a deep recession looms. 

“During the last crisis we had to prop up banks, this time we are helping banks to prop up households and companies,” the EU’s financial services chief Valdis Dombrovskis said

The easing of capital and accounting rules will be temporary, and the package needs to be approved by EU states and the European Parliament by June at the latest to have the full effect, he said. 

The EU executive backed statements from regulators that banks should refrain from paying dividends or making share buybacks at a time they are getting capital relief. 

“For the banks, moderating the amount of bonuses paid out to senior management and high earners in these challenging times is also a way to express solidarity with those affected by the outbreak of Covid-19,” the Commission said. 

Banks like UniCredit and Deutsche Bank have begun reporting rising provisions for bad loans as a deep recession beckons after national lockdowns to fight the pandemic. 

Today’s package offers flexibility in how provisions are calculated and to delay their eventual hit to a bank’s capital buffer to avoid lending turning into a trickle in the face of mounting bad loans caused by the pandemic. 

Delays to repayments should not automatically lead to a harsher accounting treatment of the respective loans, the Commission said. 

An EU official estimated that euro zone banks could face an extra 100 billion euros in provisioning for loans in 2020, but the capital relief set out today means they will still be able to support extra lending worth up to €450 billion.

The European Commission also proposed giving banks more leeway in how they calculate a capital measure known as the leverage ratio, brought forward easier capital treatment of lending to small companies, and accelerated a rule that allows banks not to deduct the value of software from capital.

“These adjustments to the prudential framework would facilitate collective efforts aimed at mitigating the impact of the pandemic and thus moving towards a fast recovery,” the Commission said. 

In previous measures, EU regulators said banks could draw on some of their capital buffers to keep credit flowing to the economy, though some of the initiatives announced today fall short of similar proposals made by US regulators.

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S&P revises outlook for Irish banks downwards

Ratings agency S&P Global Ratings has revised down its outlook for three of the main Irish banks from stable to negative, saying that downside risks for the banks’ financial profiles remain substantial.

However, the agency has affirmed the current ratings of AIB, Bank of Ireland, Permanent TSB and KBC Bank Ireland.

It has also not changed the outlook for KBC because it thinks its parent group will be willing and able to provide both ongoing and extraordinary support over the next 18-24 months.

The agency said European economies, including ours, face an unprecedented economic challenge due to the global slowdown in activity and trade, despite efforts by governments to contain the coronavirus pandemic.

“We continue to expect Ireland’s wide-ranging fiscal and related monetary measures to substantially mitigate this extraordinarily sharp, cyclical shock to the economy, and so also support the banking system in its key role as a conduit of fiscal and monetary support,” the S&P said.

But it added that even under its base case of an economic recovery starting in the third-quarter of this year, its expectation is that the banks’ earnings, asset quality, and in some cases, capitalisation will weaken meaningfully during the remainder of this year and into next.

“We could take further negative rating actions if we expect the cyclical economic recovery to be substantially weaker or delayed, as this would imply a far more negative effect on banks’ credit strengths,” it said in a statement this evening.

“Actions could also follow idiosyncratic negative developments at individual banks.”

The actions following a review by S&P of banking systems in Western Europe following the start of the coronavirus crisis.

“The Irish economy is small and open, making it vulnerable to economic cycles and external shocks, like the ones caused by the COVID-19 pandemic,” it said.

“We expect the Irish economy to contract in 2020 and recover only gradually starting from 2021. However, despite the anticipated recovery, we believe that there will be significant pressure on Irish banks’ operating environment and earnings prospects over the next two-to-three years.”

It says profitability is under increasing pressure at Irish banks because of their ongoing high cost base, compressed interest margins and their investments in transforming their business and becoming more digitally capable.

S&P sees growth opportunities as modest and says competition is stiff.

“The rating actions we have taken reflect that we now see Irish banks’ profitability remaining structurally low for at least the next two years with return on equity in the low single digits,” it says.

It says that even under its economic assumption, the policy responses taken in Ireland may not be completely successful in avoiding permanent economic damage later.

Earlier this month, ratings agency Fitch downgraded its outlook on AIB and Bank of Ireland to negative from stable as a result of the challenges posed by the Covid-19 pandemic.

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Calls for law change to allow virtual AGMs

It is the time of the year when many companies are due to hold their Annual General Meetings, however, because of the Covid-19 crisis, and social distancing requirements, many AGMs have been rescheduled or postponed.

Companies have found their firms in a Catch 22 situation – A company must have a physical AGM in order to change its constitution to allow virtual AGMs.

The Institute of Directors in Ireland says the vast majority of business leaders say Company Law should be amended temporarily to allow virtual AGMs.

Holding an AGM is essential for many companies in terms of meeting their governance responsibilities as well as complying with the regulations under Company Law. Holding an AGM provides accountability to shareholders and allows for the approval of the annual accounts in addition to meeting other requirements. 

Maura Quinn is Chief Executive of the Institute of Directors in Ireland.

“Directors are clearly faced with a dilemma as we enter what is widely regarded as AGM ‘season’ for many organisations, and they would like a resolution,” she said. “With many companies required to hold an AGM, IoD’s latest research shows that over one in five of businesses are postponing or rescheduling their AGMs in the hope that they can have a physical AGM within the 15-month timeline provided for under the Companies Act 2014.”

She said given that the survey has found that 29% of business leaders say their company’s Constitution does not allow/provide for them holding a virtual AGM, this means a lot of organisations are going to run out of road if physical distancing measures continue.

“In a sense it’s a chicken and egg situation, because companies themselves cannot amend their Constitution to allow for virtual AGMs, without having an AGM or EGM.”

Ms Quinn said a key finding of the snap poll is that an overwhelming majority of business leaders say Company Law should be amended temporarily to allow virtual AGMs to be held without the need for a company to amend its Constitution. “For this reason, we have raised this crucial issue in letters to the Department for Business, Enterprise, and Innovation, and the Office of the Director of Corporate Enforcement.”

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Housing alliance seeks permission to restart building works

A housing alliance which is building affordable homes is getting a site ready to reopen next week, despite not having permission to re-start work from the State Housing Agency.

The Ó Cualann Cohousing Alliance has said they want to re-open their construction site in Ballymun in Dublin, but the development is not on the list of 35 housing developments which have been given permission to restart work.

The developer behind the project is Hugh Brennan. He told RTÉ’s News at One no work would recommence unless approval is received.

He said his company wrote to the State Housing Agency for permission to re-start work, and awaits its response before work recommences.

There are seven families, he said, which are in “dire need” of homes and are at risk of a lapse in mortgage approval if they don’t move in.

Mr Brennan said these homes are “will take three to four weeks to complete.”

He said the site is being prepared with the appropriate social distancing markers, and that the company can demonstrate that no one will be infected with Covid-19 as a result of attending work at the site.

“I have three family members who are vulnerable and could be compromises. If we pose any danger to anybody we don’t open up.  We have to ensure that we can maintain physical distancing. 

“We will operate a buddy system so that you will only work together with one person, and these people will travel together as well.”

“If we can’t start, we can’t start.  We won’t start unless we get the approval. We wouldn’t be able to start because we would be in breach of health and safety regulations. 

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Oil prices fall on oversupply and storage capacity fears

Oil prices fell today on concerns about scarce storage capacity and global economic doldrums from the coronavirus pandemic. 

US oil futures led losses, falling by more than $2 a barrel on fears that storage at Cushing, Oklahoma, could reach full capacity soon. 

US West Texas Intermediate June futures fell $2.86, or 16.88%, to $14.08 a barrel just before lunchtime. 

Brent crude was down 83 cents, or 3.9%, at $20.61 a barrel. The June Brent contract expires on Thursday. 

Oil futures marked their third week of losses in a row last week – and have fallen for eight of the past nine – with Brent ending down 24% and WTI off around 7%. 

The June WTI contract’s price fall may have been partly triggered by investors moving to later months after the May contract lapsed into negative territory for the first time ever before expiring last week. 

The front-month contract was trading at lower-than-usual volumes. 

“The market is very concerned of a repeat of negative pricing as the Cushing storage and delivery hub saturates,” Harry Tchilinguirian, global oil strategist at BNP Paribas in London, told the Reuters Global Oil Forum. 

“The shift of open interest away from June will have negative consequences for the liquidity of the contract, potentially leading to greater volatility in its price,” he added. 

US crude inventories rose to 518.6 million barrels in the week to April 17, near an all-time record of 535 million barrels set in 2017. 

Cushing, the delivery point for WTI, was 70% full as of mid-April, although traders said all available space was already leased.  

Global economic output is expected to contract by 2% this year, worse than the financial crisis, while demand has collapsed 30% due to the pandemic. 

In the US, a record 26.5 million Americans have filed for unemployment benefits since the middle of March, and the Congressional Budget Office predicted that the economy would contract by nearly 40% annually in the second quarter.

“The current oil balance is simply awful, and no improvement is anticipated until after June due to massive fall in global oil demand,” said oil broker PVM’s Tamas Varga. 

The Organization of the Petroleum Exporting Countries and its allies including Russia, a group known as OPEC+, pledged this month to cut output by an unprecedented 9.7 million barrels per day in May and June. 

Kuwait and Azerbaijan are coordinating oil output cuts, while Russia is set to reduce its western seaborne exports by half in May. 

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Minister says scale of challenge on national economy and households ‘now very clear’

591,000 people are now receiving the Covid-19 Pandemic Unemployment Payment, with around 21,000 receiving it for the first time this week. 

That is on top of around 212,000 eligible for standard “non-Covid” Jobseekers benefit of €203 per week, and 337,400 receiving income support through the Temporary Wage Subsidy Scheme. 

The Minister for Employment Affairs and Social Protection, Regina Doherty, said the priority now was support all those needing assistance, and to help employers and workers to adjust to the emerging reality that Covid-19 may be with us for a long time to come. 

This week’s 7,000 increase in the number receiving the Covid Pandemic Payment is smaller than in previous weeks.

However, it yet again represents record-breaking levels of unemployment and social welfare dependency. 

While 591,000 are now receiving the €350 Covid payment, that is on top of around 212,000 receiving standard Jobseekers Benefit – though the Jobseekers figure tends to fluctuate, as it includes part-time and other atypical workers.

In addition, more than 49,000 employers have now registered for the Temporary Wage Subsidy Scheme administered by the Revenue Commissioners – with 337,400 employees receiving income support under the scheme. 

In total, 1,140,400 people are now fully or partially dependent on the State for income support. That is just under half the total workforce of 2.3 million. 

While a total of 691,000 applications have been processed for either the Covid Pandemic Payment or Jobseekers Benefit, 64,000 applications were closed – presumably because the employer in question took the employees back to avail of the Temporary Wage Subsidy Scheme.

Meanwhile 36,100 workers have been medically certified to receive the €350 per week Covid-19 Enhanced Illness Benefit, on the basis that they have either contracted the virus, or been ordered to self-isolate on a precautionary basis.  

Minister Doherty said the smaller increase in numbers on the Covid Pandemic Payment this week would suggest the country had come through the worst of temporary job layoffs. 

“That said, with over a million people in the country now dependent on some level of state provided income support, the scale of the challenge that this health emergency has posed for our national economy and to so many households is now very clear,” the Minister said.  

She said the priority now was to continue to support all those needing assistance and to help all employers and workers to adjust to the emerging reality that Covid-19 may be with us for a long time to come. 

“By anticipating which sectors will be most challenged, by identifying what future skills will be in greater demand and by providing the most effective job activation and employment supports, we will help as many people as possible back to work as quickly as possible,” she said. 

She noted that she had convened the first meeting of a new Labour Market Advisory Council last Friday to advise on public policy responses to support labour market recovery to support labour market recovery.

The Department of Employment Affairs and Social Protection also stressed that it carries out checks with the Revenue Commissioners to confirm eligibility for payments.

Two weeks ago, the Department confirmed to RTÉ News that applicants for the new Pandemic Unemployment Payment are not required to provide proof that they have been made redundant or laid off to qualify for the Pandemic Unemployment Payment, though such proof is required to apply for Jobseekers Benefit. 

Today’s statement says: “Integrity checks are made against records already held by the Department including Public Service Information data dn cross checks with payments on other schemes.”

Budget Office concerned over ‘lack of clarity’

Meanwhile, the Parliamentary Budget Office has said the ‘lack of clarity and detail’ provided to the Dáil about the cost of the Pandemic Unemployment Payment and Temporary Work Subsidy Scheme is a concern. 

In a publication issued today, the PBO estimates the combined schemes could cost between €3.87 and €3.93 billion over a 12-week period. 

It contrasts the €3.7bn estimate given by the Government in late March and the €4 to €4.5bn estimate outlined in last week’s Stability Programme update from the Department of Finance. 

It also highlights that a vote in the Dáil will be needed by May or June to approve the revised spending to cover the pandemic payments. This is because by that stage it is estimated that 80% of the previous year’s net allocation will have been reached and that is the limit set by the rules. 

It says the impact of Covid-19 on the economy is likely to be prolonged, even if businesses are able to reopen in June. Tourism, it notes, may be particularly badly affected. 

The PBO also notes that workers under the TWSS have little incentive to apply for the Covid Illness Benefit. This, it believes, may mean that the prevalence of the virus in the workforce is underestimated. 

In a further breakdown of recipients of the Pandemic Unemployment Payment, the Department confirmed that 337,000 are male, while 254,000 are female. 

The sectors with the highest number of PUP recipients are accommodation and food service activities (127,000), followed by wholesale and retail trade (89,300) and construction (78,500).
 
The counties with the highest numbers of applications were Dublin (171,700), Cork (61,200) and Galway (32,000) – while Leitrim had the fewest at 4,100. 

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Central Bank: SMEs will need up to €5.7 billion in funding to weather coronavirus storm

The Central Bank has said that small and medium-sized businesses will need up to €5.7 billion in emergency cash as a result of the Coronavirus lockdown to cover costs.

The deputy governor of the Central Bank, Ed Sibley, said that SMEs have a really important role to play in the Irish economy, both socially and through their employment of over one million people.

Mr Sibley told RTE’s The Business programme that there is potentially a need for State grants and guarantees for the sector, but also for the banking system to support SME’s with lending and payment breaks.

He said that the sector needs a high degree of support to get them through the shock of the current crisis.

Any state supports, he said, need to be appropriately targeted, rationed and must not ‘socialise losses that should be being taken by the private sector’ – including banks or landlords.
 
He said the Central Bank are making sure there is a good flow of liquidity into the system and that private sectors support through banks and lenders is available.

The Central Bank is also ensuring there is stimulus into the economy through the Euroepan Central Bank to maintain operational capacity in the system to support households and businesses.

Mr Sibley said the the implementation of payment breaks will give a degree of breathing space for those SMEs who borrow to continue to function.

He said there may be a need for state supports for those getting back to business in the short term, and longer term for those SMEs that don’t bounce back when the health restrictions are lifted.

He said the State has already stepped in and it will be a blend of measures needed including a role for the banking system.

Mr Sibley said a high degree of uncertainty going forward and over the last decade the Central Bank has built a much more resilient banking sector which should be able to support the economy.

He said the Central Bank expected banks to support their customers, while continuing to lend prudently and look at the affordability for borrowers in relation to mortgages.  

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Business and consumer sentiment sink in April

A new survey shows that with the country more or less in full lockdown, job losses soaring and incomes under pressure, consumer and business confidence both sank in April. 

The Bank of Ireland Economic Pulse came in at 34.3 in April, the lowest reading in its history. 

The index, which combines the results of the Consumer and Business Pulses, was down 36.1 on last month and 57 lower than a year ago.

It reveals that three in five firms expect a further decline in business activity in the coming three months and just over a quarter anticipate having to lay off staff. 

Three in five households also indicated that they are holding out on spending because they are not certain which way economic policy is going to go.

Expectations for house price increases took a battering this month, with buying and especially selling sentiment also softening, Bank of Ireland said today.

Dr Loretta O’Sullivan, Group Chief Economist for Bank of Ireland, said this month’s survey findings are “grim” in the extreme. 

She said that the Economic Pulse reading is down a whopping 36 points, more than double last month’s drop. 

“With the country more or less in full lockdown, job losses soaring and incomes under pressure, consumer and business confidence both tanked in April,” Dr O’Sullivan said. 

“The Covid-19 shock is unprecedented and has resulted in a sudden turnaround in the economy’s fortunes.

“Given this and the huge uncertainty about the path of the virus and the depth and duration of the recession, it is no wonder that households and firms are very uneasy,” she added.

Bank of Ireland said today that its Business Pulse posted a historic low in April 2020, coming in at 29.6. This was down 38.8 on March and 63.7 lower than a year ago. 

The readings were weak across the board, with seven in ten firms reporting lower business activity in the recent trading period – led by services and retail. 

Bank of Ireland said the Covid-19 outbreak and the policy actions being taken at home and overseas to suppress the virus are affecting businesses through a number of channels – demand, supply chains, operations – and mostly negatively, though around three in ten are seeing some new opportunities.

The survey also showed that firms are downbeat about business activity and hiring, while one in five expects to cut wages in the coming year.

Today’s survey shows that the Consumer Pulse stood at 53.2 in April 2020, down 25.3 on last month and 30.3 on a year ago. 

Households’ assessment of the economy and their own financial prospects moved deep into the red this month, taking the headline index to an all-time low. 

Bank of Ireland noted that with the pandemic very much to the fore, just 13% considered it a good time to purchase big ticket items like furniture and electrical goods, down from 31% last month. 

Meanwhile, the Housing Pulse came in at 25 in April, a fall from last month’s reading of 52.4 and a new low for the series. 

Bank of Ireland said that expectations for house price gains over the coming year fell sharply this month, and for the first time since sentiment started to be tracked in January 2016, more households now expect prices to decline (55%) than go up (one in seven). 

“The Covid-19 outbreak has imparted a significant shock to the economy and with the government imposing a temporary rent freeze and ban on evictions, households’ expectations for future rent increases also headed into negative territory,” Bank of Ireland said. 

Today’s survey shows that 25% of consumers think it is a good time to sell a house, a big slump from the 61% at the start of the year. 

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Oil heads for steep weekly slide after coronavirus turmoil

Oil prices were broadly steady today but were headed for their third weekly loss as production shutdowns failed to keep pace with sliding demand due to the coronavirus crisis. 

Brent crude was up 18 cents, or 0.84%, to $21.51 so far today, having risen 5% yesterday, while US oil was steady at $16.50 a barrel, after rising 20% the day before. 

Both contracts traded within a range of around $2 a barrel. 

Prices are heading for their eighth weekly loss in the last nine, with Brent on course for a 23% drop this week and US West Texas Intermediate (WTI) set for a fall of around 9.5%. 

WTI fell into negative territory, to -$37.63 a barrel on Monday, while Brent dropped to a two-decade low. 

“After the price crash earlier this week, which seems to have made every person on the planet aware of the problems in the oil market, several relevant announcements of active crude production shut-ins have made the rounds,” JBC Energy said. 

Continental Resources, the largest oil producer in North Dakota has halted most of its production in the US state and notified some customers it would not supply crude, people familiar with the matter said. 

State officials say overall production has already dropped by about 300,000 barrels per day (bpd), and coming into this year Continental produced nearly 150,000 bpd in the Bakken oil field. 

Under a deal agreed between the Organization of the Petroleum Exporting Counties (OPEC) and other producers including Russia and Azerbaijan, a grouping known as OPEC+, output cuts of 9.7 million barrels bpd are due from May. 

Kuwait’s state news agency KUNA said that the OPEC producer will begin cutting supplies to international markets without waiting for the official start of the deal. 

Azerbaijan’s Azeri-Chirag-Guneshli oil project will also have to cut output sharply from May to fulfil commitments under the deal, four sources told Reuters. 

But with global storage space filling up fast and oil demand slumping by around 30%, those shut-ins are so far proving too little to rebalance the market. 

“Unless more production shuts down, the extracted oil will literally have nowhere else to be stored, which implies a forced shutdown across several locations,” Head of Oil Markets at Rystad Energy Bjornar Tonhaugen said. 

In China, where the coronavirus outbreak started late last year, analysts said fuel sales should pick up in the second quarter as Beijing eases curbs to contain the pandemic. 

Meanwhile, US legislators approved a nearly $500 billion bill for relief from the pandemic, providing support to small businesses and hospitals. The package raises US spending to combat the crisis to nearly $3 trillion. 

But the global economy may still see a record contraction this year, according to a Reuters poll. 

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EU wants trillion euro coronavirus recovery plan agreed within two weeks

EU leaders have set a target of two weeks to reach agreement on a trillion euro plus recovery plan for countries stricken by the coronavirus pandemic.

This follows a four hour video conference today.

The plan will involve leveraging the EU’s one trillion euro seven year budget in order to provide loans and grants to the economies most affected. 

EU leaders also endorsed an immediate €540 billion euro package to help countries who have been badly hit.

Taoiseach Leo Varadkar told the video conference that farmers needed urgent financial support, and he called for a plan to be developed to ensure that member states have public health controls at airports before business and tourist travel resumes.

He also called on the EU to scale up its capacity to produce medical equipment and create stockpiles in advance of a possible second wave of the pandemic.

The European Commission has been asked by leaders to prepare a final deal, using the seven year EU budget to produce a so-called Recovery Fund.

Part of the preparation will involve a sector-by-sector analysis of where the pandemic has hit hardest in terms of member states and economic activity. 

Earlier, European Central Bank chief Christine Lagarde said her colleagues risked “doing too little, too late” when the EU leaders met by video.

Europe remains deeply split on how to handle the economic turmoil created by the coronavirus crisis, as the politicians debated over a recovery package estimated at more than €1 trilllion via video conference.

At the end of the meeting, the 27 leaders asked the European Commission – the bloc’s executive arm – to come up with a plan by 6 May.

Some of the wounds of the 2009 economic crisis have been reopened, with debt-laden southern nations such as Spain and Italy, both badly hit by the disease, demanding help to get back on their feet.

But richer northern countries like Germany and the Netherlands, while saying they are ready to help for now, insist they will not take the long-term step of pooling debt with Mediterranean governments they accuse of profligacy.

Ms Lagarde warned against inaction, saying the bank’s worst-case forecast predicts the bloc’s GDP falling by as much as 15% in 2020.

“A consensus is being formed to strengthen Europe’s strategic autonomy,” French President Emmanuel Macron said after the talks.

Given bitter recriminations ahead of the talks, expectations for a breakthrough had been low.

As expected, leaders agreed that any plan would take place through the EU’s long-term budget, the Brussels-based money pot that usually goes to farming subsidies and development aid to eastern and southern Europe.

This was demanded by German Chancellor Angela Merkel, who has stood firmly against more sweeping proposals backed by Italy and Spain, most notably joint EU borrowing. 

Saying all the elements of a package had to be put in place during May and be ready by 1 June, Ms Merkel acknowledged differences between countries but said the atmosphere of talks had been good.

“We weren’t always in agreement, for example on whether that should be done in the form of grants or credits or how it should be implemented, but we all agreed that this recovery fund had to be closely linked to the next medium-term financial framework,” she said.

Germany would have to make higher contributions to the future EU budget, she said, and reiterated her opposition to euro bonds.

“It is not acceptable that debts are mutualised,” she said.

European Commission President Ursula Von Der Leyen released a statement following the video conference.

“Unless we act decisively and collectively, the recovery will not be symmetric and divergences between Member States will increase.

“I am therefore very happy that the leaders this evening tasked the Commission with shaping our collective response to the crisis.

“I am convinced that there is only one instrument that can deliver this magnitude of tasks behind the recovery and that is the European budget, clearly linked to the Recovery Fund.”

The next battle will be over by how much to boost the EU budget and whether the EU Commission will be able to raise even more cash by borrowing.

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