Coronavirus could cause a new euro crisis: Dutch Planning Office

The coronavirus crisis could lead to a new euro crisis, the Netherlands office for economic policy analysis CPB said after analyzing the vulnerabilities of the financial system.

Despite coronavirus support measures implemented by the government, businesses and households are facing increasing financial difficulties. And if the recession continues for some time and more debts become impossible to repay, households and businesses may pull financial institutions down with them, the CPB warned.

After the government, businesses are hardest hit by the coronavirus crisis, according to a stress test the CPB did. It showed that a quarter of small and medium sized businesses (SMEs) need more money than support measures provide and will face solvency problems if their turnover is lower than before the crisis for a period of six months. 

In the first three months of the coronavirus crisis, about 30 percent of Dutch SMEs needed a total of at least 12 billion euros extra than before the crisis. If turnover remains low, this will increase to 30 billion euros for almost 50 percent of Dutch SMEs, the CPB said. A significant part of this extra money needed due to loss of income is covered by the government's support measures. 

If the government reduces its coronavirus support measures too quickly, companies will have to go further into debt. This could lead to more bad loans, putting banks under pressure, the CPB said. But on the other hand, keeping the measures going for too long means that the government is spending great amounts of money to keep companies afloat that may ultimately not be viable. 

Banks and governments are interconnected, because banks hold government bonds. In the previous financial crisis around 2010, this interconnectedness caused serious problems. Banks are now stronger than in the previous crisis, partly due to higher obligatory buffers and a banking union. This means that they are less likely to pass risks on to governments. But this could happen if the banks have to absorb too many bad loans.