2020-03-14_The_Economist_UserUpload.Net

8 Leaders The EconomistMarch 14th 2020

1

W

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

W

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