Friday27 March 2020 ★ † FINANCIAL TIMES 17

Opinion

FINANCE

Gillian

Tett

is our common humanity. That is why

the strategy to tackle the human and

economic cost of thisscourge must be

global in design and application. Health

is a worldwide public good. It requires

global action guided byglobal solidarity.

But Covid-19 hasexposed our dark

underbelly.We desperately need global-

level leadership to tackle swiftly pan-

demics such as this, and in a way that is

institutionalised rather than ad hoc.

A good place to start is with theWorld

Health Organization. As countries with

theresources focus on fighting the pan-

demic through their national institu-

tions, the WHO must be empowered

and resourcedto co-ordinate responses

globally and directly to assist govern-

ments in developing countries.

Meanwhile, the G20 must provide

collective leadership for a co-ordinated

per cent of national output and is a

major source of hard currency. It will be

pushed to the brink as its business is

upended by the pandemic. Shortage of

hard currency will then make it all but

impossible to source essential medical

supplies and equipment from abroad.

The cost of servicing our debts is already

often more than our annual health

budgets.

This grim reality is not unique to Ethi-

opia. It is shared by most African coun-

tries. But if they do not take appropriate

measures to tackle the pandemic, no

country in the world is safe.

Covid-19 teaches us that we are all glo-

bal citizens connected by a single virus

that recognises none of our natural or

man-made diversity: not the colour of

our skin, nor our passports, or the gods

we worship. For the virus, what matters

population that lacks access to clean

water. Evensocial distancing is hard to

implement. Our lifestyle is deeply com-

munal, with extended families tradi-

tionallyeating meals from the same

plate. Weather cycles dictate ouragri-

culture —planting, weeding and har-

vesting. The slightest disruptioncan

spell disaster, further jeopardising a en-t

uous food supply and food security.

TakeEthiopian Airlines, the country’s

largest company, which accounts for 3

unsustainable and potentially counter-

productive. A virus that ignores borders

cannot be tackled successfully like this.

We can defeat this invisible and

vicious adversary — but only with global

leadership. Without that, Africa may

suffer the worst, yet it will not be the

last. We are all in this together, and we

must work together to the end.

Fragile and vulnerable at the best of

times, African economies are staring at

an abyss. Let me illustrate this with the

situation in my own country.

Ethiopia has made steady progress in

the provision of health services over the

past two decades. But nothing has pre-

pared us for the threats posed by Cov-

id-19. Access tobasic health services

remains the exception rather than the

norm. Washing hands is often an unaf-

fordable luxury for the half of the

T

here is aserious flaw in

the strategy to deal with

thecoronavirus pandemic.

Advanced economies are

unveiling unprecedented

economic stimulus packages. African

countries, by contrast, lack the where-

withal to make similarly meaningful

interventions. Yet if the virus is not

defeated in Africa, it will only bounce

back to the rest of the world.

That is why the current strategy of

uncoordinated country-specific meas-

ures, while understandable, is myopic,

If Covid-19 is not beaten in Africa, it will come back to haunt the world

This hasexposed our dark

underbelly.We desperately

need global leadership to

tackle pandemics

could realistically remain in business

only if the debt raised to keep people

employed during that time were even-

tually cancelled.

Either governments compensate bor-

rowers for their expenses, or those bor-

rowers will fail and the guarantee will be

made good by the government. If moral

hazard can be contained, the former is

better for the economy. The second

route is likely to be less costly for the

budget. Both cases will lead to govern-

ments absorbing a large share of the

income loss caused by the shutdown, if

jobs and capacity are to be protected.

Public debt levels will have increased.

But the alternative — a permanent

destruction of productive capacity and

therefore of the fiscal base — would be

much more damaging to the economy

and eventually to government credit.

We must also remember that given the

present andprobable future levels of

interest rates, such an increase in gov-

ernment debt will not add to its servic-

ing costs.

In some respects, Europe is well

equipped to deal with this extraordi-

Since in this way they are becoming a

vehicle for public policy, the capital they

need to perform this task must be pro-

vided by the government in the form of

state guarantees on all additional over-

drafts or loans. Neither regulation nor

collateral rules should stand in the way

of creating all the space needed in bank

balance sheets for this purpose. Fur-

thermore, the cost of these guarantees

should not be based on the credit risk of

thecompanyreceiving them, but should

be zero regardless of the cost of funding

of the government that issues them.

Companies, however, will not draw on

liquidity support simply because credit

is cheap. In some cases, for exam-

plebusinesses with an order backlog,

their losses may be recoverable and

then they will repay debt. In other sec-

tors, this will probably not be the case.

Suchcompanies may still be able to

absorb this crisis for a short period of

time and raise debt to keep their staff in

work. But their accumulated losses risk

impairing their ability to invest after-

wards. And, were the virus outbreak

and associated lockdowns to last, they

ernments have already introduced wel-

come measures to channel liquidity to

struggling businesses. But a more com-

prehensive approach is needed.

While different European countries

havevarying financial and industrial

structures, the only effective way to

reach immediately into every crack of

the economy is to fully mobilise their

entire financial systems: bond markets,

mostly for large corporates, banking

systems and in some countries even the

postal system for everybody else. And it

has to be done immediately, avoiding

bureaucratic delays. Banks in particular

extend across the entire economy and

can create money instantly by allowing

overdrafts or opening credit facilities.

Banks must rapidly lend funds at zero

cost tocompanies prepared to save jobs.

must eventually be absorbed, wholly or

in part, on to government balance

sheets. Much higher public debt levels

will become a permanent feature of our

economies and will be accompanied by

private debt cancellation.

It is the proper role of the state to

deploy its balance sheet to protect citi-

zens and the economy against shocks

the private sector is not responsible for

and cannot absorb. States have always

done so in the face of national emergen-

cies. Wars — the most relevant prece-

dent — were financed by increases in

public debt. During the first world war,

in Italy and Germany between 6 and 15

per cent of war spending in real terms

was financed from taxes. In Austria-

Hungary, Russia and France, none of

thecontinuing costs of the war were

paid out of taxes. Everywhere, the tax

base was eroded by war damage and

conscription. Today, it is by the pan-

demic’s human distress and the shut-

down.

The key question is not whether but

how the state should put its balance

sheet to good use. The priority must not

only be providing basic income for those

who lose their jobs. We must protect

people from losing their jobs in the first

place. If we do not, we will emerge from

this crisis with permanently lower

employment and capacity, as families

andcompanies struggle to repair their

balance sheets and rebuild net assets.

Employment and unemployment

subsidies and the postponement of

taxes are important steps that have

already been introduced by many gov-

ernments. But protecting employment

and productive capacity at a time of dra-

matic income loss requires immediate

liquidity support. This is essential for

allbusinesses to cover their operating

expenses during the crisis, be they large

corporations or even more so small and

medium-sized enterprises and self-

employed entrepreneurs. Several gov-

We must

mobilise

as if for war

global response. There is no time to

waste: millions of lives are at risk. Build-

ing on what has been announced by

international financial institutions, the

G20 must launch a global fund to pre-

vent the collapse of Africa’s health sys-

tems. The institutions need to establish

a facility to provide budgetary support

to the continent. The issue of resolving

Africa’s debt burdenis also urgent.

Finally, all of Africa’s development

partners must ensure that their devel-

opment aid budgets remain ringfenced

and are not diverted to domestic priori-

ties. This is where true humanity and

solidarity must be demonstrated. If

such aid were ever necessary in Africa, it

is now more than ever before.

ThewriterisprimeministerofEthiopiaand

the2019NobelPeaceprizelaureate

nary shock. It has a granular financial

structure able to channel funds to every

part of the economy that needs it. It has

a strong public sector able to co-ordi-

nate a rapid policy response. Speed is

absolutely essential for effectiveness.

Faced with unforeseen circum-

stances, a change of mindset is as neces-

sary in thiscrisis as it would be in times

of war. The shock e are facingw s noti

cyclical. The loss of income is not the

fault of any of those who suffer from it.

The cost of hesitation may be irreversi-

ble. The memory of the sufferings of

Europeans in the 1920s is enough of a

cautionary tale.

The speed of the deterioration of pri-

vate balance sheets — caused by an eco-

nomic shutdown that is both inevitable

and desirable — must be metwith equal

speed in deploying government balance

sheets, mobilising banks and, as Euro-

peans, supporting each other in the pur-

suit of what is evidently a common

cause.

The writer is a former president of the

EuropeanCentralBank

ment or consultancy skills, none has the

combination on BlackRock’s scale.

For the key thing to understand about

the canny Mr Fink is that he has not only

spent thepast decade building a highly

visible asset management company, he

has also quietly used the Maiden Lane

experience to make FMA dominant in

its consultancy space. It has 280 staff,

and has quietly worked for numerous

public institutions, including the UK

Treasury and European Central Bank.

As a result BlackRock has extensive

“expertise with purchasing large

amounts of all relevant types of corpo-

rate debt issuance and corporate bonds

in the secondary market”, as theNew

York Fed notes. In plain English, Black-

Rock’s experience and data base make it

a natural Fed partner — if it can manage

those potential conflicts of interest.

Can it? Both sides insist so. BlackRock

officials stress that its asset manager

and consultancy units are separated by

strict Chinese walls. Fed officials point

out that BlackRock’s mandate is only a

need in terms of manpower and skills.

Consider, again, corporate debt. The

Fed says it will only buy investment

grade credit, to limit possible losses.

But, as Scott Minerd of Guggenheim

points out, “There are approximately

$1tn worth of investment-grade corp-

orate bonds that are in danger of being

downgraded”. Indeed, $36bn of Ford

debt has alreadybecome junk.

Fed officials hope they can offset these

risks by using a $30bn Treasury fund to

absorb future losses. But it is also imper-

ative to have external managers, given

that the Fed has never exposed itself to

such credit risk. And while numerous

financial groups have asset manage-

as it happens a BlackRock-run ETF,

called LQD, is the biggest of this type.

The price of LQD, like other ETFs, has

already rallied since theannouncement.

If the Fed does a broad ETF programme,

LQD will probably be part of that mix.

This leaves some BlackRock rivals mut-

tering about conflicts of interest — and

non-American regulators caustically

pointing out that since 2008 Mr Fink

has been adept in persuading US regula-

tors to refrain from sweeping regulatory

reforms on asset managers, such as his.

Fair enough. But the problem the Fed

faces is that it does not have the luxury

of operating in peacetime; it is fighting a

war to stop a financial freeze. Thank-

fully, the White House is letting Fed offi-

cials experiment as flexibly as they did

in 2008, contrary to earlier fears among

policy veterans such as Hank Paulson,

the former US Treasury secretary, that

the Fed’s hands would be tied.

However, even with this freedom,

Fed officials face a practical problem:

they do not have all the resources they

Tuesday, it again tapped BlackRock’s

Financial Markets Advisory, its consul-

tancy arm, again to run three vehicles

the Fed will create to buy corporate debt

from the primary and secondary mar-

kets, and also commercial mortgage-

backed securities.

Is this replay a smart move by the

Fed? The answer depends on if you have

a wartime or peacetime perspective. In

calm market times, as existed a month

ago (remember that?), Tuesday’s

announcement would look very odd.

Never mind that the Fed has used

BlackRock before, or that Mr Fink is

fabulously well-connected. What is

more notable is that BlackRock received

this mandate without a contest. Moreo-

ver, his asset management firm has such

a humungous footprint that it will inevi-

tably collide with those Fed vehicles.

Take the $140bn world of investment

grade US corporate bond exchange

traded funds. On Monday the Fed

pledged to invest in some ETFs to sup-

port corporate funding flows. However,

T

his month, Wall Street

watchers might feel as if

they are living in Ground-

hog Day. Now, as in 2008,

markets are melting down.

Once again, the US Federal Reserve is

frantically innovating to stop a financial

freeze. And, as these wild policy experi-

ments unfold, a familiar figure is also

back in the frame: Larry Fink, chief

executive of BlackRock, the $7tn asset

management behemoth.

Twelve not-so-long years ago, the Fed

turned to BlackRock to manage the

three Maiden Lane vehicles that it cre-

ated to hold assets from the defunct

insurer AIG and also Bear Stearns. On

Why the Fed returned to BlackRock’s canny Fink

short-term contract, and thus will be

reviewed soon. Most important, the

$2tn stimulus bill in Congress stipulates

that details of Fed’s actions must be pub-

lished after a seven-day lag.

If honoured, this should provide

transparency about trades and Black-

Rock’s fees, in a welcome contrast to

what happened in 2008. “We’ve learnt

from the past,” insists one Fed official.

“We won’t repeat the mistakes.”

Maybe so. But 2008 also shows that

decisions that seem sensible in the heat

of war can spark furious political back-

lash later. If Fed officials, and Mr Fink,

want to minimise these risks, it will be

crucial to maintain transparency and

conduct proper beauty parades when

normality returns. If, or when, we

return to that point, US regulators will

then need to ask another question: why

did they let the asset management

world become so concentrated that the

ever-present Mr Fink reigns supreme?

[email protected]

Decisions that seem

sensible in the heat of

conflict can spark a furious

political backlash later

Abiy

Ahmed

Higher public debt levels

will become a feature

and be accompanied by

private debt cancellation,

writes Mario Draghi

FT series

Coronavirus: the economic cure

Either states compensate

borrowers, or they will fail

and the guarantee will be

made good by the state

T

he coronavirus pandemic is

a human tragedy of poten-

tially biblical proportions.

Many today are living in

fear of their lives or mourn-

ing their loved ones. The actions being

taken by governments to prevent our

health systems from being over-

whelmed are brave and necessary. They

must be supported.

But those actions also come with a

huge and unavoidable economic cost.

While many face a loss of life, a great

many more face a loss of livelihood. Day

by day, the economic news is worsen-

ing.Companies face a loss of income

across the whole economy. A great many

are already downsizing and laying off

workers. A deep recession is inevitable.

The challenge we face is how to act

with sufficient strength and speed to

prevent the recession from morphing

into a prolonged depression, made

deeper by aplethora of defaults leaving

irreversible damage. It is already clear

that the answer must involve a signifi-

cant increase in public debt. The loss of

income incurred by the private sector —

and any debt raised to fill the gap —

MARCH 27 2020 Section:Features Time: 26/3/2020- 18:31 User:alistair.hayes Page Name:COMMENT USA, Part,Page,Edition:USA, 17, 1