Finance & Markets

Navigating the Economic Landscape in 2024

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Article originally published in Tomorrow’s Affairs

As we embark on the year 2024, the economic landscape is characterized by a blend of factors, including declining but still elevated inflation, potential interest rate cuts, increasing geopolitical risks, and soaring public debt.

The final quarter of 2023 witnessed a remarkable improvement in market sentiment. The moderation of inflation, strong corporate profits that exceeded expectations, and optimism regarding impending rate cuts all contributed to this surge.

The heightened complacency, evident in the “extreme greed” levels on the CNN Greed and Fear Index, resulted from aggressive rate reduction expectations by central banks and projections of a swift decline in inflation. However, as we move into 2024, parallels with the preceding year become apparent.

Contrary to market expectations, a “soft landing” is not enough to bring about the anticipated year of disinflation; a recession is the necessary catalyst.

An abrupt increase in the global money supply, standing at nearly $107 trillion by the end of the year, remained a bulwark against a recession in 2023, coupled with relentless government spending.

A lag effect

The contrast between alleged tight monetary policy and active fiscal measures has placed the entire negative impact on the private sector, bearing the brunt of rate hikes and declining monetary aggregates.

A manufacturing sector that remains in deep contraction is joined by a services sector that sees how consumers have almost depleted their savings for 2021.

Although inflation declined alongside monetary aggregates, the economic repercussions have been delayed due to a lag effect.

The full-scale impact of the 2023 monetary contraction is expected to manifest in 2024

The full-scale impact of the 2023 monetary contraction is expected to manifest in 2024, leading to a decline in inflation if the economy falters and private sector demand recedes.

However, the notion of a quick slump in inflation with no impact on growth or jobs appears increasingly implausible. Additionally, a looser monetary policy may contribute to commodities rebounding, attracting freshly printed money towards unconventional assets, and making the inflation decline more challenging.

The impact of debt and public spending remains a critical consideration. Will central banks uphold market support? How will taxes and macroeconomic factors shape the global economy? These questions underscore the delicate balance between recovery and potential risks.

A year of stagnation

In 2024, a prudent investment policy is recommended. Central banks are expected to maintain accommodative policies, injecting liquidity selectively. However, anticipated interest rate reductions may not be as significant as expected.

The global economy enters 2024 with less uncertainty. Geopolitical risks seem to have been discounted, and this may be a sign of excessive optimism in a year where global growth is projected to slow markedly, while the Eurozone and Latin America may continue to show worse growth than their counterparts.

2024 will likely be a year of stagnation with elevated public debt

Strong China and India growth will not likely change the weak trend of productivity and growth generated in most developed and emerging economies after years of debt-fueled government spending programs.

2024 will likely be a year of stagnation with elevated public debt. Thus, the expected quantitative tightening is likely to be less severe with a rising global money supply and improved credit conditions.

A risky environment for fiat currencies is anticipated, with ongoing destruction of the purchasing power of the domestic currencies as governments continue to increase their fiscal imbalances.

Gold and bitcoin may help citizens avoid the debasement of currencies without ignoring the large difference in volatility of each asset class.

Global loss of purchasing power is likely to continue even with declining annual rates of rise in consumer prices, with expected global inflation between 3.5% and 4%

Expectations of large rate cuts and even quantitative easing from the Federal Reserve may be too optimistic. In a U.S. election year, substantial changes in monetary policy are not anticipated.

As such, global demand for dollars is expected to rise, creating a favorable environment for dollar-denominated assets.

Numerous risks cast shadows on the economic horizon, including more persistent inflation, unanticipated impacts on business margin and profits, potential currency depreciation in emerging markets, the ongoing China-USA trade conflict, the war in Ukraine and Israel generating widespread geopolitical risk, and the spectre of a black swan event in the debt market causing a credit crunch.

2024 is likely to be very similar to 2023. The long-term trends of weak productivity and GDP growth, high debt, rising government size in major economies, increases in taxes, and erosion of the purchasing power of salaries and savings will continue.

Equities may react positively to looser monetary policy, but the macroeconomic path to stagnation remains.


Why Milei Must Shut Down the Argentina Central Bank

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The monumental fiscal and monetary hole that Peronists Massa and Fernández have left for Javier Milei is difficult to replicate. Ex-president Mauricio Macri himself explained that the inheritance Milei receives is “worse” than the one he found from Cristina Fernández de Kirchner. Peronism leaves a country in ruins and with a massive time bomb for the next administration.

The enormous economic problems of Argentina start with a primary fiscal deficit of 3% of GDP and a total deficit (including interest expenses) exceeding 5% of GDP. Moreover, it is a structural deficit that cannot be reduced unless public spending is slashed. Public expenditure already accounts for 40% of GDP and has doubled in the era of Kirchnerism. If we analyze Argentina’s budget, up to 20% is purely political spending. The previous left-wing administration only cut spending on pensions, which were half of the adjustment in real terms, according to the Argentine Institute of Fiscal Analysis

Massa and Fernández’s interventionist policies and price controls have left a shortage of meat and gasoline in a country rich in oil and livestock, demonstrating again what Milton Friedman said: “Will we read next that government control of prices has created a shortage of sand in the Sahara?”

We must not forget that the Fernandez administration leaves Argentina with an annual inflation rate of 140% following an insane increase in the monetary base of more than 485% in five years, according to the Central Bank of Argentina.

This confiscatory and extractive fiscal and monetary policies have created a disaster in the central bank reserves. Fernandez leaves a bankrupt central bank with negative net reserves of $12 billion and a time bomb in remunerated liabilities (Leliqs) that exceed 12% of GDP and effectively mean more money printing and inflation in the future, when they mature. With a country risk of 2,400 basis points, the self-proclaimed “socialism of the 21st century” government has left Argentina and its central bank officially bankrupt, with 40% of the population in poverty and with a failed currency.

Milei must now confront this poisoned legacy with determination and courage. Macri, who suffered from the error of gradualism, recently argued that there was no room for mild measures, and he is right.

Milei has promised to shut down the central bank and dollarize the economy. However, can it be accomplished?

The answer is yes. Absolutely.

To understand why Argentina must dollarize, the reader must know that the peso is a failed currency that even Argentine citizens reject. Most Argentine citizens already save what they can in US dollars and conduct all major transactions in the US currency, because they know that their local currency will be dissolved by government interventionism. The government has 15 different exchange rates for the peso, all fake, of course, all of which have only one objective: to steal from citizens their US dollars at a fake exchange rate.

The central bank is bankrupt, with negative net reserves, and the peso is a failed currency. Therefore, shutting down the central bank is essential, and the country needs to have an independent regulator without the power to print currency and monetize all the fiscal deficit, and it must eliminate the possibility of issuing the insane Leliq (remunerated debt) that destroys the currency today and in the future.

Shutting down the central bank requires an immediate and strong solution to the Leliqs, which will have to include a realistic approach to the monetary mismatch in a country where the “official exchange rate” is half the real market rate against the US dollar. Taking a bold step to recognize this monetary mismatch, closing the central bank, and ending the monetization of debt are three essential steps to end a path to the destruction of a country comparable to that of Venezuela. Milei understands this and knows that the US dollars that citizens save with enormous difficulty should flow back to the domestic economy by recognizing the monetary reality of the country making the US dollar a legal tender for all transactions.

The monetary issue is one side of a hugely problematic coin. The fiscal problem needs to be addressed. Milei needs to put an end to the bloated fiscal deficit, and that requires an adjustment that eliminates political spending without destroying pensions. This must involve selling some of the many inefficient and bloated public companies and the excess spending in purely political subsidies. Secondly, Milei must put an end to the ridiculous trade deficit. Argentina must slash the misguided protectionist and interventionist laws if the Peronists are open to the world to export all they can. To do this, it needs to put an end to the ridiculous “currency exchange rate clamp” and the 15 false exchange rates that the government uses to expropriate dollars from citizens and exporters with unfair rates and confiscations.

Taxes need to be lowered in a country that has 165 taxes and the highest tax wedge in the region, where small and medium-sized enterprises pay up to 100% of their sales.

Argentina must change what is currently a confiscatory and predatory state. Additionally, bureaucratic barriers, protectionist measures, and political subsidies must be removed. Furthermore, Milei must ensure legal certainty and an attractive and reliable regulatory framework where the ghost of expropriation and institutional theft does not return.

Milei’s challenges are many, and the opposition will try to sabotage all market-friendly reforms because many politicians in Argentina became very powerful and rich turning the country into a new Venezuela.

If Argentina wants to become a thriving economy that returns to prosperity, it needs a stable macroeconomic and monetary system. It must recognize it has a failed currency and a bankrupt central bank and implement the urgent measures required as quickly as possible. It will be difficult but not impossible, and the potential of the economy is enormous.

Argentina was a rich country made poor by socialism. It needs to abandon socialism to become rich again.


The Slow And Painful Path To Jobs Recovery

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The United States recovered 4.8 million jobs in June, adding to May’s 2.5 million jobs rebound. The United States employment recovery is faster and stronger than the Eurozone one, which has over 40 million workers on subsidized jobless schemes added to a 7.4% unemployment that is expected to rise to 11% by September.

However, the positive headlines show important weaknesses that will have to be addressed in the following months. Labor Department data showed that in the week ending 27 June, initial claims for unemployment fell only slightly, to 1.43 million, on the previous week. Additionally, continuing claims remained stubbornly high at 19.29 million and the share of those reporting permanent job losses increased by 588 thousand.

Considering these factors, the trend shows that the United States unemployment rate would fall to 8.5% with a labor force participation rate of 63% at the end of 2020, according to my estimates. Goldman Sachs has improved its unemployment rate outlook to 9% for 2020 from 9.5% a month ago. However, at this rate the United States would only recover the 2019 record-low unemployment at the end of 2021. Still, much faster than the eurozone.

Subsidized jobless schemes, as the eurozone economies are implementing, is costly and generates extraordinarily little impact on consumption. Government spending is rising at the fastest pace in decades to include the increase in healthcare costs, the jobless insurance expenses, and the subsidised jobless programs. However, workers under these schemes know that their positions are at risk and are deciding, wisely, to save as much as they can. Almost 10% of the labor force in the major European economies is under one of these schemes, designed to help businesses navigate the crisis without letting go of employees.

The World Labor Organization estimates that 400 million full-time jobs have been lost in this crisis. Recovering and strengthening the labor market is crucial for developed economies to achieve the estimates of gross domestic product growth expected in 2021 and 2022. Without a strong job market, consumption and growth are likely to stall in 2021, and it will be exceedingly difficult to see investment growth.

How can economies recover the lost employment and continue to create jobs? Unfortunately, many governments would have to do the opposite of what most developed economies are doing. They should stop bailing out zombie firms, as those already had overcapacity in the past five years and are not going to hire more workers soon. Governments should also reduce unnecessary spending to prevent deficits from rising to unmanageable levels and then increase taxes that would reduce investment and job creation. Bloated public budgets are not going to bring employment back. It did not work in the eurozone in the 2009-2012 period and it will not work elsewhere.

The United States government has taken a more effective approach by combining some demand-side measures with more efficient supply-side policies that have supported the job recovery, even if it is still weak. There is a long and painful road ahead, and the rising number of covid-19 cases may harm the economic recovery as lockdown risks return.

Some commentators in Europe have argued that the job recovery in the United States is stronger due to a larger fiscal and monetary stimulus. It could not be further from the truth. The European Central Bank balance sheet is now 52.8% of GDP, 6.2 trillion euro. It started the year at 39.4%, or 4.6 trillion euro. The Federal Reserve balance sheet is 32.6% of GDP. Fiscal stimulus is also much smaller than in eurozone economies. The US fiscal impulse is equivalent to 5.2% of GDP, compared to 38% in Germany, 30% in Italy, 23% in France, and 10% in Spain.

The reason why the US economy is improving faster than the eurozone is a more dynamic and flexible labor market with more resilient businesses. That does not take away the important challenges of the US. It lost 7.9 million jobs in hospitality and leisure, according to the Bureau of Labor Statistics, and the service sector, which saw the biggest employment reductions, is coming back slowly.

If the United States wants to surprise the world with a much quicker return to record employment it needs to address the permanent job loss figure with tax incentives to hire faster and the continuing jobless claims with a robust and effective set of policies that strengthen business creation and allows existing ones to grow, particularly in digitalization and added-value online services for global customers.

At the current pace, the eurozone will not return to the 2019 employment levels until 2023. In the case of the United States, at the end of 2021 or first quarter of 2022. It is not enough. The global economy may fall back into a recession if the conditions for the labor market and business creation to strengthen are not introduced rapidly.

Governments will have t liberalize the labor market, cut red tape, eliminate harmful overregulation and provide a stable and helpful framework for businesses to start and grow, or they will find themselves in a deeper crisis than feared.

Deeper Crisis, Weaker Recovery

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Outlook for 2020 and 2021.

Gold and copper.

Equities and bonds.



If we look at the recovery so far in the majority of economies it is quite less exciting than what many expected, so what we can certainly rule out is the concept of a V-shaped recovery. I think it’s also very uneven. We see that the recovery is quite rapid in those areas that have to do with government spending and weaker in those areas that have to do with travel and leisure. Considering the outlook for 2021, what we believe is that there will be more of an L-shaped type of recovery.

Three Risks For European Banks

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The measures implemented by governments in the Eurozone have one common denominator: A massive increase in debt from governments and the private sector. Loans lead the stimulus packages from Germany to Spain. The objective is to give firms and families some leverage to pass the bad months of the confinement and allow the economy to recover strongly in the third and fourth quarter. This bet on a speedy recovery may put the troubled European banking sector in a difficult situation. Read More

Three Reasons Why The Eurozone Recovery Will Be Poor

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The Eurozone economy is expected to collapse in 2020. In countries like Spain and Italy, the decline, more than 9%, will likely be much larger then emerging market economies. However, the key is to understand how and when will the eurozone economies recover.

There are three reasons why we should be concerned:

  1. The eurozone was already in a severe slowdown in 2019. Despite massive fiscal and monetary stimulus, negative rates, and the ECB balance sheet above 40% of GDP, France and Italy showed stagnation in the fourth quarter and Germany narrowly escaped recession. The eurozone weakness started already in 2017 and disappointing economic figures continued throughout the next years. Many governments blamed the weakness on the Brexit and Trade War cards, but it was significantly more structural. The eurozone abandoned all structural reforms in 2014 when the ECB started its quantitative easing program (QE) and expanded the balance sheet to record-levels. Manufacturing PMIs were already in contraction, government spending remained too high and the elevated tax wedge weighed on growth and jobs. In 2019, almost 22% of the eurozone GDP gross added value came from Travel & Leisure, a sector that will unlikely come back anytime soon, while the exporting sector is also likely to suffer a prolonged weakness.
  2. The banking sector is still weak. In the eurozone, 80% of the real economy is financed via the banking channel (compared to less than 15% in the United States). Eurozone banks still have more than 600 billion euro in non-performing loans (3.3% of total assets vs 1% in the U.S.), an almost unprofitable business with a poor return on tangible assets (ROTE) due to negative rates, and a significant challenge ahead, as most of the growth investments, in LatAm in particular, may reduce capital strength significantly in the next months. Most of the eurozone governments are relying on leveraging the banks’ balance sheets in their “recovery plans”. A massive increase in loans, even with some form of state guarantee, is likely to cause significant strains on lending capacity and solvency in the next years, even with massive TLTROs and capital requirement reductions.
  3. Most of the recovery plans go to government current spending, and tax increases will surely impact growth and jobs. The eurozone tax wedge on jobs and investment is already very high. According to the Paying Taxes 2019 report, the majority of eurozone economies show widely uncompetitive taxation levels. As most governments will massively increase deficits to combat the Covid-19 crisis, there is a high likelihood of a massive increase in taxes that will make it more difficult to attract investment growth and jobs. Most of the recovery plans are also aimed at bailing out the past and letting the future die. There are massive bailout packages for traditional conglomerates and industries, but investment in technology and R&D continues to have high burdens and no support. Considering that the eurozone was already in contraction in the middle of the massive Juncker plan (that mobilized more than 400 billion euro in investments) and the large green policies implemented, it is safe to say that relying on a Green New Deal will unlikely boost growth or reduce debt. The main problem of these large investment plans is that they are politically directed and, as such, have a large tendency to fail, as we saw with the Jobs and Growth Plan of 2009.

Almost 30% of the eurozone labor force is expected to be under some form of unemployment scheme, be it temporary, permanent, or self-employed cessation of activity. After a decade of recovery from the past crisis, the eurozone still had almost double the unemployment rate of its large peers, the US, or China. Germany may recover jobs fast, but France, Spain or Italy, with important rigidities and tax burdens on job creation may suffer large unemployment levels for longer.

The eurozone also faces important challenges into a recovery due to its lack of technological and intellectual property leadership. Those two factors will help China and the U.S. recover faster, as well as the reality of having more flexible jobs market and higher support for entrepreneurial activity through attractive taxation. Considering the severity of the crisis, the eurozone is likely to need at last 10% of its GDP o rebuild the economy, but that figure is almost completely absorbed by the traditional sectors (airlines, autos, agriculture, tourism). Furthermore, the New Green deal initiative includes severe restrictions to travel and energy-intensive industries that may act as a brake on future growth.

The ECB policy was already unnecessarily expansionary in the past years, and now it runs out of tools to address the unprecedented challenge of recovery post-Covid-19. With negative rates, targetted liquidity programs, asset purchases of private and public debt, and a balance sheet that exceeds 42% of GDP of the eurozone, the best it can do is to disguise some risk, not eliminate it. We should also warn of adding massive monetary imbalances when demand for euros globally is acceptable but shrinking according to the Bank of International Settlements, and risk of redenomination remains in a politically unstable eurozone.

Our estimates show that, even with large fiscal and monetary stimulus, the eurozone economy will not recover its output and jobs until 2023, and rising debt to record highs as well as monetary imbalances due to massive supply of euros in a diminishing demand environment, may cause significant problems for the stability of the eurozone.

The eurozone needs to understand that if it decides to increase taxes to address the rising debt due to the Covid-19 response, its ability to recover will be irreparably damaged.

Banks Will Not Bail Out The Economy

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These days, we hear a lot that banks were the problem in the 2008 crisis and now they are the part of the solution. 

Banking was not the main problem of the 2008 crisis, but one of the symptoms that indicated a more serious disease, the excess risk taken by public and private economic agents after massive interest rate cuts and direct incentives to take more debt coming from legislation as well as local and supranational regulation. Lehman Brothers was not a cause, it was a consequence of years of legislation and monetary policies that encouraged risk-taking.

The second part of the sentence, “now banks are the solution,” is dangerous. It starts from a wrong premise, that banks are stronger than ever and can bail out the global economy. Banking may be part of the solution, but we cannot place, as the eurozone is doing, the entire burden of the crisis on the banks’ balance sheet. I will explain why.

When economists in Europe talk endlessly about the differences in growth and success of monetary and fiscal policy between the United States and Europe, many ignore two key factors. In the United States, according to the St Louis Federal Reserve, less than 15% of the real economy is financed through the banking channel, in the European Union, it is almost 80%. In addition, in the United States, there is an open, diversified, more efficient and faster mechanism to clean non-performing loans and recapitalize the economy that adds to its high diversification in private non-bank financing channels. 

It is, therefore, essential that in periods of crisis countries, particularly in Europe, do not relax risk analysis mechanisms, because the economic recovery may be slowed down by ongoing problems in the financial sector and even lead to a banking crisis in the midterm. The worst measure that countries can take in a crisis is to force incentives to take a disproportionate risk.

European banking is stronger today than in 2008, but not as healthy as governments would like to believe. In recent years, the banking sector increased its top-quality capital ratios (CET1) at a rate of almost 1% per year despite the difficult economic environment in Europe, poor growth and, above all, negative interest rates that have decimated the sector’s margins and profits. However, a large part of that capital improvement has been achieved by issuing hybrid bonds (CoCos), which should be taken into account when considering hidden risks. CoCos can create a domino negative impact on the financial sector as a coupon on these instruments is paid only if core capital remains above a certain level. If the coupon is cut, the fragile capital structure of eurozone banks can deteriorate rapidly.

More than EUR104 billion of hybrid bonds (CoCos) are included in the calculation of eurozone banks’ core capital.
European banks have been able to strengthen their balance sheet and reduce risk in an environment of margin destruction via negative rates and suffocating regulation. The impact, according to Scope Ratings, has been very high, more than 25 billion euros in lost profits between 2014 and 2018. Analyzing the earnings of the financial sector (SX7E Index) between 2014 and 2019, the net income margin has fallen by 30%, earnings per share have fallen an average of 13% and the capitalization of the sector in the stock market is at record lows.

In such a difficult environment, the sector has reduced its non-performing loans (NPLs) by half to 636 billion euros according to the European Banking Association, that is 3% of total assets (as compared to 1% in US banks) while highest quality capital ratio (CET1) is at 14.8% and total capital ratio at 18.4% with leverage of 5.68%.

In the face of the Covid-19 crisis, European states have launched huge economic programs aimed at businesses and individuals, but the common denominator of all these programs is to exponentially leverage the balance of banks.

In my study “Monetary and Fiscal Policies In The Covid-19 Crisis. Will They Work? ” I explain how most of the European governments have made the decision to massively leverage the banks’ balance sheets through partially or totally state-guaranteed loans. However, we cannot forget that these are loans and that the vast majority go to businesses with enormous difficulties due to the forced closure of the economy, which in some cases means doubling the risk of banks.

Germany, for example, has taken fiscal measures equivalent to 4.5% of its GDP, but bank leverage measures via liquidity lines and loans equivalent to 24% of its GDP. In the case of France, fiscal measures of 2% of GDP and bank leverage ones of 14% of GDP. In Italy, 1.4% and 20% respectively, and in Spain, 1.4% and 8%.

I think the disproportion is obvious. European states are trying to bail-out the economy, closed by government decision, via a huge increase in debt and multiplying the risk on the banks’ balance sheet. The fact that governments guarantee part of these figures neither eliminates the risk nor moderates it, because these guarantees, if executed, will be paid with more debt and more taxes and, with it, less growth and investment.

European governments want banks to sip and blow at the same time. They require them to strengthen their balance sheets in an environment of negative interest rates and burdensome taxation, and at the same time, disproportionately increase credit taking a greater risk with lower profitability. Europe may face a bigger financial problem in the future because, contrary to what most governments expect, the probability of a rapid and V-shaped recovery of the eurozone economy is very low. If the economic recovery is weak and uneven, as is most likely, the rise in non-performing loans and weakening of banks will be substantial, and the impact on the real economy, severe.

Large stimulus is targetting the wrong sectors. Most of the massive loan plans is being absorbed by sectors that were already weak before the crisis due to obsolescence, technology and consumer pattern changes as well as overcapacity.

Another important factor to consider in these huge bail-out plans is the risk of allocating liquidity and capital to those who do not need it in the first place or, worse, to those who should not receive more credit. The vast majority of aid via loans granted by European states focus on sectors that were already “zombified” and with difficulties in 2016-2019, huge conglomerates and so-called strategic sectors that have never had a problem of credit. While zombie sectors are bailed-out, small businesses are dying at a rate of thousands per month. Spain, for example, has lost 122,000 businesses in March 2020, while billions of euro of grants were provided to traditional sectors that had overcapacity before the crisis.

The solution cannot come from huge loans to pay taxes in the future while praying for a V-shaped recovery. It must come through short-term liquidity lines without recourse and tax exemptions during the crisis added to a radical adjustment of non-essential budget items.

Governments cannot ask the real economy to hibernate and drown in debt, or demand large adjustments from the private sector while they keep unnecessary public spending and bloated budgets. 

Countries need to use the fiscal space they have to preserve the productive business fabric, not adding massive leverage, creating a problem in the financial sector in the medium term.

The reader may think that the solution would be a huge public bank that would bail out all sectors. 

The vast majority of productive sectors do not need to be rescued, they need governments to eliminate taxes during the lockdown and lift it quickly. Businesses are not falling due to mismanagement or bad strategies, they are collapsing due to the government-imposed shutdown.

The world has plenty of capital to finance the recovery and strengthen the economy. What the world does not need are politically directed recovery plans. Just allow investments to be channeled efficiently and quickly, not hinder it.

International studies show that public banks have worse solvency and liquidity ratios, in addition to political management. We do not have to remind anyone that two public entities, Freddie Mac and Fannie Mae, inflated the subprime bubble by lending without control and with political criteria to citizens without resources. 

European banks can survive the risks of the Covid-19 crisis, manage the loss of value of their current assets and the rise in non-performing loans, but the banking sector bail-out the entire eurozone economy from the mistakes in health and economic planning of governments.

Fighting the pandemic and preserving the productive fabric are not exclusive objectives. Burdening banks with multiplied risks can create a bigger, long-term problem.