Rounding up of toxic assets laid bare by the pandemic

Author: George Mangion
Published on Malta Independent 16 June 2020

Many will remember the collapse of the Irish economy in the 2008/9 global recession when all the three national banks had to be bailed out.  At that time, the huge exposure of Irish banks on real estate and loans to developers resulted in a property crush.

The American term for such under-valued collateral is toxic assets and a quick decision was taken by the Irish Central Bank in 2009 to round up all debt in a moribund company called NAMA – in order to deal expeditiously with non-performing property loans acquired from Irish banks.  This move was a smart way to clear the banks of devalued properties in their books which they held as collateral for loans that went bust.  History seems to repeat itself.

The latest Covid19 pandemic has left its toll on the stock markets.  The rout in equities is coupled with the sharp decline in the price of oil amid a collapse in demand for energy.  This resulted in Saudi Arabia abandoning attempts to limit supply but instead focused on increasing its market share with the oil price tumbling by more than 30 per cent.

In Malta, during the global recession, banks did not suffer such a catastrophe since the property prices did not collapse so severely and banks were more diversified and better capitalized. This year, faced with the drop in demand, the developers association protested and lobbied with the government for assistance.  It is true, the property market took a nose dive and this is reflected by the hundreds of idle property negotiators (not funded under Annex A or B wage supplement scheme).  Rentals also suffered, particularly in the luxury market sector.

It is obvious that with 11,000 unemployed and many workers living hand to mouth with a minimum wage supplement there is little room for profligacy.  Experts, predict a drop in money in circulation.  This is expected to reach €1.5 billion in lost tourism revenue and its multiplier effect this season due to closed ports and airports.  The energetic rush to open the latter for traffic by the end of June, is not expected to open the floodgates for hordes of visitors checking their TripAdvisor app for the best hotel and restaurants.  This fact will be a major contributor to a fall in domestic demand brought about by the drop in tourism and the sudden repatriation of third-country nationals (TCNs).  On average there are approximately 75,000 fewer persons/consumers living in Malta (including tourists and TCNs) than there were in June 2019.

NAO informs us meekly that the accommodation sector has contracted by 18% in the first quarter.  To boost demand, we need to lure back TCNs and create more jobs.  As a start, Identity Malta needs to expedite the extension of work permits of TCNs who are still in employment when they expire.  In spite of the crisis, there is still a demand for foreign labour in areas where no Maltese employees are available.  The so-called “recovery budget styled multimillion” has left an ephemeral feel-good factor but the opposition disagrees with its design saying when the demand is low, one would have expected taxes to be lowered to encourage spending.  The opportunity to reduce the soaring cost of living by lowering consumption taxes (as Germany did for a transition period) was resisted.  A mere 2% drop in fuel prices and a 50% cut in electricity cost for selected entities (these consist mostly of firms being paid wage supplements with their operations on hold) looked parsimonious given the severe drop in demand.

Now would have been an ideal opportunity for the government to offer tangible sums for those companies which make new investments post-Covid19 in anticipation of growth next year, with enhanced incentives channeled towards green economic activities, agriculture, and innovation.  The novel idea of issuing 320,000 free vouchers of €100 each to the families is an effective way how hotels, restaurants and other shops can attract business albeit for a temporary period (vouchers mostly cashed by St Maria feast in mid-August).

It is advisable that strict measures are in place during the security printing of vouchers, so as to avoid counterfeit ones being peddled in shops and restaurants.  This three-month plan is complemented by a €900 million loan guarantee fund for both small and large companies, which is underwritten by the Malta Development Bank in conjunction with a number of local commercial banks.  Technically, MDB will be guaranteed 50% of the total exposure for banks.  The treasury just heaped more debt by borrowing €2 billion in bonds locally.

This is a bold attempt by the government (knowing how over liquid local banks are) to kick start a new wave of company initiatives to help them finance recurrent expenditure at a time when domestic sales are down or export orders slashed.  Much depends if the second virus wave does not morph into a larger swathe of infections ahead of the time when an effective vaccine is rolled out. The Malta government’s drive to oil the machinery and provide much-needed liquidity is also mirrored with similar action taken at the European level.

In fact, Europe is about to mobilize trillions of euros to bolster the region’s economy, aimed at shielding commercial banks from any second fallout from the crisis if rising unemployment chokes off the income needed to repay loans.  Similar to what occurred in Ireland during the last global recession, the ECB had set up a task force to look at the idea of a “bad bank” to warehouse unpaid euro debt.  Progress on the scheme had accelerated in recent weeks.  The amount of debt in the eurozone that is considered unlikely to ever be fully repaid already stands at more than half a trillion euros, including credit cards, car loans, and mortgages, according to official statistics.  It goes without saying that debt is set to rise as the Covid-19 outbreak squeezes borrowers and could even double to one trillion euros, weighing on already fragile banks and hindering new lending.

Malta qualifies for one billion in aid out of the war chest of €750 billion touted to be used to provide financial assistance under the auspices of the European Stability Mechanism.  The concept of toxic assets in bad banks, and the ECB blueprint, could come up for discussion among central bank governors and ministers later this year.  Note how, when the pandemic struck, banks in Italy and Greece, for example, were still recuperating from the fallout from the past global financial crisis more than a decade earlier.

In conclusion,  Malta ushered a fourth mini-budget to take us gingerly up to September and then the future beckons. This may be an unadulterated populist way to calm the nerves of workers having been cocooned at home for the best part of four months. The fly in the ointment is that it is not a long term plan.  More like “we cross the bridge when we come to it”.   Surely, an important piece of advice is to avoid a ‘short-term-ist’ attitude as Malta deserves a vision on how to focus on a longer-term recovery horizon.

George Mangion


Author: George Mangion
Published on Malta Independent 16 June 2020
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