Page 16 - Investment Outlook

Europe
The eurozone is becoming the single biggest danger to global financial stability.
The Eurozone has been less co- ordinated in its response to the coronavirus crisis than either the US or the UK and therefore their chances of emerging from the crisis early will have be affected.
The leaders of the Eurozone have agreed to a €500bn rescue package to aid businesses and households badly hit by the coronavirus. The agreement was delayed due to southern European countries accusing northern countries of not doing enough to support them at this time of crisis. The coronavirus has stirred a feeling from the southern European nations, particularly Italy, that the Eurozone does not provide it with sufficient support.
Italy had wanted the package to be as large as €1.5tn and that the repayments would not be linked to specific nations. France lined up alongside Italy and Spain in pursuing this strategy. The EU Covid-19 emergency package averted an immediate crisis
but did expose some stark differences between
the nations. The northern bloc rejected any move towards joint debt and fiscal transfers.
The package is made up of three elements, healthcare support, credit guarantees and an unemployment relief scheme. At 4.5% of GDP this is expected to be a substantial first step, but other EU
wide measures are likely to be needed.
Despite this and previous support packages, Italian sovereign bond yields have been rising over the last couple of weeks in spite of equities becoming more buoyant. This is because there are many knock-on impacts of the EU and Eurozone response on the political backdrop in Italy. Domestic tensions are already high given the perception that the Northern bloc are focused on their own economies but not the wider European communities.
The European Central Bank (ECB) has supported the bond markets in Spain, Italy and Greece with an additional €750bn Pandemic Emergency Purchase Program (PEPP) of eurozone sovereign bond purchases and additional liquidity for banks. Even with this investment, EU leaders will need to take further steps which at the moment are being argued over between the Northern wealthier countries and the Southern indebted nations. Italy is particularly hurting as it is being hit by both an economic contraction and an exploding deficit. Italy’s debt to GDP could rise from the current 135% to as much as 155% of GDP over the months ahead. This level of debt is considered unsustainable for a country that does not control its own currency.
The ECB further increased its actions to shelter the eurozone economy by lending to eurozone banks
at a rate of -1% as long as that money is provided as lending to households and businesses. The European Banks are therefore now getting paid 1% to lend by
ESTATE CAPITAL INVESTMENT OUTLOOK
15 EDITION 33 Summer & Autumn 2020