ECB warns of economic hit if pandemic-support is phased out

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FILE PHOTO: A euro logo sculpture stands in front the headquarters of the European Central Bank in Frankfurt

FRANKFURT (Reuters) - The European Central Bank warned on Tuesday of painful "cliff effects" for households and companies if governments and regulators phase out the economic support they have provided to cushion the impact of the coronavirus pandemic.

The ECB estimates the euro zone's five largest economies will lose 2% to 4% of their gross domestic product if these measures, ranging from loan guarantees and moratoria to short-time working schemes, are left to expire by the end of 2021.

"The simultaneous termination of policy measures could trigger a protracted downward shift in the recovery path," the ECB said. "Such cliff-edge effects would be concentrated in the first half of 2021."

The ECB cautioned, however, that keeping this support in place for too long could also curb long-term growth and endanger financial stability, by keeping inefficient companies alive and causing capital to be poorly allocated.

"There are substantial short-term risks associated with the withdrawal of policy support, while medium-term risks of protracted policy support should also not be ignored," the ECB said.

(Reporting By Francesco Canepa, editing by Larry King)