58 Finance & economics The EconomistMarch 14th 2020
21A far broader set of firms could face a
cash crunch if temporary shutdowns and
quarantines spread. In China over the past
months, financial distress—and informal
forbearance—has been widespread. One
multinational says it has relaxed its pay-
ment terms with suppliers in China. hna,
an outrageously indebted conglomerate
than runs an airline, has been bailed out.
To get a sense of the potential damage in
other countries The Economisthas done a
crude “cash-crunch stress-test” of 3,000-
odd listed non-financial firms outside Chi-
na. It assumes their sales slump by two-
thirds and that they continue to pay run-
ning costs, such as interest and wages.
Within three months 13% of firms, ac-
counting for 16% of total debt, exhaust
their cash at hand. They would be forced to
borrow, retrench or default on some of
their combined $2trn of debt. If the freeze
extended to six months, almost a quarter of
all firms would run out of cash at hand.
The near-certainty of rating down-
grades and defaults in the travel-related
and oil industries, and the possibility of a
broader crunch, is the third concern. Credit
derivatives, the most actively traded part of
the fixed-income markets, have recoiled.
The cdxindex, which reflects the cost of
insuring against default on investment-
grade debt, is at its highest level since 2016,
as is the iTraxx crossover, which covers
riskier European borrowers. Out of the
public eye, privately traded debt may now
only change hands at heavily discounted
prices. The issuance of new debt has “dried
up”, says the head of a big fund manager.
This could fast become a serious problem
because firms need to refinance $1.9trn of
debt worldwide in 2020, including $350bn
in America.
Fractured markets mean the fourth ele-
ment, the resilience of the institutions that
make loans and buy bonds, is critical. A
majority of American bonds are owned by
pension funds, insurers and mutual funds
that can cope with losses. But some will be
reluctant to buy more. And 10-20% of all
American corporate debt (bonds and loans)
is owned by more esoteric vehicles such as
collateralised-loan obligations and ex-
change-traded funds. Such exposures have
yet to be fully tested in an extended period
of severe market stress.
Who, then, can act as a source of stabil-
ity and fresh lending? Some big cash-rich
firms such as Apple could grant more fa-
vourable payment terms to their supply
chains. Private-equity firms have capital to
burn. But in the end much will rest on the
banks, who have the relationships and flex-
ibility to extend credit to tide firms over.
America’s banks have their flaws—Gold-
man Sachs is sitting on $180bn of loans and
lending commitments with ratings of bbb
or below, for example. But broadly speak-
ing they are in reasonable shape, with solidprofits and capital positions.
Outside America the picture is less reas-
suring. Europe’s banks make puny profits,
partly because interest rates are so low;
Italian banks had a return on equity of just
5% last year. Since the virus struck, the cost
of insuring their debt against default has
flared up, hinting that they could yet be-
come a source of contagion. State-backed
banks in China and India will do as direct-
ed by politicians. But they are already la-
bouring under large bad debts.Global business may need a giant
“bridging loan” to get through a tough few
months. And governments may need to in-
tervene to make it happen: by flooding
credit markets with liquidity; by cutting
taxes to get cash to companies; and by
prodding banks to lend and show forbear-
ance. The world’s financial system has not
yet become a source of contagion in its own
right. But neither has it shown it can spon-
taneously help firms and households ab-
sorb a nasty but transitory shock. 7S
audi arabia and Russia are used to
fighting their enemies via proxies. But
the oil-price war that has broken out be-
tween them is head-on and has swiftly es-
calated. It started when Russia refused to
slash production during a meeting with the
Organisation of the Petroleum Exporting
Countries in Vienna on March 6th. Saudi
Arabia, opec’s de facto leader, hit back with
discounts to buyers and a promise to pump
more crude. Shortly thereafter it said it
would provide customers with 12.3m bar-
rels a day (b/d) in April, about 25% more
than it supplied last month—and a level it
has never before attained. Russia said it
could raise output, too, adding up to
500,000 b/d to its 11.2m b/d. The price of
Brent crude plunged by 24%, to $34 a bar-
rel, on March 9th—its steepest one-day
drop in nearly 30 years.
Amid turmoil in global markets un-
leashed by the plummeting oil price, and
panic about its impact on the global econ-
omy, Saudi Arabia upped the ante again on
March 11th, ordering Saudi Aramco, its
state-owned oil giant, to raise national pro-duction capacity by a further 1m b/d. Is the
kingdom merely strengthening its bar-
gaining position to force Russia back to the
table? Or is it waging a fierce price war to
crowd out rivals that will instead ensure
what analysts at Bernstein, an investment
firm, call “mutually assured destruction”?
The answer may determine how long the
disruption will last.
The fallout caps a seismic decade for
oilmen. Power has shifted between Saudi
Arabia, Russia and America (see chart). In
2014 Saudi Arabia sought to check Ameri-
ca’s ascendant shale industry by flooding
the market with oil. The result was cata-
clysmic for all producers. Two years later
opecrestored its grip on output by forging
an alliance with Russia and others.
In recent years, though, Russia has
flouted the terms of its deals with opec. Its
oil companies, led by Rosneft, have chafed
at market share lost to American frackers.
As troubling for Russia, America has be-
come less shy about leaning on foreigners.
In December it announced sanctions to de-
lay Nord Stream 2, a Russian gas pipeline to
Europe. In February America imposed
sanctions to punish Rosneft for its dealings
with Venezuela.
Russia’s partnership with opechas won
it new influence in the Middle East, while
Saudi Arabia has borne most of the burden
of production cuts. The Saudis are getting
tired of the role of swing producer. That po-
sition has become all the more invidious
since January, when the outbreak of co-
vid-19 in China, the world’s biggest oil im-
porter, put downward pressure on prices.
The Saudi decision to open the spigots
is nevertheless extremely rash. With the
coronavirus raging, global appetite for oil
may decline in 2020 for only the third time
in more than 30 years. Increasing supply at
a time of falling demand may send theNo one wins from the oil-price warOil pricesScorched earth
Fight for supremacy
Crude oil production, m barrelsperdaySources:Bloomberg;EIA15129630
2010 1918161412SaudiArabiaUnited StatesRussiaApril 2020
estimates