The Economist - 03.14.2020

(WallPaper) #1

8 Leaders The EconomistMarch 14th 2020


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henfacedwitha bewilderingshockit isnaturaltoturnto
yourownexperience.Ascovid-19rages,investorsandoffi-
cialsarescramblingtomakesenseoftheviolentmovesinfinan-
cialmarketsoverthepasttwoweeks.Formanytheobviousrefer-
enceisthecrisisof2007-09.Thereareindeedsomesimilarities.
Stockmarketshaveplunged.Theoilpricehastumbledbelow
$40a barrel.Therehasbeena flurryofemergencyinterest-rate
cutsbytheFederalReserveandothercentralbanks.Tradersare
onawarfooting—witharisingnumber workingfrom their
kitchentables.Still,thecomparisonwiththelastbigcrisisis
misplaced.Italsoobscurestworealfinancialdangersthatthe
pandemichasinflamed.
The severityof the shock sofar doesnot compare with
2007-09.Stockmarkets havefallen bya fifth
fromtheirpeak,comparedwitha 59%dropin
themortgagecrisis.Theamountoftoxicdebtis
limitedandeasytoidentify.Some15%ofnon-fi-
nancialcorporatebondswereissuedbyoilfirms
orothershithardbythevirus,suchasairlines
andhotels.Thebankingsystem,stuffedwith
capital,hasyettoseizeup;interbanklending
ratesareundercontrol.Wheninvestorspanic
abouttheendofcivilisationtheyrushintothedollar,thereserve
currency.Thathasnotyethappened(seeButtonwood).
Thenatureoftheshockisdifferent,too.The2007-09crisis
camefromwithinthefinancialsystem,whereasthevirusispri-
marilya healthemergency.Marketsareusuallyspookedwhen
thereisuncertaintyabouttheoutlooksixor 12 monthsout,even
whenthingsseemcalmatthetime—thinkofassetpricesdrop-
pinginearly2008,longbeforemostsubprimemortgageborrow-
ersdefaulted.Today,thetimehorizonisinverted:itisunclear
whatwillhappeninthenextfewweeks,butfairlycertainthat
withinsixmonthsthethreatwillhaveabated.
InsteadoftotteringWallStreetbanksordefaultsonFlorida
condos,twootherrisksloom.Thefirstis atemporarycash

crunchata verybroadrangeofcompaniesaroundtheworldas
quarantinesforcethemtoshutofficesandfactories.Acrude
“stresstest”basedonlistedcompaniessuggeststhat10-15%of
firmsmightfaceliquidityproblems(seeFinancesection).Cor-
porate-bondmarkets,whichdemandprecisecontractualterms
andregularpayments,arenotgoodatbridgingthiskindofshort
butprecariousgap.
In2007-09theauthoritiesfunnelledcashtothefinancialsys-
tembyinjectingcapitalintobanks,guaranteeingtheirliabilities
andstimulatingbondmarkets.Thistimethechallengeistoget
cashtocompanies.ThisiseasyinChina,wheremostbanksare
state-controlledanddoastheyaretold.Credittheregrewby11%
inFebruarycomparedwiththepreviousyear.IntheWest,where
banksareprivatelyrun,itwilltakeenlightened
managers,ruletweaksandjawboningfromreg-
ulatorstoencouragelenderstoshowclientsfor-
bearance. Governments need to be creative
aboutusingtaxbreaksandothergiveawaysto
getcash tohamstrungfirms.WhileAmerica
dithered, Britainset a good examplein this
week’sbudget(seeBritainsection).
Thesecondareatowatchistheeurozone.It
isbarelygrowing,if atall.Central-bankinterestratesarealready
belowzero.Itsbanksarehealthierthantheywerein 2008 but
stillweakcomparedwiththeirAmericancousins.Judgedbythe
costofinsuringagainstdefault,therearealreadyjittersinItaly,
theonebigeconomywherebanks’fundingcostshavejumped.
Aswewenttopress,theEuropeanCentralBankwasmeetingto
discussitsvirusresponse.Thedangeristhatit,nationalgovern-
mentsandregulatorsfailtoworktogether.
Everyfinancialshockisdifferent.In 1930 centralbankslet
banksfail.In 2007 fewpeoplehadheardofthesubprimemort-
gagesthatwereabouttoblowup.Thisfinancialshockdoesnot
yetbelonginthatcompany.Butthevirusscareof 2020 does
createfinancialrisksthatneedtobetreated—fast. 7

V is for vicious

UScorporate-bondspread
High-yield,basispoints
800
600
400
200
0
2019 2020

How to make sense of the mayhem in markets

Financial conditions

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hat a convenientthing a tame parliament is. On March
10th, acting on a proposal from the first woman in space
(now a celebrity mp), the Russian Duma approved an amend-
ment to the country’s constitution that would reset the clock
barring anyone from serving more than two consecutive terms
as president. As it happens, that would allow Vladimir Putin, at
present ineligible to run for another term when his current one
expires in 2024, to stay on for two more six-year terms after that
date, assuming he can win two more elections on top of the four
he has won already. By then, in 2036, he would be 83, and would
have ruled Russia for 36 years, as long as Ivan the Terrible. Two of

the world’s biggest military powers, China and Russia, now have
what look like presidents-for-life. Such leaders seldom improve
with age.
A few technicalities remain (see Europe section). Russia’s
Constitutional Court still has to rule on whether Mr Putin’s
changes are indeed constitutional. It is a sign of how completely
Mr Putin has packed and bent Russian institutions to his will
that no one imagines that he will fail to get his way, just as no one
imagines that Valentina Tereshkova, who took her giant leap for
womankind back on June 16th, 1963, was acting off her own bat.
The third hurdle is an “all-people vote” of doubtful legality on

Vlad the indefinite

The Russian president reluctantly agrees to stay on for another 16 years, if that’s what his people want

Russia
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