UPDATE 2-Bank of Spain warns crisis might be deeper than worst-case scenario

Bank of Spain governor Pablo Hernandez de Cos on Tuesday warned that potential harsher measures to contain the recent wave of COVID-19 contagion in the country may lead to an even deeper crisis than the bank's worst-case scenario. Spain, one of the worst-affected nations with more than 32,000 deaths and more than 800,000 cases, is heading for its worst economic performance on record in 2020, with an expected contraction of 10.5% or 12.6%, according to the Bank of Spain.

Bank of Spain governor Pablo Hernandez de Cos on Tuesday warned that potential harsher measures to contain the recent wave of COVID-19 contagion in the country may lead to an even deeper crisis than the bank's worst-case scenario.

Spain, one of the worst-affected nations with more than 32,000 deaths and more than 800,000 cases, is heading for its worst economic performance on record in 2020, with an expected contraction of 10.5% or 12.6%, according to the Bank of Spain. De Cos warned that underlying risks remain tilted downwards.

"We cannot rule out more unfavourable developments than the ones we had in our second scenario, the more adverse of the two we considered," he said. In this context, De Cos also urged broad political and social consensus to cope with the economic fallout from the COVID-19 disease as a political spat over how to tackle the crisis is escalating.

The national and regional governments have traded barbs over what to do and who was to blame for an increase in cases in Madrid and its periphery, taking to new heights the political polarisation that has characterised much of the response to the pandemic over the past months. "We must be aware of the magnitude of the challenge we face (...) and therefore I urge that we reach broad political and social agreements to tackle the urgent, ambitious and comprehensive growth strategy that our country needs," De Cos told parliament.

Spain's central bank governor also urged politicians to carry out structural reforms on the Spanish labour market to improve productivity, while maintaining some fiscal stimulus in the short-term to weather the crisis. De Cos, who also sits on the governing council of the European Central Bank (ECB), also said that there was scope for more consolidation in the banking sector in Europe at a moment when lenders are under pressure to deal with rising bad debts and record low interest rates.

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