◼ COVID-19 / ECONOMY Bloomberg Businessweek10
Federal Reserve Chair Jerome Powell has
dismissed comparisons of the business borrowing
binge to the precrisis housing debt bubble, argu-
ing that the financial system is now better able to
handle credit losses. But he has acknowledged
that some debt-laden businesses could face severe
strains if the economy deteriorates and that they
could amplify any downturn by laying off workers
and cutting back on investment.
The Fed is trying to cushion the economy—and
the corporate sector—from the blow of the corona-
virus by cutting interest rates and pumping money
into the financial system. Behravesh says Congress
and the White House will also have to act. “We’re
going to need them to set up a bailout fund, then
decide where to distribute it,” he says.
On March 9, stock markets posted their worst
losses in more than a decade. President Trump told
reporters later in the day that he’d seek a payroll
tax cut and “very substantial relief ” for industriesInspired Home Show in Chicago in mid-March.
But the trade show, like so many others, has been
canceled. “I’d booked hotel, flight ticket, and a
booth—everything was ready,” says Ni, who’s based
in Los Angeles. “But seeing the situation in the U.S.,
I began to feel afraid of going on business trips.”
There’s also a risk that the outbreak in China isn’t
really under control. Although government statis-
tics show a marked decline in the number of new
infections registered daily both in Hubei province
and in the rest of the country, there are suspicions
that authorities are manipulating the data, as case
numbers have been repeatedly revised through
the course of the outbreak. Also, health special-
ists have warned that the country could experiencea resurgence in cases as factory staff return.
No matter how quickly life returns to normal,
China is facing its first quarterly economic con-
traction in decades and the weakest year since the
early 1990s. But though unemployment is likely
to rise, it’s starting from a relatively low level of
5.2%, and there’s no evidence of widespread job
losses yet. Consequently, there’s been little talk
yet of a stimulus package on the scale of the one
Beijing cobbled together in response to the 2008
global financial crisis, which equaled about 12%
of the size of the economy. That may change as
the machinery of government, also disrupted
by the virus, resumes working. �Jeff Black,
Jinshan Hong, and James Mayger○ The coronavirus is threatening to expose the
Achilles heel of the U.S. economy: heavily leveraged
companies. As the expansion stretched into a record
11th year and interest rates stayed at ultralow levels,
business debt ballooned and now exceeds that of
households for the first time since 1991.
What’s more, borrowing increasingly has been
concentrated in riskier companies with fewer finan-
cial resources to ride out virus-driven difficulties.
A wave of defaults would intensify the economic
impact of the contagion. “It will add to recession-
ary pressures in the U.S.,” says Nariman Behravesh,
chief economist at consultant IHS Markit Ltd.
Energy companies are especially vulnerable
because of a collapse in oil prices. But they’re
not alone. Debt tied to travel companies such as
American Airlines Group Inc. and Hertz Global
Holdings Inc. has been hit hard in the fixed-income
markets, as have the obligations of movie theaters
and casinos.“It will add to
recessionary
pressures in
the U.S.”Could there be
a financial
contagion?