Forget 2009, this is the real credit crisis of our time

economic crisis

(Credit: Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Douglas Elliott, Partner, Financial Services, Oliver Wyman (MMC) & Ted Moynihan, Managing Partner, Financial Services, Oliver Wyman Group (MMC)


  • We need governments to develop policies focused more on equity than debt.
  • They could co-invest with private sector funds or subsidize investments.
  • Government-led pandemic insurance could lessen the cost of future bailouts.

The events leading to the Great Recession that started in 2007 are often referred to as a credit crisis. But that is true only in a narrow way. The recession was driven primarily by the bursting of a housing bubble and the related impacts on the financial system. The real credit crisis of our lifetime is turning out to be the coronavirus recession.

 

What we face today is both more widespread and more worrisome: households and companies of all sizes, already highly indebted, are taking on massive levels of new debt just to survive.

To be sure, this is the right course for now. By working together, governments and the financial system are keeping good businesses alive and helping to speed the economic recovery. Many companies desperately need this cash to get through the economic reopening period unfolding now.

But governments need to supplement this effort as soon as possible with policies that focus more on the ownership side of the balance sheet and less on the debt side. Unlike debt, ownership stakes, known as equity or stock, don’t need to be repaid, and therefore are a much more stable source of financing over the long run.

The clock is ticking. Numerous companies soon will find themselves with too much debt for their long-term health. They will either die when the cash injections stop or will limp along as “zombie companies” that will hold back the future economic recovery. The spillover effects will weaken the banks and governments.

Fortunately, there are a number of ways for governments to encourage more equity investment.

First, now would be an excellent time for nations to remove long-standing obstacles to equity, such as laws or regulations that make it expensive to issue stock, as well as tax advantages favouring debt over equity.

Second, governments could co-invest with private sector funds, both to inject more equity into the economy and to encourage more private sector equity investment.

Many countries probably already have enough equity funding overall. But mid-sized companies and certain segments of the economy could face hurdles in obtaining it. Here, governments can provide judicious assistance in a couple of ways.

One is to simply subsidize investments, such as by providing a dividend of a few percent a year for a limited period of time to make it more attractive to invest despite a high level of uncertainty.

A second approach would be to tackle the uncertainty directly by providing government insurance to new equity investment in these parts of the economy to protect against extreme macroeconomic results. For example, the government could make a payment to these equity investors if GDP for 2020 drops by more than 10%. By eliminating the extreme risks, investors could be made comfortable with investing without demanding fire-sale prices.

Even after these measures, of course, some companies could be pushed to the brink. Unfortunately, the economic hit from COVID-19 and the shutting down of much of the economy will mean that many otherwise viable companies can’t support their debt levels and aren’t attractive to equity investors.

Some nations, including the US, are lucky to have a bankruptcy system that is well designed to keep companies alive that are structurally healthy but have gotten in over their heads with debt. We would be better off if other governments could work with their private sectors to design a simplified, voluntary form of debt restructuring that could be activated swiftly when it becomes clear that a viable company is in serious danger of bankruptcy. They may need to add subsidies to encourage quick acceptance, reducing the losses for creditors and allowing businesses to continue to operate and to retain at least some of their employees. Even the US may need such an approach to head off a wave of bankruptcies that could overload our courts.

coronavirus, health, COVID19, pandemic

What is the World Economic Forum doing to manage emerging risks from COVID-19?

The first global pandemic in more than 100 years, COVID-19 has spread throughout the world at an unprecedented speed. At the time of writing, 4.5 million cases have been confirmed and more than 300,000 people have died due to the virus.

As countries seek to recover, some of the more long-term economic, business, environmental, societal and technological challenges and opportunities are just beginning to become visible.

To help all stakeholders – communities, governments, businesses and individuals understand the emerging risks and follow-on effects generated by the impact of the coronavirus pandemic, the World Economic Forum, in collaboration with Marsh and McLennan and Zurich Insurance Group, has launched its COVID-19 Risks Outlook: A Preliminary Mapping and its Implications – a companion for decision-makers, building on the Forum’s annual Global Risks Report.

Companies are invited to join the Forum’s work to help manage the identified emerging risks of COVID-19 across industries to shape a better future. Read the full COVID-19 Risks Outlook: A Preliminary Mapping and its Implications report here, and our impact story with further information.

Finally, with an eye to the medium and long-term, we need government-supported business interruption insurance for pandemic risks. If businesses had gone into this crisis with such protection, there would be far less need for government intervention on such an unprecedented scale.

Private insurers can’t provide this on their own, because the risk is too large and would be impossible to diversify since it hits the whole world more or less at once. Governments could charge premiums to help offset the rare year when they would have to pay out. Premiums that are acceptable for businesses are likely too low to cover the full cost, but the reduction in future bailout costs should more than cover the difference.

Yes, massive government credit programmes are necessary right now. But there are numerous ways governments can help reduce the painful hangover likely to arise in the future from indulging in so much debt.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Here’s how tech can help governments fight corruption

Khashoggi trial in Saudi Arabia falls short of independent, international probe needed: UN rights chief

Mobile technology saving lives: Changing healthcare systems with simple technology solutions

Tuesday’s Daily Brief: Venezuela-Colombia baby breakthrough, Italy piles on rescue boat pressure, States must combat hate, Kashmir rights latest and a musical plea to combat CAR hunger

Climate change will force us to redefine economic growth

This AI can predict your personality just by looking at your eyes

Northern Ireland: Parliament wants to secure post-Brexit regional funding

UN launches Facebook Messenger-powered bot to take on climate change

Keeping cool in the face of climate change

‘Favour dialogue’ over violence, UN chief urges all parties following clashes in Mali’s capital

Building climate resilience and peace, go hand in hand for Africa’s Sahel – UN forum

Being blinded by labels stops social change. Art helps us see a better future

Here’s why upskilling is crucial to drive the post-COVID recovery

UN, African Union make significant joint commitment to global health

Protecting refugees in Europe: UNHCR calls for a ‘year of change’

Yemen: UN envoy asks Security Council for more support ‘to move back’ to the negotiating table

Is the EU denying its social character favouring a banking conglomerate?

UN rights chief Bachelet appeals for dialogue in Sudan amid reports ‘70 killed’ in demonstrations

How the US should react to the pandemic, according to Bill Gates

One million facing food shortages, nutrition crisis after Mozambique cyclones: UNICEF

4 ways Africa can prepare its youth for the digital economy

UN agencies launch emergency plan for millions of Venezuelan refugees and migrants

Do doctors need to know their patients’ sexual orientation and gender identity?

The next 48 hours may change the European Union

The UK referendum has already damaged Europe: even a ‘remain’ result is not without cost to Britain and the EU

Mali facing ‘alarming’ rise in rights violations, warns UN expert

A European Discovers China: 3 First Impressions

5 things to know about African migration

MWC 2016 LIVE: GTI shifts to phase two – 5G – after hitting milestones

If we want to solve climate change, water governance is our blueprint

Minsk “ceasefire” leaves more doubts than safety, with EU already planning steps further

Trade: First year of the EU-Japan Economic Partnership Agreement shows growth in EU exports

Electronic Cigarettes: Are they really as safe as we think?

UN and African Union in ‘common battle’ for development and climate change financing

Parallel downfalls of Merkel and Deutsche Bank threaten Germany and Europe

For video game addiction, now read official ‘gaming disorder’: World Health Organization

A new proposal breaks the stalemate over the Banking Union

To Brexit, or not to Brexit…rather not: 10 Downing Street, London

AI can be a game-changer for the world’s forests. Here’s how

What young people can teach world leaders about mental health in 2020

How can you or your organization support the Hour of Pride initiative?

Why do humanitarian crises disproportionately affect women?

Russia and the West to partition Ukraine?

Uzbekistan wins its long fight against malaria, as global rates continue to rise

Clean air is good for business

These are the world’s 20 most dynamic cities

Making the most of the Sustainable Development Goal 3: its overlooked role in medical education

Capital transaction tax on Ecofin table

International Women’s Day 2019: more equality, but change is too slow

An all-out fight for the EU budget

World Digital Media Awards winners announced at WNMC.19 in Glasgow, in association with The European Sting

Millennials (and Gen X) – Here are the steps you should take to secure your financial future

Forget GDP – for the 21st century we need a modern growth measure

David Attenborough’s worried about this ocean threat – and it’s not plastic

Is this the way to finally beat corruption?

80 adolescents a day will still die of AIDS by 2030, despite slowdown in epidemic

UN ceasefire monitoring chief tours Yemeni port of Hudaydah

DR Congo elections: ‘historic opportunity’ for ‘peaceful transfer of power’ says Security Council

Consumers’ rights against defective digital content agreed by EU lawmakers

Parliament mobilised to channel EU funds to those affected by Coronavirus pandemic

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s