• The Recovery Plan for Europe: a green wave for the real estate sector


    Europe’s economic response to the COVID-19 crisis took shape in July: the European Council approved the Recovery Plan for Europe, the so-called NGEU, via which the European Union will grant up to 750 billion euros to its member states to stimulate their economic recovery after the shock of the pandemic. This is an unprecedented agreement and it could have a considerable impact on Europe’s real estate sector since one of the EU’s main goals, to which this Recovery Plan aims to contribute significantly, is to reduce greenhouse gas emissions by 55% by 2030 compared with 1990 levels. It is clear that renovating Europe’s buildings, which are responsible for 40% of the continent’s energy consumption, will be key to achieving this climate target.



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    Área geográfica
    How the Recovery Plan works and the climate challenge

    Between 2021 and 2026, the main component of the NGEU, the Recovery and Resilience Facility, will allocate up to 312.5 billion euros via grants and 360 billion in loans to member states, depending on their size and how severely they have been affected by the COVID-19 crisis. According to the European Commission’s own estimates, Spain and Italy may receive around 60 billion euros (4.8% and 3.7% of their GDP, respectively)1 from the Facility; France, approximately 30 billion (1.3% of GDP); Portugal, 13 billion (6.2% of GDP) and Germany around 20 billion (0.6% of GDP). To access these funds, EU countries must draw up National Recovery and Resilience Plans and specify both the investment projects they will finance with the funds and the reforms accompanying them. These projects and reforms should contribute to four general goals: i) Promote economic, social and territorial cohesion in the European Union, ii) Strengthen economic and social resilience, iii) Mitigate the social and economic impact of this crisis, and iv) Support ecological and digital transition. In addition, each recovery and resilience plan should also allocate a minimum of 37% of its expenditure to climate-related aspects.2

    • 1. The 72 billion euros that Spain expects to receive from the EU includes 12.5 billion from the REACT-EU fund.
    • 2. For more details, see the article «Everything you ever wanted to know about the European Recovery Plan but were afraid to ask», available at: https://www.caixabankresearch.com/en/economics-markets/public-sector/everything-you-ever-wanted-know-about-european-recovery-plan-were?987=
    Europe’s NGEU Recovery Fund has a large amount of funding

    and could be an important means of renovating Europe’s buildings, a sine qua non for achieving the agreed emission targets.

    Renovating Europe’s buildings: a key goal

    The European Commission has identified the renovation of Europe’s buildings as one of its priorities for the ecological transition. More than 200 million buildings, representing 85% of Europe’s total, were built before 2001 and most of them are not energy efficient. The following chart shows that in many countries, especially Spain, there is still much work to be done to improve the average energy efficiency of housing. The current renovation rate is too slow to meet the target of reducing emissions by 55% by 2030. According to the Commission, around 90 billion euros per year of European private and public investment is required to achieve the target renovation rate.

    Share of housing by efficiency rating

    Percentage of national housing by EPC efficiency rating (%)

    p 18

    In view of this situation, the European Commission recommends that renovating housing be one of the priorities of the national recovery and resilience plans. Such renovations could simultaneously help to achieve the two European goals of ecological transition and digitalisation of the economy, for instance through "smart" buildings that are more energy efficient and can even produce their own energy.

    p 19

    As a result, Germany, France and Spain have already announced a number of renovation projects which they hope to finance via European funding. In Germany, the government has stated that it would increase funding for its energy renovation programme for buildings from the initial 1.5 billion to 2.5 billion euros, and has also announced the creation of a new 2 billion euro programme to adapt municipal buildings applying climate-friendly criteria. France’s Plan de Relance includes 6.7 billion euros between 2021 and 2022 to renovate private housing, SME premises, public buildings and social housing.

    The following article looks at how Spain will use these European funds to finance a drive to renovate its buildings.

    Destacado Economia y Mercados
    Destacado Analisis Sectorial
    Destacado Área Geográfica
  • NGEU: an opportunity to relaunch Spain’s real estate sector


    The Recovery, Transformation and Resilience Plan (PRTR) for the Spanish economy could be an important catalyst for the real estate sector. With the help of European funds, the government plans to recondition half a million homes between 2021 and 2023, with the aim of improving their energy efficiency and thereby helping to achieve the agreed decarbonisation targets. The General State Budget (PGE) also proposes a notable increase in the funds allocated to increase the amount of rented social housing, a policy that is crucial as rents have become even less affordable for the most vulnerable members of the population.



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    Área geográfica
    Next Generation EU: a historic opportunity for the Spanish economy

    The European Recovery Fund (Next Generation EU) represents a unique opportunity to modernise the Spanish economy and boost its growth potential. Spain will receive 72 billion euros in non-refundable transfers (grants) between 2021 and 2026, equivalent to 5.8% of its GDP in 2019.1 Although the first instalment from the European Commission is not expected until mid-2021,2 the government plans to advance funds to speed up investments and expects to spend over 26 billion euros in 2021, according to the preliminary proposal for the General State Budget. As we shall see, a significant proportion of these funds will be used to support the real estate sector’s ecological and digital transition.

    • 1. This amount could total 140 billion euros if loans are included. For more details, see «Next Generation EU: a golden opportunity for the Spanish economy», available at: https://www.caixabankresearch.com/en/economics-markets/public-sector/next-generation-eu-golden-opportunity-spanish-economy?index=
    • 2. The EU is expected to pay out the first tranche of the funds, 6.4 billion euros, in Q3 2021.
    NGEU and the Spain’s Budget for 2021: a significant amount allocated for housing policies

    In the area of housing, the Recovery, Transformation and Resilience Plan presented by the Spanish government to channel European NGEU3 funds focuses especially on the plan to renovate housing and urban regeneration. This policy is well aligned with the goals set by the Commission as renovating Europe’s buildings is one of its key priorities.4 The PRTR emphasises the importance of improving housing quality and boosting the construction industry both sustainably (by increasing energy efficiency, promoting green infrastructure and deploying solar roofs) and digitally (through smart applications in buildings). Specifically, the PRTR plans to recondition 500,000 homes between 2021 and 2023. This is an ambitious target which, if achieved, would be very positive for the sector as well as for the environment given the current state of housing, as we will see below.

    • 3. In October, the government presented an outline of the Plan with the main proposals. The final plan must be submitted to the European Commission by 30 April 2021 and is expected to be approved by the European Council in June 2021.
    • 4. See the article «The Recovery Plan for Europe: a green wave for the real estate sector»" in this Sector Report.
    About 6% of the European NGEU funds

    will be allocated to renovating housing, tripling public investment in this area.

    According to the Ministry of Territorial Policy, 4.5 billion euros of the NGEU (6.25% of all transfers) will be allocated to renovating housing over the next few years. In 2021, as stated in the PGE, around 1.65 billion euros will be channelled from the NGEU to finance housing and development policies. If this comes about, the amount alone would represent more than three times the housing items included in the country’s budgets on average over the past five years, ranging from 460 to 510 million euros per year. Furthermore, this amount represents 73% of the total allocation in the 2021 Budget for housing policies (2,253 million euros) and 6.2% of the aforementioned 26,634 million euros of the European NGEU funds that are expected to be paid out in 2021.

    The 2021 General State Budget allocates 2,253 million euros for housing,

    of which 1,651 million euros come from the European funds and will be used to recondition housing, while 569 million euros will be invested in social housing policies.

    p 22

    The 1.65 billion euros from the NGEU funds in 2021 will be used by three programmes: one to renovate residential environments (housing and neighbourhoods), managed mainly by the autonomous regions via agreements and totalling 1.55 billion euros; another focusing on the digital and sustainable reconditioning of public buildings, worth 81 million, and another programme with a budget of 20 million to renew the country’s architectural heritage. Consequently, although European funds will not directly finance social housing programmes, they will enable funds to be released and thereby increase the budget for this area in the 2021 General State Budget: the total allocation of 2,253 million euros for housing includes 569 million euros for social housing, 20% more than in previous budgets. This allocation will be used mainly to subsidise rent for vulnerable households and for the plan to provide 20,000 homes under the social rent scheme.

    The PGE includes 500 million euros from the NGEU funds for the circular economy, which should help to improve the efficient use of resources as well as the competitiveness of various strategic sectors. However, details of whether some of this budget will be devoted specifically to the construction industry have not been disclosed.

    The state of housing in Spain: old and not very energy efficient

    The plan to renovate housing is a unique opportunity to promote the decarbonisation of the real estate sector but also to alleviate some of the problems faced by housing at present. Especially, in addition to the age of housing (50% of homes in Spain are 40 years old or more), there is also a great deal of variability regarding their characteristics and performance in terms of energy efficiency, habitability and access.

    Spain’s housing tends to be old

    and much of it was built with little attention paid to energy efficiency

    In some cases these differences are the result of the technical regulations in force at the time they were built. For example, and as the following chart shows, half of Spain’s housing was built before the first basic building regulations came into force in 1980. In other words, around 12.8 million homes were built according to standards that regulated the safety of the structure but did not consider issues related to thermal insulation or energy consumption.5 Likewise, an additional 44% of homes (some 11.4 million) were built between 1981 and 2007, before the First Technical Building Code came into force which established minimum requirements for safety, habitability and energy efficiency.6 The result is that Spanish homes are largely inefficient from an energy point of view and require a thorough renovation to meet the greenhouse gas reduction targets the country has undertaken to achieve.

    • 5. From 1960 onwards, several provincial ordinances were introduced which regulated the thermal insulation of social housing, albeit to a limited extent.
    • 6. However, as they were built after the Basic Building Regulations CT/79, these homes have a certain degree of thermal insulation (façades and roofs), which guarantees a minimum of thermal comfort. In addition, this period saw an increasing use of aluminium and double glazing in both doors and windows, also helping to improve a home’s thermal insulation.

    Segmentation of housing in Spain according to year of construction and technical regulations

    Last actualization: 14 November 2022 - 13:39

    Part of Spain’s housing also suffers from various problems related to its habitability and quality. One of these problems is the small size of some housing. Specifically, 13% of homes in Spain are less than 60 m2 in size, while 46% are between 61 m2 and 90 m2. Renovation aimed at improving the use of space (such as enclosing terraces) can be of great help in increasing the net surface area of such homes.

    Another problem that affects some housing is its poor state of conservation. Specifically, nearly 1.8 million homes in Spain (7% of the total) are in a state of repair that can be classed as dilapidated, bad or deficient,7 placing Spain slightly below the EU average in relative terms: 15% of Spain’s population lives in a property with conservation problems compared with 13% in the EU.8

    Architectural barriers and poor means of access, which affects 13.2% of the residential stock, are other major shortcomings of housing in Spain. About 3.4 million homes are in buildings of four storeys or more without a lift.

    • 7. Data from the last housing census (2011).
    • 8. Eurostat data.
    Energy consumption in the residential sector: we’re not so bad

    Partly due to the climate, the energy demand of Spain’s residential sector is lower than that of the EU, both in absolute9 and relative terms.10 This lower energy consumption necessarily results in a lower savings potential than in other European countries. This is an important aspect, since one of the arguments in favour of energy reconditioning is that future energy savings (especially in HVAC) can be higher than the cost of the investment/work carried out.11

    If we look at how the energy consumed by Spanish households is used, most is for heating (see the chart below). However, Spain’s share of energy consumption is much lower than that of the EU: 42% in Spain compared with 64% in the EU.12

    Lighting and household appliances also account for a large part of the energy consumed by households, but in this case the proportion of energy consumed is higher than in the EU: 14% in the EU compared with 32% in Spain. This is important, since households have more and more equipment and appliances, so these need to be increasingly energy efficient to avoid a parallel increase in electricity consumption.

    • 9. The average annual consumption per household in Spain is 9,224.1 KWh per dwelling, while the average consumption in the EU is 16,526 KWh per dwelling. A similar conclusion is reached when we compare the energy consumption in residential buildings per m2.
    • 10. The residential sector accounts for approximately 17% of energy consumption in Spain compared with 26% in the EU, according to data from IDAE-MITECO (2018).
    • 11. Another aspect that may make it difficult to capitalise on energy savings within a reasonable period of time is the energy tariff structure, which in Spain consists of a high proportion of fixed costs related to the power under contract and taxes.
    • 12. The unit consumption per m2 for heating is also much lower than in the EU.

    Final energy consumption of the Spanish residential sector broken down by use (2018)

    Last actualization: 14 November 2022 - 13:39
    The reconditioning of housing gets a boost from European funds

    As already mentioned, the Recovery, Transformation and Resilience Plan for the Spanish economy proposes to recondition 500,000 homes between 2021 and 2023. This provides a significant boost for the goals set out in the National Integrated Energy and Climate Plan (PNIEC 2021-2030),13 which includes the renovation of the thermal envelope (façades and roofs) of 1,200,000 homes by 2030, starting with 30,000 homes per year in 2021 and ending with 300,000 homes per year in 2030.14

    • 13. The National Integrated Energy and Climate Plan (PNIEC 2021-2030) is a strategic document drawn up by the government (at the request of the EU) which sets out the strategy for decarbonising the Spanish economy.
    • 14. The PNIEC also proposes the renovation of heating and hot water installations in an average of 300,000 homes per year.
    European funds will support the renovation of Spanish housing

    but there are certain limitations that may hinder the rate proposed.

    The European funds should therefore considerably help to speed up the rate at which Spanish housing is renovated. However, there are certain aspects that could hinder the plan’s complete implementation. Firstly, the ambition of the Recovery, Transformation and Resilience Plan contrasts with the current rate of housing renovation (close to 25,000 homes per year); in fact, achieving the target of 500,000 homes in three years entails multiplying the current rate of renovation by six by 2023.

    Secondly, the investment to improve the energy efficiency of housing ranges from 5,000 to 10,000 euros for the building’s envelope and from 12,000 to 40,000 euros for complete projects,15 a high cost for many households. It will be crucial for renovation support to also reach the hardest hit and most vulnerable households, as well as zones with the greatest needs in terms of reconditioning.

    Thirdly, in general the population is relatively unwilling to carry out building work. According to the Housing Barometer (CIS, 2018), 87% of those surveyed did not plan to carry out any improvements or reforms to their homes in the following year (most because they did not think their homes needed them). Moreover, among those who did plan to carry out work, decorative reforms (such as in the kitchen or bathroom) were clearly prioritised over those related to energy efficiency (such as replacing doors and windows).

    We should also note the predominant type of housing in Spain, mostly multi-family buildings of three or more storeys, these accounting for 67% of the total housing. It tends to be more difficult to make decisions in communities of several owners and this can present an additional barrier to some of the work required being carried out.

    And, finally, the extent of public concern or awareness regarding energy efficiency is relatively lower than other housing-related issues. According to the latest housing barometer (CIS, 2018), concern about thermal comfort (35%) is similar to other concerns such as noise and security against burglary, and lower than other issues such as the lack
    of a lift in some buildings.

    • 15. Includes changing HVAC and hot water installations. Estimates from the «Estrategia a largo plazo para la rehabilitación energética en el sector de la edificación en España», Ministry of Economy (2020).

    Percentage of households that are little or not at all satisfied with the following aspects of the building in which their home is located

    Last actualization: 14 November 2022 - 13:39

    In short, the reconditioning of housing is key to reducing energy consumption and thereby greenhouse gas emissions. However, in order to encourage such building works, it is also important to convince people that renovating their dwelling is a great opportunity to improve the comfort and interior habitability of their homes (an issue that lockdown has made even more evident), as well as to increase the property’s value. It is therefore essential to direct the available public resources appropriately in order to address the main problems of Spain’s housing together with its citizens.

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    Social housing for rent: the big task ahead

    In addition to renovation, another priority for housing policy over the coming years is to increase the amount of public housing aimed at social or affordable rents. Spain is one of the European countries with the highest percentage of tenants who spend more than 40% of their income on rent, a sign of the extra effort many households have to make to meet their housing costs. This extra effort is also disproportionately high for low-income households and young people. Moreover, the coronavirus crisis has aggravated the existing problems of affordable rented accommodation, especially among the most vulnerable people, as pointed out by the International Monetary Fund (IMF) in its latest report on the Spanish economy.16 The IMF recommends increasing the number of homes allocated for social rented accommodation as Spain has one of the lowest figures in Europe: social housing accounts for 2.5% of the total number of primary residences in Spain compared with a European average of 9.3%, according to Eurostat data. To reach the European average, 1.2 million additional social housing units would be needed, a figure that would be difficult to achieve without public-private partnerships.

    • 16. IMF Country Report no. 20/299. Spain. Selected Issues. Available at https://www.imf.org/-/media/Files/Publications/CR/2020/English/ 1ESPEA2020002.ashx
    In the past 4 decades, almost 2.4 million social dwellings have been built in Spain,

    most of them intended for ownership, not rent. As a result, there is very little rented social housing, approximately 290,000 homes.

    This lack of rented social housing is the result of housing policies that have historically been aimed at developing social housing via ownership. Between 1981 and 2019, almost 11 million homes were completed in Spain, 21.6% of which were social housing. During this same period, households grew by just under 8 million, so we can conclude that social housing has covered the accommodation needs of approximately 30% of Spanish households in the past four decades, a highly significant figure. However, most of the social housing built in Spain has been destined for ownership (see the chart below). Consequently, after a few years these properties have now acquired the status of free housing on the market, thereby losing their original social purpose.

    The development of social housing for rent has been very limited in Spain

    Last actualization: 14 November 2022 - 13:39

    Very little social housing has been developed since 2010, affecting rented accommodation to a greater extent. In fact, between 2013 and 2016 the development of this kind of property has been almost zero (368 homes per year on average), increasing the prevalence of social housing under ownership. However, since 2017 rental accommodation seems to have regained some of its relative weight. Specifically, 12,496 social homes were built in Spain in 2019, of which 2,585 (20.7%) were for rent. Nevertheless, these figures are clearly not enough to significantly increase the stock of rented social housing.

    According to recent estimates by the Ministry of Transport, Mobility and Urban Agenda,17 Spain’s stock of publicly-owned social housing for rent totals about 290,000 homes. Of these, around 180,000 are owned by the autonomous region and 110,000 by the local council. These 290,000 rented social homes cover 1.6% of the 18.6 million households in Spain (data from the «Cuestionario sobre vivienda social», 2019).

    • 17. «Boletín especial vivienda social», 2020, Ministry of Transport, Mobility and Urban Agenda.
    Final points

    The European funds represent a historic opportunity to recondition Spain’s old, poorly energy-efficient housing, renovations that will also contribute, simultaneously, to the two European goals of ecological transition and digitalisation of the economy, for instance through more energy-efficient «smart» buildings. Similarly, the strong economic and social impact of the COVID-19 crisis has highlighted the need to create a large amount of public housing available for rent in order to resolve the current shortage and be able to provide a housing solution for the most vulnerable in society. These policies should drive a green, social and digital recovery.

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    Destacado Analisis Sectorial
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The coronavirus spreads to the markets and monetary policy takes urgent action

Content available in
April 16th, 2020

The COVID-19 health emergency, initially concentrated in China, has transformed into a global crisis that is crippling the world’s economy. Economic activity indicators that capture this shift in the scenario are still scarce, but its effects have been very palpable in the performance of the financial markets. Investors have suffered a sudden and severe spike in risk aversion and volatility (see first chart), which has led to historic crashes in stock and commodity prices, a surge in risk premiums (especially for corporates and emerging economies, which have also experienced capital outflow) and a general tightening of financial conditions. In response to this, the major central banks have acted quickly and decisively, guaranteeing the abundance of liquidity and easier access to credit, and anchoring an environment of low interest rates.

The markets trade a global recession

The historic collapse in the stock markets is the most striking exposure of the change in the economic scenario. Since mid-February, the world’s major stock markets have suffered their biggest setbacks in years, and at the end of March the benchmark indices had amassed losses of around 30% both in the US and in Europe. Moreover, the weakness has been similar across all sectors (registering setbacks of 20%-30%), with the exception of energy (also affected by the collapse in oil prices, the sector’s stocks lost around 50% in the US) and the health sector (with losses of somewhat less than 20%). In addition, the speed of the correction has been particularly abrupt. Whilst the losses amassed during the 2008-2009 recession approached 60%, it took a year and a half for them to reach this point. Now, in contrast, less than two months after the correction began we have already seen sessions with the greatest volatility in recent decades, both on the negative and on the positive side: in the US, such significant daily losses have not been seen since 1987, and in the closing weeks of March, the announcements of economic measures to cushion the impact of the COVID-19 epidemic resulted in daily rebounds of around 10%.

The Chinese stock market, however, has been relatively isolated from the recent turbulence: its cumulative losses so far this year have not reached 10% (in all other major stock markets, they exceed 20%), while the decline in the past month is barely 3%. This better performance seems to reflect a combination of factors. On the one hand, the country is already in the recovery phase of the COVID-19 epidemic, and decisive measures to support the economic recovery are expected. On the other hand, the stock valuation ratios came from a lower starting point (especially compared to the US). Furthermore, various market trends (such as the better performance among blue chip stocks and higher leverage) also indicate support from the authorities and greater risk taking.

The stagnation of economic activity is evident in the commodity markets, as reflected in the aggregate price indices such as that of Bloomberg or Thomson Reuters, which show falls of between 20% and 30% in the year to date. These declines are observed in the prices of industrial metals (with 20% setbacks), such as copper and aluminium. However, the collapse in prices has been particularly sharp in the case of oil: a barrel of Brent has plummeted to 20-25 dollars. This is an unusually low level in the 21st century (see third chart) and represents a fall of almost 70% compared to the price of 60 dollars registered at the beginning of the year. One of the causes of this drop is the inevitable and particularly severe impact of the containment measures on the demand for fuel. However, the freeze in demand has been exacerbated on the supply side by a price war between the OPEC countries and their partners such as Russia. This group, known as OPEC+, halted negotiations in early March to extend the crude oil production cuts (which had been in force since 2016) and the market suffered its biggest daily fall since 1991 (with the Gulf War). However, in the medium term, the prices needed to cover Russia and Saudi Arabia’s fiscal needs (around 40 or 50 dollars) and the reactivation of the global economy should support a recovery in oil prices. That said, the low levels could persist while the stagnation of the global economy continues and as long as some OPEC+ members remain interested in driving US shale producers out of the market.1

The COVID-19 epidemic is also causing interest rates to plummet, to the point that in early March yields on German and US 10-year sovereign debt registered historic lows (intraday rate: –0.89% and 0.33%, respectively). Both risk aversion and the expectation of an accommodative and decisive reaction from the central banks explain the decline in these safe-haven assets. However, throughout March, and as the need for fiscal policy to lead the fight against the COVID-19 epidemic became apparent, the expectation of greater financing needs on the part of the public sector exacerbated the declines in yields (see fourth chart).

Financial conditions tighten

The COVID-19 epidemic is not affecting all yields equally. In fact, the fear that the paralysis of economic activity could lead to cuts in credit ratings (a possible amplifier)2 or to corporate bankruptcies has driven risk premiums on corporate debt in all segments up to levels close to those of 2008-2009 (particularly in the US shale sector, also hit by the collapse in oil prices). Sovereign risk premiums of the euro area periphery were also temporarily stressed, with the combination of the expectation of greater financing needs in the public sector and a cold reception from investors to the first measures announced by the ECB (and let us not forget the words «we are not here to close spreads» muttered by its president, Christine Lagarde, which accentuated investors’ risk aversion). However, the strength of the ECB’s second round of measures (detailed below) allayed doubts over the sustainability of public debt in the euro area periphery. The surge in risk, meanwhile, was also observed in the interbank market (see sixth chart), albeit to a much more contained extent than in previous episodes.

Liquidity tensions appear, but they are localised. The most significant of them arose in the US commercial paper market (promissory notes), where, following a surge in risk premiums that denoted the absence of buyers in the market, the Fed ended up reintroducing the CPFF (commercial paper funding facility). In addition, other indications of liquidity problems appeared when, in some sessions marked by significant risk aversion, the prices of what are traditionally considered «safe-haven» assets (such as US or German sovereign debt) decreased instead of increasing: a symptom that needs to obtain liquidity were forcing some market players to sell assets which, in such a context of risk aversion, they would normally like to maintain on their balance sheet. On the other hand, and as detailed below, liquidity tensions also emerged for financing denominated in dollars abroad (see the expansion of the basis in the last chart) – something which the Fed once again stemmed in coordination with other central banks.

Financial security prices highlight the risks for emerging economies, where the COVID-19 health crisis could prove much more serious (due to their health systems having fewer resources, the existence of large, dense cities with pockets of poverty, and more fragile institutions). Furthermore, such countries are more sensitive to the tightening of international financial conditions and to the fall in commodity prices. In the year to date, emerging currencies have registered widespread depreciation against the US dollar, led by the Russian rouble, the Mexican peso, the South African rand and the Brazilian real (all with depreciation in excess of 20%). This amplifies the burden of emerging economy debt denominated in dollars, resulting in emerging economies also experiencing a surge in their risk premiums (the J.P. Morgan EMBI index has risen to levels of 2009). Moreover, in recent weeks there has been an unprecedented outflow of capital from emerging economies, as shown by the data on portfolio flows produced by the Institute of International Finance (see seventh chart).

Monetary policy to the rescue

Monetary policy is responding quickly and decisively, but requests the leadership of fiscal policy. Faced with the self-imposed disruption of economic activity which is paralysing both economies’ supply and their demand (domestic and foreign), the actions taken by monetary policy focus on three areas: (i) preventing liquidity problems, (ii) facilitating access to credit for businesses and households, and (iii) anchoring a low interest rate environment which, in addition to supporting the economic recovery when the restrictions on activity are lifted, can provide cover in order for fiscal policy to act aggressively and without raising doubts about the sustainability of the public accounts.

Central banks have launched a wide range of measures (see accompanying table).3 Those with the margin to do so have slashed rates to almost 0% (by –150 bps in the case of the Fed, and by –65 bps in that of the Bank of England), while the rest (such as the ECB and the Bank of Japan) have kept rates at their historic lows. In addition, all of them have implemented significant measures to ensure an abundance of liquidity and favourable credit conditions. For instance, the Fed launched liquidity lines amounting to 1 trillion dollars a week, while the ECB cut the cost of the TLTROs, increased their volume and eased various regulatory requirements on the financial sector. Also, both central banks expanded the range of assets accepted as collateral for their liquidity injections. On the other hand, the most aggressive step came in the form of the asset purchase programmes, which not only inject liquidity but also enable the anchoring of low interest rates and placate risk aversion. In particular, the Fed announced unlimited purchases of sovereign bonds and mortgage-backed securities (MBSs), as well as purchases of corporate debt (in primary markets with the PMCCF and in secondary markets with the SMCCF) and purchases of assets backed by loans received by consumers (with the TALF). The ECB, meanwhile, increased the scale of its asset purchases planned for 2020 by 870 billion euros. Of this amount, 750 billion will be implemented under the new Pandemic Emergency Purchase Programme (PEPP), practically without restrictions (in particular, without the 33% limit on assets from the same issuer or issue, and allowing temporary deviations from the capital key). In addition, the PEPP will also involve purchases of public debt with very short maturities (a notable feature given that most governments are expected to finance their fiscal packages to combat the coronavirus with short-term debt). Indeed, the size (more than 7% of euro area GDP) and flexibility of these purchases have led many analysts to conclude that the ECB has acted just as forcefully, or even more so, as if it had activated the OMT programme (which was announced by Draghi in 2012 in the midst of fears of a rupture of the euro area, but was never finally activated). Finally, in coordination with the Fed, the other major central banks have injected liquidity denominated in dollars into their respective jurisdictions. In this way, they have corrected the emergence of stress in financing denominated in dollars, which was becoming relatively more scarce (as reflected in the expansion of the basis in the last chart) due to the significant risk aversion and the US currency’s value as a safe-haven asset.


1. For more details, see the note «El Brent se desploma tras el desacuerdo entre la OPEP y sus aliados» available at www.caixabankresearch.com.

2. See the Focus «The US credit cycle: how much should it concern us? Part II» in the MR06/2019.

3. More details in the ECB Observatory of 19 March, «El BCE actúa de emergencia contra el COVID-19», and the Fed Observatory of 16 March, «La Fed bombea liquidez y lleva los tipos al 0%».