Hernández de Cos calls for an “ambitious agenda” of reforms in the face of structural damage to the crisis

The Bank of Spain's forecasts point to a sharp contraction in the profitability of companies, with more than half of companies with expectations of losses in 2020

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The governor of the Bank of Spain, Pablo Hernández de Cos, warned on Tuesday about the consequences that the regrowns could have on the economy and has encouraged structural reforms to reduce the impact on businesses and households.

“It is also clear that the degree of persistence of this disturbance, which in principle should be regarded as temporary in nature, is also being very high, as a result of the fact that the regrowths of the disease are forcing us to maintain – and even increase again – restrictions on people’s activity and movement and interaction. This persistence makes it more likely that unwanted structural damage will occur, beyond the structural changes we are beginning to perceive,” he said during his speech at the closing of the XI Financial Sector Meeting organized by Expansion and KPMG.

Damages that, according to the bank of Spain’s analyses, are already worthy such as increased indebtedness of the non-financial private sector and families, loss of productive fabric, significant reduction of employment or increased inequality. “There is evidence that the employment most affected by this crisis is that of young people, women and lower-wage workers,” said De Cos.

The employment consequences stem precisely from the effects that the pandemic is having on businesses, especially small and medium-sized enterprises. The Bank of Spain’s forecasts point to a sharp contraction in the profitability of companies throughout this year, with more than half of companies with expectations of losses in 2020 “and a more unfavourable evolution in SMEs, and especially in companies in the hospitality, catering and leisure branches, motor vehicles, commerce, and transport and storage”, according to De Cos.

Simulations by the supervisor also anticipate that the percentage of companies with liquidity needs from the second to fourth quarter of this year would increase as a result of the pandemic by almost 10 percentage points to 70%.

REFORMS AND CERTAINTIES

Faced with this situation, the governor of the Bank of Spain has called for the use of economic policy as a tool to “provide certainty” and to work to prevent the health and economic crisis from morphing into a financial crisis. “We all know of the harshness and persistence of crises that have had a relevant financial component in the past,” he recalled.

In this context, De Cos has set out to implement an “urgently” agenda of “ambitious” structural reforms, aimed at increasing the potential growth of the economy, “which was already reduced before this crisis”. It also considers it “fundamental” to maintain support measures and extend them “if necessary, given the level of uncertainty we have” as otherwise “premature withdrawal of the disguises would cause greater harm”.

Targeting these measures in the sectors most affected, making “good use” of structural funds from Europe and designing a fiscal consolidation programme so far “to give economic operators certainties about the sustainability of public accounts” are, in the leader’s view, other economic policy measures that the Government must put in place when dealing with the current crisis.

In the financial sphere, Hernández de Cos has once again supported the bank consolidation process as a means of “strengthening entities” and has supported the ECB’s limited dividend distribution policy in a low-interest rate scenario such as the one currently exists. “It is clear that these dividend distribution policies must be very prudent until the solid economic recovery is consolidated,” he said.

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