- EU announces creation of €750bn Coronavirus recovery fund
- Fund will be used to provide low-interest loans to 27 members of EU bloc while also disbursing grants to zone’s worst-hit economies
- In response to united fiscal response to crisis, scale of fiscal support becomes increasingly sanguine towards European financial assets
- Deltec Bank upgrades its stance on European Equities and Euro currency, believes these assets are set to outperform in near-and-medium term
Deltec Bank & Trust, a Bahamas-based private bank recently awarded the title of ‘Best Private Bank in the Caribbean’ in 2020 (http://ibn.fm/PS1F4), has published its latest investment research note entitled “EUreka” (http://ibn.fm/UhKNZ). The piece looks into the intricacies underpinning the European Union’s proactive fiscal response in dealing with the ongoing coronavirus outbreak and its effect on Eurozone financial asset prices and the Euro.
In the early hours of July 21, the European Union announced that it would be creating a €750 billion coronavirus recovery fund, as an addendum to the Eurozone’s existing €1.1 trillion, 7-year budget. The recovery fund consists of €360 billion in low-interest loans available to all members of the block (to be repaid over a 30-year period) as well as €390 billion in grants to member states hardest hit by the coronavirus. Given that the funds disbursed through the EU’s emergency mechanism exceeded the EU’s prior budgeted payments, it was agreed that the European Commission would itself issue debt and borrow from financial markets – an unprecedented move, given that any prior capital raises have been done on a country-by-country basis.
Deltec Bank’s research team has taken a relatively benign view to the Eurozone’s fiscal measures. The team believes that the issuance of debt by a centralized body represents a further step towards European Federalization, which may subsequently open the way for the harmonization of tax regimes and other economic policies. The latter in particular has long been a contentious thorn in the Eurozone’s side, which has seen its 27 member countries adopt a homogenized monetary policy stance despite having wildly differing fiscal frameworks and benchmarks.
In the longer term, Deltec Bank believes that the EU’s actions will benefit the government bonds and economies of Europe’s weaker economies, with over-strained fiscal budgets set to be subsidized by the EU’s recovery fund mechanism. Markets have adopted a similar point of view, with the premium in Italy’s 10-year bond yields relative to German Bunds narrowing to their lowest level since March – illustrating the sharp increase in investor confidence in the southern European nation’s debt.
Nonetheless, despite the relatively transient nature of the emergency fiscal measures, investors must not dismiss the EU recovery fund’s historic importance. For years, EU voters and Northern European politicians have found themselves extremely averse to the type of fiscal transfers and debt mutualization this recovery fund represents.
In fact, it was only a few years ago in 2012 that the European Central Bank refused to accept Greek sovereign bonds as collateral, despite the dire condition of the Greek economy, under the European Stability Mechanism (“ESM”), which was implemented in 2010 to help resolve a credit crisis brewing in the Eurozone (http://ibn.fm/OTU6j). Today, following the historic introduction of the €750 billion coronavirus recovery fund, Deltec Bank’s investment research team believe that EU’s measures will help bolster inexpensive Southern European assets—including their equity markets as a whole. Additionally, the fiscal boost to the various members’ coffers should also help bolster the value of the Euro, which has led the bank to upgrade its positive stance on the Euro and European Equities.
For more information, visit the company’s website at www.DeltecBank.com.
NOTE TO INVESTORS: The latest news and updates relating to Deltec are available in the company’s newsroom at http://ibn.fm/Deltec
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