Article by Keith Zahra – CiConsulta
A look at media reports on the performance of financial markets around the world offer a myriad of numbers providing evidence of the blow to the industry as the COVID pandemic continues with its whirlwind of destruction. Bonds and share prices have tumbled, sending investors into a panic frenzy, seeking safe-haven investment and disposing of their assets.
In just four weeks, when the financial world started to come to terms with the realities of the pandemic, the world’s major markets lost between 26% and 35%, that’s a staggering 8 trillion euro wiped off. The New York Stock Exchange has dropped to pre-2002 levels – that’s lower than the 2009 international crisis. But the extent of the market impact of the economic repercussions of the health crisis is probably best shown by a startling statement made by oil traders to leading financial service and economy media house Bloomberg. Commenting on the collapse of oil prices – black gold is currently trading at 20 dollars a barrel, down from 60 dollars from the beginning of the year – traders have not ruled out the possibility of negative oil prices. No, that’s not a typo, oil traders are really considering energy prices falling into negative territory such demand has come to a halt. This will mostly undermining emerging markets who depend to a larger extent on the production of oil.
In the context of widespread market disruption, central banks have sought to apply those measures which seemed effective in 2008 – but many financial analysists are arguing might not be enough this time round. All major central banking institutions, including the European Central Bank, the US Federal Reserve and the Bank of Japan have either slashed interest rates further to support liquidity or else expanded asset purchase programmes.
Despite these re-assurance, the vast scale of damage left by the spread of the virus has increased concerns about the lack of liquidity in the international credit markets, with debt-afflicted countries suffering a bigger brunt since investors are moving their money to safer locations, therefore adding insult to injury to a number of economies. In this context, we must not forget that the current crisis comes at a point where economic experts were already pointing out a level of fragility with leading economies growing very timidly in the last quarter of 2019.
In the context of the restrictive measures taken worldwide, it was inevitable that businesses involved in travel, hospitality, airlines, healthcare and many retail sectors are facing the worst of the brunt. But according to global management consultancy firm Oliver Wyman, it is the banking industry that will have the greatest single influence on the economy. Banks may amplify or dampening the crisis according to the way they choose to address it. They will be operating on a fine line, impacted themselves through declining interest rates, significantly reduced economic activities and liquidity challenges as their clients – corporate or individual alike – will start struggling with their loan repayment programmes.
In this context, Oliver Wyman recommends that decisive support to clients is critical to ultimately ensure that these institutions rebound as quickly as possible from this crisis. Banks remain the main source of liquidity for firms. Supportive steps should be tailormade to client’s individual and sectoral circumstances. These might include extension of credit terms and credit holidays in a sustainable manner as ultimately the survival of their clients is critical to their bottom line too. The European banking authorities have already given their go ahead so that banks can temporarily use the capital and liquidity buffers built up in recent time. It is therefore in the banks’ own interested that their client-firms survive.
Secondly, banks need to invest in their digital systems and make sure their clients are empowered to make best use of these channels. It has been reported that Chinese financial services companies experienced an increase ranging from 100% to 900% in demand for digital services. Banks should therefore ram up their digital capabilities, together with an awareness campaign and call-centre support to facilitate this transition. When thinking about the queues outside local bank branches, one surely understands the wider benefit of this, even in health terms.
It is evidently too early to forecast the longer-term effects of COVID-19 on markets, since the policy response is still in its early days. It is also unclear on how successful governments will be in limiting the economic hit of the crisis and the financial price they will pay to do so. Around Europe, Governments announced multi-billion packages to prevent companies from collapsing, and included loan support and guarantees, tax holidays and subsidies to address employment.
While these solutions eventually worked during the 2008 financial crisis, whether they will be enough during these testing times, which have been compared to a “war time”, remains to be seen. Despite the measures announced so far, credit rating agency Standard and Poor’s insists that Europe must not solely look at temporary, immediate measures, but start thinking about the long-haul. The consequences of failing to implement the necessary fiscal measures that support a prompt recovery may eventually be significantly longer lasting, leading to what The Guardian has described as a “recession to end all recessions”.
Unfortunately, most of the tools available to governments are national not international. It will be easier to build walls and call of international projects. Yet, at a time where a global recession seems inevitable, the case for stronger international cooperation is stronger than ever.
Keith Zahra – CiConsulta