It, currently, was too early to discuss the financial crisis. Thus, the best thing people could do at this time was just waiting and hoping for a favourable situation, and preparing for the worst.
From recession to crisis financial
The trading day of March 12 marked the widespread psychological crisis in most global stock markets. The Dow Jones and S&P 500 industrial stock indexes of America had the sharpest decline in 30 years.
El Erian, an economist of Allianz, who predicted last week that the market would continue to decline this week, used the word ‘recession’ when predicting economic prospects. He believed that Q1/2020 economic growth figures of many key economies would be negative, and a recession was unavoidable. Technically, the economic downturn was confirmed when there were two consecutive quarters of negative gross domestic product (GDP). The probability was high, but not 100%.
In the US market, after a record drop on March 12, the US market reversed dramatically on March 13, regaining nearly 90 percent of what was lost in the dark history.
However, a day of the rally did not change the truth about the prospects of the global economy. The possibility of some economies falling into the great recession, especially in Europe, the centre of the Covid-19 epidemic.
Several key Italian car companies, such as Fiat Chrysler, had decided to close part of their factory. Meanwhile, in the UK, it was likely that in the next one to two weeks, many big festivals and events would be canceled, leading to the suspension of the catering, tourism and hotel industries. These were labour-intensive industries, so this stagnation would lead to large numbers of unemployed. The consequence might be the problem of default.
Here, there were three possible defaults.
The first was the corporate default. The bankruptcy credit default swap (CDS) index of US high-risk bonds (i.e., income is also high) increased to 688 points, the highest since 2012. Even with safer bonds (investment grade type), the CDS index was also the highest since December 2011. Because CDS was considered as an insurance premium paid in return in case of insolvency, the top CDS costs reflected the fear of the US corporate bond default.
The second was the bank credit default. In addition to bond loans, many companies could borrow syndicated loans from banks. The current disease situation caused some large companies with stable business operations to close. If this situation lasted until Q2/2020, it would be difficult to assume that large enterprises with high debt in banks would not be in trouble.
The third was the default on consumer loans. In the context of manufacturing enterprises and services stagnating, workers would lose their jobs. Workers who lost their jobs had no income to pay back consumer loans.
That was the seed of a new financial crisis. So, did the recession lead to one or more defaults and lead to a global financial crisis?
Whether or not the crisis would occur depended on the efficiency of government spending and the lasting time of the epidemic.
Budget packages were being rolled out by governments in the last few weeks. This was the time to have ” cash to support businesses.
Money could be in the form of a credit support package of 250 trillion dong, tax support of nearly 30 trillion dong committed in Vietnam. It could also be money to support families affected by the epidemic like in Japan, money paid to citizens aging 18 and over in Hong Kong. It could also be a loan extension to buy a home loan like in Italy. However, that must be a real support, which meant that businesses indeed had more money, or could reduce the amount needed to spend. Practical support would not be the decisions to cut interest rates, inject liquidity for banks, then the money actually did not run out of banks, but back to safe channels like government bonds.
Currently, governments around the world had somehow spent money. They had captured the debt market disease. The question was whether the doses and timing of these interventions were effective and enough or not. At the same time, it was still early to talk about whether the debt crisis would occur.
In addition to the debt market, consumer spending and the home market were the other two pillars of the economy. Whenever the economy depressed, people’s income decreased, consumer spending and house prices tended to fall accordingly. These were things that could only be stimulated by increasing the income of workers in society so they could afford to buy goods and pay higher rent, which was an essential factor that would drive home prices.
However, if the Covid-19 epidemic lasted for too long, no budget resources could save the economy and then, the collapse of three pillars, which was credit, home market, consumption, would be unavoidable. To put it simply, Covid-19 lasted, and people could not work, so they paid off the debt, bought the house and paid the rent. As Covid-19 spread globally, this would not be a collapse in one country, but a global meltdown.
However, the duration of Covid-19 was unknown. There were calculations that the peak would be around 10 weeks to 14 weeks in Europe and the US. If so, it would still be within the tolerance of these governments. China was also recovering from the devastating epidemic earlier this year. Those were positive signals.
Therefore, one could only wait and hope for the best, as well as prepare for the worst. Fear the crisis at the moment would not help, and mentioning it then seemed to be too soon. Fear was contagious and only made people act unreasonably. When it came to patience, one should be patient.
