Europe will face a new wave of non-performing loans (NPLs) if governments withdraw their support programs before the economy has fully recovered, according to Ernst & Young’s report on the consequences of the COVID-19 crisis. Some industries will fail despite the state support, experts warned. It will lead to more non-performing loans granted to the corporate sector and SMEs.
Significant parts of the loans are covered by guarantees and moratoria, but the potential NPL volumes could reach those during the global financial crisis. The European approach for tackling NPLs has changed from an already rejected idea of a single European bank for bad loans to a network of debt management companies, as it is noted in E&Y’s report.
According to experts there will be a strong push for electronic debt platforms. E-services, big data analyses and automatisation of processes will spread widely in order to bring better services for both debtors and creditors.
As a response to the COVID-19 crisis, the European Commission (EC) has started a new NPLs action strategy – debt management companies will be the basic tool for solving the expected COVID-related issue of bad loans in the EU countries, according to E&Y. Drawing lessons from the last economic crisis, it is necessary to address a renewed build-up of NPLs on banks’ balance sheets as early as possible. The idea for establishing a European bank for bad loans is rejected, so the solution will rely on the specialized debt purchasing companies.
The strategy of the European Commission (the EC) will involve strengthening the development of secondary NPL markets as well as establishing rules for negotiating restructuring, recovery and insolvency. The main goal of the EC’s action plan is to offload bad loans from banks’ balance sheets in order to accelerate their recovery and stabilize the banking sectors at a national level. According to the ECB’s severe scenario the total NPLs across the EU will rise to €1.4 trillion, as the current level is at €600 billion. Citigroup’s forecasted NPLs will amount to €1 trillion.