Mario Draghi: write off private debts - we are at war.
The dramatic situation created in the global economy by the koronovirus pandemic presented with an article in the Financial Times, Mario Draghi, The former head of the European Central Bank, with the phrases "we are at war" and "tragedy with potentially biblical dimensions", called for the immediate write-off of private debts and the mobilization of governments and banks in order to avoid a deep recession! As Mario Draghi explained, a big increase in government debt is now inevitable, while introducing a "whatever it takes" strategy to support companies that will keep staff, with overdrafts and credit lines. The pandemic is a human tragedy with potentially biblical dimensions, says Mario Draghi in his article in the Financial Times, in which he clarifies that a great recession is inevitable and calls for immediate action by governments to avoid turning it into a deep depression, which will be caused by a plethora of bankruptcies. It is already clear that the answer must involve a significant increase in public debt. The loss of income in the private sector and any debt issued to fill the gap must ultimately be absorbed, in whole or in part, from the state balance sheet. The much higher levels of government debt will become a permanent element in our economies and will be accompanied by cancellation of private debt," writes the former head of the ECB. "It is the proper role of a state to develop its balance sheet to protect citizens and the economy from shocks for which the private sector is not responsible and cannot absorb. States have always done this when national emergencies arise. The wars, the most relative precedent, were financed by public debt." The key question is not whether, but how states should use their balance sheets properly. The priority must be to secure basic income for those who lose their jobs. First we need to protect people from losing their jobs. If we don't, we will come out of this crisis with permanently lower employment and production capacity, as families and companies struggle to correct their balance sheets and rebuild net assets." Employment and unemployment benefits and the suspension of tax payments are important steps that many governments have already launched. Protecting employment and capacity, however, in times of dramatic income declines, requires immediate liquidity support. It is important, he continues, to cover the operating costs of all companies during the crisis, regardless of whether they are large or medium and small businesses or even professionals. Several governments have already launched welcome liquidity measures. But a more comprehensive approach is needed. The only efficient way to reach every corner of the economy is to fully mobilize the entire financial system: bond markets, especially for large companies, banking systems and in some countries even the postal system. And it must be done immediately, avoiding bureaucracy. Banks in particular are expanding across the economy and can generate money directly, allowing overdrafts and opening credit lines. Banks, Draghi writes, must quickly lend at zero cost to companies preparing to save jobs. As they thus become a vehicle for state policy, the capital they need to do so must be offered by governments in the form of guarantees on all overdrafts or loans. Neither regulations nor rules on guarantees should stand in the way of creating all the space required in bank balance sheets. In addition, the cost of these guarantees should be based on the credit risk of the receiving company, but should be zero for the countries providing them, regardless of the borrowing costs of the latter. Companies, however, will not pump liquidity, simply because it is cheap. In some cases, for example, companies that have orders to execute, the losses may be recoverable and will pay off the debt. In other disciplines, this probably will not be done. Such companies may be able to absorb the crisis for a short time and draw on debt to keep workers. Their accumulated debt, however, creates the risk of damage to their ability to invest after the crisis. And if the pandemic and the restrictive measures hold, they will be able to stay open only if the debt they took on to keep workers during the crisis is finally canceled. Either governments will compensate borrowers for their expenses, or they will fail and the state guarantees will be paid. If moral hazard can be contained, the former is better for the economy, writes the former ECB chief. The second road may be less expensive for the budget. In both cases, governments will absorb a large part of the income lost as a result of the restrictive measures if employment and capacity are protected. The public debt should increase. But the alternative-permanent destruction of production capacity and hence the fiscal space - will be a much bigger blow to the economy. We should not forget that given current interest rates (and probably future ones), this increase in public debt does not add to the cost of servicing. In some respects, he continues, Europe is well equipped to deal with this extraordinary shock. The structure of the banking system allows to channel resources into every segment of the economy that needs them. It has a strong public sector that is able to coordinate a quick political response. Speed is absolutely essential to efficiency. Faced with conditions that could not be foreseen, a change of mentality is as necessary in this crisis as it would be in a time of war. The shock we face is not cyclical. The loss of income is not the fault of any of those who suffer from it. The cost of hesitation can be irreversible. The memory of what Europeans suffered in the 1920s is enough. The speed with which private sector balance sheets are deteriorating (because of a "lock" that is both inevitable and desirable) must be met with a corresponding speed of development of the government balance sheet, mobilization of banks and, as Europeans, from support to one another, in the effort to move forward in what is ultimately the common purpose.
https://www.thepressroom.gr/oikonomia/mario-ntragki-diagrapste-ta-idiotika-hrei-eimaste-se-polemo Facebooktwitterpinterestexchange Facebooktwitterpinterestexchange Posted by ANDREAS BOTSARIS BLOG at 2:14 AM
