ECB Officials Fear Banks Will Get Hit Hard By Pandemic Fallout

European Central Bank (ECB) officials are concerned that Euro-area banks will get hit hard in 2021 by fallout from the COVID-19 pandemic as weakened businesses slide into bankruptcy.

“The main issue incoming is related to the wave of bankruptcies,” said ECB Lithuanian Governor Vitas Vasiliauskas during a panel discussion with other ECB Governing Council officials, according to a Bloomberg report.

Vasiliauskas noted that Lithuanian bankruptcies declined by 50 percent in 2020. “It means that we can expect some big increases this year. This risk is very important.”

ECB officials on the panel warned that government measures to prop up the economy have masked the severity of the crisis.

“The crisis is not over, and its economic impacts have still to fully emerge,” Irish Governor Gabriel Makhlouf told the panel, according to Bloomberg. “Euro-area banks are likely to face significant losses and further pressure on their already weak profitability prospects.”

Makhlouf added that European banks must be “extremely prudent” in issuing dividends this year to make sure their capitalizations are not negatively impacted.

Greek Governor Yannis Stournaras and Cypriot Governor Constantinos Herodotou echoed the concern that the banking crisis runs deeper than many realize.

“Even though I remain overly optimistic about the medium prospects, I’m afraid that the scars from the pandemic will be more visible in 2021,” Stournaras said during the discussion. “The loan moratoria and the fiscal support measures averted the massive defaults of borrowers in 2020.”

“The results of the pandemic in terms of the impact on the loans and the credit risk will become visible in 2021,” said Herodotou. “What we need to do about it will take the latter half of 2021 and 2022.”

In late November, the International Monetary Fund (IMF) said in a statement that additional funding might be needed to counter the second wave of the coronavirus that stifled an economic rebound in the eurozone.

“Rising infections and re-imposed lockdowns have damaged confidence and lowered mobility,” according to the IMF statement.

“A prolonged health crisis and a slow recovery … would lead to tighter financial conditions and increased private and public sector vulnerabilities, while significant labor market hysteresis would increase inequality and poverty,” the IMF said. “Taken together, these ‘scarring’ effects would also depress the growth potential of the euro area.”

In December, Mastercard Chief Economist Bricklin Dwyer expressed cautious optimism in Mastercard Economic Institute’s Economy 2021 report. Dwyer called the near-term economic outlook “challenging,” dominated by the logistics and deployment of the vaccine. But the second quarter, he said, could see multi-speed global recovery.