The coronavirus crisis will have a huge impact on Slovenia’s and Europe’s economies and monetary policy measures will be commensurate to the gravity of the situation. Equally important will be decisive and fast fiscal policy action, Boštjan Vasle, the governor of Slovenia’s central bank, told the STA.
“It is clear at this moment that the effects of coronavirus on our economic growth will be enormous”, Banka Slovenije governor Vasle said, adding that estimates about the scope of the contraction will only be possible once the health situation calms down.
Vasle said monetary policy measures in the eurozone had been taken with the awareness of how serious the situation is. “Their most important message is that they are adjusted to the scope of damage that will occur. This will remain so in the future”.
The European Central Bank (ECB) and national central banks in the Eurosystem have increased asset purchases in the framework of existing programmes and a EUR 750 billion asset purchase instrument was added last week.
“Add together the value of these measures and we’re talking about almost a thousand billion euro at the level of the eurozone. For comparison, Slovenia’s GDP is around EUR 46 billion.”
This is a clear signal that monetary policy is aware of the gravity of the crisis and that central banks are capable of fast and effective action. The ECB’s governing council will keep a close eye on the situation and use all instruments at its disposal for additional action if necessary, he said.
If the response to this health crisis is to be successful, coordinated action of all economic policies in a country is necessary along with concerted action by domestic and EU institutions.
“The ECB’s governing council, therefore, believes that fiscal policy must respond with equal determination and perhaps even more decisively than monetary policy”, Vasle said.
“Slovenia must bear in mind the experience of the previous crisis. This experience says countries which had reacted fast were more successful and in some cases subject to fewer of the restrictions that were put in place after the initial period of action”.
Slovenia’s fiscal policy action is constrained by a constitutional fiscal rule. The government has repeatedly said it would take advantage of the built-in flexibility of the constraints and Vasle likewise noted that the existing rules have exemptions for extraordinary circumstances. “It would not make sense not to take advantage of that”.
Turning to the state of the Slovenian banking system, Vasle said that banks are in a better shape than they were when the financial crisis erupted.
They are sufficiently capitalised and the structure of their financing is significantly different in that it is based on deposits; equity is seven times the size of non-performing loans, which improves resilience to the current shock.
Neither do banks have packages of non-performing loans on their portfolios – which had been a part of the reason why the previous crisis was so deep – while companies are financially stronger and better equipped to absorb the crisis.
Overall, the liquidity of the banking system is good, with EUR 5.7 billion in primary liquidity and EUR 7.7 billion in secondary liquidity that banks may activate by selling liquid investments or by leveraging them for monetary policy measures.
“Despite the good starting point, the crisis will of course reflect on banks as well”, Vasle said, adding that the impact would strongly depend on the duration of the extraordinary circumstances and the effectiveness of mitigation measures./ibna