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New forecasts predict a 7.4 percent economic collapse and risks of even worse decline if the reopening triggers a second virus wave.

BRUSSELS — The good news for Europe is that the worst of the pandemic is beginning to ease. This week deaths in Italy hit a nearly two-month low. And the German leader Angela Merkel announced that schools, day care centers and restaurants would reopen in the next few days.

But the relief could be short-lived.

The European Commission released projections on Wednesday that Europe’s economy will shrink by 7.4 percent this year. A top official told residents of the European Union, first formed in the aftermath of the Second World War, to expect the “deepest economic recession in its history.”

To put this figure in perspective, the 27-nation bloc’s economy had been predicted to grow by 1.2 percent this year. In 2009, at the back of the global financial crisis, it shrank by 4.5 percent.

It’s a grim reminder that even if the virus dissipates, the economic fallout could pressure the world economy for months, if not years.

In China, where the outbreak has subsided in recent weeks, the factories that power the global supply chain have been fired up. But with few global buyers for its goods, its economy has been slow to recover.

In the United States, where the growth of new cases in the hardest-hit areas shows signs of slowing and there is a push to lift lockdowns, there are also signs that a recovery may be elusive. The government on Friday is set to release the monthly employment report, and some forecasts predict a loss of more than 20 million jobs in April — a number that would wipe out a decade’s worth of job gains.

The European Union, home to 440 million people, is the United States’ No. 1 trading partner, and China’s second-largest. It’s the biggest foreign investor in sub-Saharan Africa and other parts of the developing world.

A prolonged European recession, a second wave of the virus or an anemic economic recovery would spell added misery for many Europeans, and hurt companies, banks and people the world over. The crisis is also reigniting political divisions between a wealthier north and a poorer south, threatening to break the brittle balance between divergent nations with inextricably linked economies.

A recovery will probably start unevenly in the second half of the year, Paolo Gentiloni, European commissioner for economy, said at a news conference after the release of the forecast, which comes out four times a year. But by the end of 2021 the countries of the European Union will be in worse shape than they were just two months ago, before the coronavirus started ripping through the continent. U.S. gross domestic product fell at a 4.8 percent annual rate in the first three months of the year, and some economists believe it will contract at an annual rate of 30 percent or more in the current quarter.

“The danger of a deeper and more protracted recession is very real,” the head of the commission’s economic unit, Maarten Verwey, said in the forecast’s foreword.

A resurgence of the virus after the end of lockdowns would shave a further 3 percentage points off economic performance this year, he said.

The economies of Italy and Spain, two of the countries hardest hit by the disease, will most likely shrink by over 9 percent each this year, and Italy’s economy will be particularly slow to recover, Mr. Gentiloni said.

Greece, which had started turning a corner after a decade of economic calamity, will be worst-hit in the union, according to the forecasts, losing 9.7 of its economic output this year. Poland would suffer the least, with a 4.5 percent recession.

And unemployment will most likely average 9 percent in the bloc, the European Commission said, from 6.7 percent the year before.

The bloc’s biggest economy, Germany, will also be hammered, suffering its worst recession since World War II, set to shrink by 6.5 percent, but it is expected to recover relatively quickly. France, the second-largest economy, is expected to contract 8.5 percent this year.

The severe downturn in Europe will have major repercussions for United States growth and jobs because the two economies are intimately connected.

The European Union and the United States are each other’s largest trading partners, exchanging goods and services worth $1.3 trillion last year. European companies like Daimler, BMW or Siemens employ more than four million people in the United States, according to U.S. government figures.

China will also suffer. The European Union is second only to the United States as a customer for Chinese goods.

As grim as the economic outlook appears, the greater danger to the world economy may be the risk that the euro common currency could be undermined by the deepening rifts between its members and their leaders. That almost happened in the early years of the last decade, but was averted when the European Central Bank, the euro’s Federal Reserve, used its monetary firepower to prevent Greece, Italy and Spain from becoming insolvent.

The central bank is again flooding the eurozone with credit and buying the bonds of eurozone governments to keep their borrowing costs from spinning out of control. But the central bank’s ability to rescue the euro again may be constrained after a ruling Tuesday by Germany’s highest court.

The German Constitutional Court issued an ultimatum to the European Central Bank, saying it must show that the side effects of the bond buying do not outweigh the economic benefits. The court threatened to bar Germany’s central bank, the Bundesbank, from taking part in the stimulus program, which would be a serious breach of European unity.

The coronavirus is already producing an economic shock in Europe more severe than the one that followed the financial crisis in 2008.

“It is clearly more massive, and it is going down more steeply,” Clemens Fuest, the president of the Ifo Institute, one of Germany’s leading economic think tanks, said during an online presentation Wednesday.

The pandemic could have ramifications for politics and society that are impossible to predict. The economic dislocation caused by the 2008 financial crisis helped fuel far-right populist movements in Germany, Italy and France.

Europe’s best hope is that economies will bounce back quickly, in what economists optimistically call a V-shaped recession, as lockdowns are eased.

Already, factories have resumed production in much of Italy, and Germany this week allowed hairdressers to begin receiving customers again. France will begin gradually ending its lockdown next week.

But many restrictions remain, including bans on large public gatherings. And no one knows yet whether the virus will reappear with a vengeance as public life resumes.

The fresh set of figures will pile pressure on European leaders to conjure up a brave joint response to the recession to ensure the recovery isn’t lopsided, hurting the joint currency and spawning more political unrest in the weaker economies.

Although the leaders have approved a half-trillion euros’ worth of measures that effectively call on wealthier nations to subsidize the recovery of worse-hit poorer ones, they have been criticized for not going far enough.

The persistent divide “poses a threat to the single market and the euro area — yet it can be mitigated through decisive, joint European action,” Mr. Gentiloni said.

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Macro :

- ECB’s First Problem on German Court’s QE Demand Is Who Responds

- U.S. Investor Bull-Bear Spread -29: AAII

- Rally in Peril Due to Corporate Earnings, Janus Henderson Says

Keep an eye on :

- ABBN SW : ABB Wins Orders Worth Over $180 Million From Stadler

- ABI BB : AB InBev First Quarter Adjusted Ebitda -13.7%, Est. -14.7%

- ABI BB : Virus May See AB InBev Destroy $8 Million of Beer: Bus. Insider

- AD NA : Ahold Delhaize Maintains FY Free Cash Flow Above EU1.5 Bln

- ADP FP : Paris Orly Airport to Remain Closed Until Fall: ADP CEO

- AF FP : Air France-KLM Warns Rebound Will Takes Years After Losses Mount

- AZA IM : Alitalia Agrees With Unions on 6,622 Layoffs To End of October

- MT NA : ArcelorMittal Pulls Forecast For Steel Demand; Suspends Div. (1)

- B2H NO : B2Holding First Quarter Operating Profit NOK255 Mln, -27% Y/y

- BAMNB NA : BAM First Quarter Adjusted Pretax Profit EU1.3 Mln, -92% Y/y

- BPE IM : BPER Banca First Quarter Revenue EU596.6 Mln, Est. EU582.6 Mln

- BNR GY : Brenntag First Quarter Oper Ebitda EU263.0 Mln

- DEZ GY : Deutz First Quarter Adj Ebit Loss EU11.8 Mln

- DNO DC : DNO Cuts Spending 35% to Protect Cash Amid Covid-19, Oil Slump

- DSM NA : DSM 1Q Adjusted Ebitda EU423 Mln, -0.2% Y/y, Est. EU413.3 Mln

- EVD GY : CTS Eventim to Suspend Dividend for 2019

- EDPR PL : EDPR Gets Power Purchase Agreement for U.S. Solar Project

- ZIL2 GY : ElringKlinger First Quarter Ebit EU16.0 Mln

- EMGS NO : EMGS Warns ‘No Guarantees’ It Can Preserve Sufficient Liquidity

- ENEL IM Enel 1Q Adj. Ebitda EU4.74b, Est. EU4.54b; Confirms Targets

- EQNR NO : Equinor Profit Plunges 63% Amid Historic Oil Market Crisis

- EVK GY : Evonik Cuts 2020 Sales, Adj. Ebitda Forecast

- FGR FP : Eiffage Wins Paris Hospital Contract Worth EU141m

- EQNR NO : Equinor Has $20b Tax Loss Carryover in the U.S., DN Reports

- EUCAR FP : Hertz and Avis Cancel Orders in Setback for Battered Automakers

- GBLB BB : GBL First Quarter Cash Profit EU161 Mln, +61% Y/y

- GSF NO : Grieg Seafood 1Q Ebit NOK240 Mln, -10% Y/y, Est. NOK263.4 Mln

- HEI GY : HeidelbergCement Cuts FY Div Proposal, 2020 Outlook Uncertain

- IBE SM : *IBERDROLA TO BUY AALTO POWER FOR EU100M: EXPANSION

- KOJAMO FH : Kojamo Maintains Full Year Revenue +2% to +6%

- LATOB SS : Investment Latour Cuts Proposed Dividend to SEK1.25 From SEK2.75

- SKB GY : Koenig & Bauer 1Q Ebit Loss EU34.9 Mln Vs. Loss EU2.80 Mln Y/y

- LR FP : Legrand 1Q Adjusted Operating Profit EU282.6 Mln, -7.4% Y/y

- LDO IM : Leonardo Signed New Credit Lines for EU2b

- LHA GY : Lufthansa Bailout Slowed by Coalition Haggling Over 25% Stake

- MCHN SW : MCH Group Cancels Baselworld 2021 After Watchmakers Depart

- B4B GY : Metro Profit Halves on Restructuring While Russian Sales Improve

- MOR GY : MorphoSys Forecasts Ebit Loss

- MUV2 GY : Munich Re 1Q Profit EU221M, -65% Y/Y

- KN FP : Natixis Joins French Equities Wipeout With $140 Million Hit

- NEL NO : NEL First Quarter Revenue NOK126.5 Mln, +3.3% Y/y

- NWO GY : New Work SE First Quarter Revenue EU68.9 Mln, +10% Y/y

- NEX FP : Nexans First Quarter Revenue EU1.57 Bln, -1.1% Y/y

- NXI FP : Nexity First Quarter Revenue EU787 Mln

- NOS PL : NOS First Quarter Revenue EU345.4 Mln, -3% Y/y

- NOVN SW : Novartis’s Capmatinib Gets Accelerated Approval by FDA

- OSR GY : Osram 2Q Profit Rises on Structural Measures and Cash Management

- PARG SW : Pargesa First Quarter Net Income CHF6 Mln, -93% Y/y

- PMO LN : Premier Oil Underwriting Agreement for U.K. Acquisitions Lapses

- PSM GY : ProSieben Can’t Provide Reliable Outlook With Virus Uncertainty

- RHK GY : Rhoen Klinikum Maintains FY Ebitda EU72.5 Mln to EU82.5 Mln

- ROG SW :Roche CEO Says Low Valuations Could Make M&A Easier, NZZ Reports

- ROG SW : *ROCHE CEO EXPECTS NOVARTIS TO MAINTAIN ROCHE SHAREHOLDING: NZZ

- RR/ LN : U.K. Is Ready to Offer More Support to Rolls Royce: Jenrick

- RRTL GY : Moody’s Downgrades Bertelsmann Long-Term Issuer Rating to Baa2

- RUI FP : Rubis First Quarter Revenue EU1.39 Bln

- SESG FP : SES First Quarter Ebitda EU284.7 Mln, -1.9% Y/y

- SIX2 GY : Sixt SE Agrees on Credit Line of as Much as EU1.5b

- AM3D GY : SLM Solutions 1Q Revenue EU17.8 Mln Vs. EU7.34 Mln Y/y

- SRG IM : Snam’s Chairman Dal Fabbro Decided to Resign From Post

- TKA GY : ThyssenKrupp Steel Seeks Discounts From Suppliers: Handelsblatt

- TEF SM : Telefonica Withdraws 2020 Guidance, Maintains Dividend

- TRI FP : Trigano 1H Current Op. Profit -11%; Sees 2H ‘Strongly Impacted’

- TUI LN : TUI Faces Liquidity Shortfall, Move Underweight: Morgan Stanley

- VATN SW : Valiant Says It’s Well Positioned to Overcome Current Challenges

- VLA FP : Valneva Now Sees 2020 Negative Ebitda of EU10M to EU30M

- VASTN NA : Vastned Cuts Final Dividend; Omits 2020 Interim Payout

- VEI NO : Veidekke First Quarter Revenue NOK8.44 Bln, Est. NOK8.28 Bln

- DG FP : London Gatwick under a cloud as carriers threaten to quit airport FT : https://on.ft.com/2SJEceb

- VOW GY : VW ID4 Electric Crossover Is Already in Production: Electrek

- WAC GY : Wacker Neuson First Quarter Ebit EU28.9 Mln

- WDI GY : Top investor calls for dismissal of Wirecard chief Markus Braun - FT : https://on.ft.com/2WxgRNX

- ZAL GY : Zalando Sees Full Year Revenue +10% to +20%

Liberty Global and Telefónica agree £24bn deal to merge UK groups

Combination of O2 and Virgin Media is set to transform British telecoms market

Liberty Global and Telefónica have reached an agreement to combine their British operations O2 and Virgin Media, in a tie-up worth more than £24bn that is set to reshape the UK’s telecoms market, said people with direct knowledge of the matter.

The two companies are expected to announce the deal on Thursday after five months of negotiations between the Spanish telecoms company and the US group controlled by billionaire John Malone, the people added. 

Under the terms of the agreement, the companies would have equal ownership of O2 and Virgin Media, the people said, adding that Telefónica would receive £5.5bn in cash to help it reduce its heavy debt position. 

Liberty Global would also take £1.5bn in cash after splitting out Virgin Media’s Irish business, which would not be included in the merger with O2. 

The parent companies expect to achieve £700m worth of synergies by merging the businesses, through a combination stripping out costs and moving Virgin Media’s existing 3m mobile customers from EE on to O2’s network. 

The deal, which was led by Mike Fries, chief executive of Liberty Global, and José María Álvarez-Pallete, chairman and chief executive of Telefónica, will create a stronger competitor to BT, which owns the EE network.

The deal will also reshape the British telecoms sector by uniting the country’s second-largest broadband network with the largest mobile network, which has 26m direct customers and 34m non-direct clients, via brands such as Tesco Mobile and business users. It was also force rivals Vodafone, Sky, Three and TalkTalk to compete with two much larger telecoms companies. 

Vodafone had long been linked with a plan to combine its UK business with Virgin Media but has held back, despite merging with Liberty Global in the Netherlands and buying the cable company’s networks in Germany and eastern Europe last year. It also merged with rival Idea in India and could yet look to unsettle the O2 tie-up in the coming weeks, according to one person with knowledge of the company’s plans. 

Telefónica has also been looking for a UK deal for a number of years. Its efforts have included trying to sell O2 to BT, agreeing a £10.3bn sale to mobile rival Three that was blocked by regulators and has attempting to launch an initial public offering of the network.

The Virgin Media deal represents the fourth time the business has changed hands. It was founded as Cellnet under BT before being demerged and relaunched as MMO2. Telefónica fought off competition from KPN, the Dutch telecoms company, to buy the mobile network in 2005 for nearly £18bn.

Backers of the deal between Liberty and Telefónica also justified it by pointing to the need to invest in expanding Virgin Media’s ultrafast broadband network and upgrading O2’s mobile services to 5G networks. Both businesses have suffered network issues in the weeks leading up to the merger. 

Investors fear Italy is heading for ‘junk’ borrower status

Coveted top-quality rating hanging by a thread as Moody’s decision looms

Fund managers are growing increasingly nervous Italy could lose its investment-grade credit rating, a development that would create upheaval in European bond markets.

Moody’s on Friday will become the first of the big three agencies to slap a “junk” label on Italian debt, if it downgrades Rome’s creditworthiness from the current Baa3 — the lowest rating still counted as investment-grade. Most fund managers think a demotion is unlikely, but even a change in Moody’s outlook on Italy’s creditworthiness from stable to negative would add to a sense that the country’s coveted top-quality rating is hanging by a thread.

Last week, Fitch unexpectedly cut its rating to the lowest investment-grade rung, on a par with Moody’s and one notch below rival Standard & Poor’s. The move reflected the economic pain being caused by Covid-19 and the extra debt Rome is taking on to fund its response.

“I struggle to see a path forward where Italy isn’t eventually downgraded,” said James Athey, a fixed-income portfolio manager at Aberdeen Standard Investments. “We are talking about one of the biggest bond markets in the world going to junk, where the vast majority of real money investors are involved. I can’t think of any precedent that even comes close.”

Even with a junk rating, Italy’s €2.4tn of government bonds would most likely retain the support of the European Central Bank, which has battled to keep borrowing costs down since mid-March by buying bonds through its €750bn pandemic emergency purchase programme. The central bank waived its usual investment-grade requirement to include Greece in the PEPP and could do the same for Italy.

But many investors such as pension funds and insurance companies are restricted to holding the highest-grade bonds, or at least have limits placed on how much riskier debt they can buy. Then there are trillions of dollars in passive investments that track the biggest bond benchmarks.

Rules vary between the main indices, but typically a bond issuer needs an investment-grade rating from two of the main three agencies to be included. That means a junk rating from more than one could spark a wave of forced selling.

Chiara Cremonesi, a fixed-income strategist at UniCredit, said rating-constrained investors “would not wait to become forced sellers” and are most likely to start offloading the debt when the first downgrade to junk comes. “Actually, those who are more sensitive to rating downgrades have probably already started to reduce their positioning,” she added.

The sheer size of Italy’s bond market dwarfs any other “fallen angel” — market parlance for bond issuers recently downgraded to junk — making it tough for traditional high-yield investors to absorb the sudden extra supply.

Peter Chatwell, head of multi-asset strategy at Mizuho International, said: “It would have a seismic impact on the relative size and importance of European investment-grade and high-yield indices, and would completely change the profile of the typical Italian government bond investor.”

In the event of a downgrade, most analysts think the ECB would have to buy Italian debt even faster amid an exodus of private investors — particularly the foreign holders who own more than a fifth of Italy’s debt.

“You’d be looking at a huge shift from private to public hands,” said Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers. He said that would keep a lid on borrowing costs in the short term, but investors might start to question the ECB’s ability to go on buying vast quantities of Italian debt once economies begin to recover. Another risk is the German constitutional court’s legal challenge to the central bank’s debt purchases, in a ruling earlier this week.

“On the pure economics Italy is junk; it’s only the ECB’s support that is keeping the rating agencies from acting,” Mr Ahmed said. “But how long that support lasts is a lot less clear than it was a few weeks ago.”

Fitch and S&P both highlighted ECB buying, which enables Rome to borrow relatively cheaply, as a crucial factor supporting Italy’s rating in their recent updates. But despite the central bank’s largesse, borrowing costs have been creeping higher, with Italy’s 10-year yield hitting a two-week high just below 2 per cent on Wednesday.

At some point that fall in the price of the debt could become self-fulfilling, as higher yields undermine the case for debt sustainability, spurring more investors to sell in anticipation of a downgrade, Mr Athey said.

“Typically, rating agencies are late to the party and just reflect what markets have already price in,” he said. “But as we approach that line in the sand between investment grade and junk, they really start to matter.”

Rami Maklouf’s complaints against his cousin show strains in power structure

During Ramadan, Syrians are usually entertained by lurid television dramas. But this holy month they are gripped by a real-life family saga like no other. An unprecedented dispute within Syria’s secretive ruling clan has blown open, pitting a billionaire against his cousin — who happens to be the president.

After nine years below the radar while controlling a sprawling business empire, Rami Makhlouf, maternal first cousin of president Bashar al-Assad and the civil war-torn country’s most powerful tycoon, last week filmed himself making an unexpected claim — that Syrian authorities are ransacking his businesses and secret police are targeting his employees.

“Did anyone expect that the security services would come after the companies of Rami Makhlouf, who was the biggest supporter of these services?” said Mr Makhlouf, filmed cross-legged in a second video broadcast live on Facebook last Sunday. “I have been asked to step aside,” he added, pleading with Mr Assad for “fairness”.

Once thought untouchable because of his family connections, Mr Makhlouf’s extraordinary appeals to Mr Assad illuminate profound changes within the power structure of the clan, which belongs to the minority Alawite sect and has dominated Syria since Mr Assad’s father Hafez seized power in 1970.

Although Hafez’s brother attempted a coup in 1984, “the ruling family in Syria had never aired its dirty laundry in public in this way before,” said Lina Khatib, MENA programme director for Chatham House. Resorting to Facebook shows Mr Makhlouf’s “lines of direct communication with Bashar al-Assad must be completely broken”.

The raids on Mr Makhlouf’s financial dominion, whose crown jewel is Syria’s biggest mobile network Syriatel, comes as Mr Assad battles to consolidate authority over the war-ravaged country and its crippled economy. Although Russian and Iranian military intervention have helped Mr Assad regain 70 per cent of Syria, jihadist rebels dominate a pocket of the north-west and the government-held south is wracked by lawlessness. More than 80 per cent of Syrians live in poverty.

Although unlikely to seriously challenge Mr Assad, Mr Makhlouf has unveiled “tensions inside the first circle at a time when the pie is shrinking, and competition and recriminations more intense,” said Emile Hokayem, Middle East analyst at the International Institute for Strategic Studies: “[Mr] Makhlouf is no mere consigliere or lieutenant. He sits a notch below Bashar”.

Accused by Washington of using family connections to amass wealth corruptly, the EU has sanctioned Mr Makhlouf for allegedly bankrolling the regime’s war effort during the nearly decade-long conflict. On Sunday, he called himself the Syrian security services’ “biggest sponsor”.

But there were already signs last year that the mogul had fallen out of Mr Assad’s inner circle. In December, Syria’s finance ministry froze his assets and those of a Lebanon-registered, US-sanctioned offshore oil company over alleged unpaid customs fees. Mr Makhlouf later denied being connected to the company.

Then in April, Egyptian authorities raided a cargo ship carrying drugs from Syria stuffed into “MilkMan” milk cartons — a brand owned by Mr Makhlouf. In a Facebook post, he denied his company’s involvement.

But the move which provoked Mr Makhlouf’s appearance on Facebook came from the telecommunications ministry, which last month demanded Syriatel, and its smaller competitor MTN, pay a total of $180m between them as re-evaluated licence fees. The ministry defended the order in a statement after Mr Makhlouf alleged the charge was unwarranted.

“Not even the MBS shakedown had billionaires grovelling over tax payments,” said one Syrian businessman of Mr Makhlouf’s public humiliation, citing Saudi crown prince’s infamous incarceration of billionaires in the Ritz Carlton hotel.

With Damascus palace politics shrouded in mystery, analysts cannot pinpoint why Mr Makhlouf is in the line of fire. However, the Syrian state is cash-strapped, its local currency is shedding value and many business people complain customs and other authorities pursue them for back-taxes and other charges.

Meanwhile, Mr Assad's main military backer Moscow is being dragged into an ever-longer engagement in Syria, which is dogged by what a former Russian diplomat called “rampant corruption”.

But roots of the family’s feud may go deeper: two sources with insight into Assad’s inner circle reported years of tensions between Mr Makhlouf and Asmaa al-Assad, Syria’s first lady. Ms Assad heads Syria’s two biggest aid organisations, which annually funnel tens of millions of dollars in international humanitarian funding.

Although reviled by many for his alleged corruption and support to the regime, Mr Makhlouf has support in parts of the Alawite community. Mr Makhlouf has stressed his philanthropy and his foundation is reportedly active on the coast, an area with a big Alawite population. The US treasury sanctioned Mr Makhlouf’s Al Bustan Charity in 2017 over its alleged links to pro-regime militias.

Ms Khatib argued that Mr Makhlouf used the videos to paint himself as safeguarding Alawite interests and some loyalist commentators have warned that further action against Mr Makhlouf could create intra-Alawite conflict.

“Do not [expose the coastal region] to fire, wars and destruction,” wrote Sharif Shuhada, a former member of parliament and prominent loyalist, on Facebook.

Alleging that security services were targeting Syriatel employees, without specifying which agencies, Mr Makhlouf pleaded with Mr Assad: “These are your people, they are loyal to you”.

But Mr Assad has not publicly responded. In a speech broadcast on Monday, Mr Assad asked officials for solutions to rein in runaway price rises and corruption. He did not mention his cousin.