The Economist - 03.14.2020

The EconomistMarch 14th 2020 Finance & economics 59

2 price of Brent crude below $30 in the sec-
ond quarter, estimates Citi, a bank.
The pain may be most acute for smaller,
unstable countries dependent on oil rev-
enue, such as Nigeria. Iraq’s government is
already teetering—a collapsing oil price
may topple it. The movement of forward
contracts on Gulf currencies pegged to the
dollar, such as Oman’s rial, suggest incipi-
ent concerns about the ability to sustain
the pegs if dollar revenues from oil remain
depressed for a long time.
America, too, will be hit hard. Cheap oil
used to be a boon to America’s economy.
That is no longer the case. In a viral out-
break, savings on petrol are unlikely to
translate into more spending on other
things, especially ones that involve
crowds. Even if it did, any boost to the
economy from consumers would be out-
weighed by damage to shale states such as
Texas and North Dakota. Breakeven
prices—those oil producers need to turn a
profit—in America’s shale basins range
from $23 to $75 a barrel, according to the
Dallas Federal Reserve. Production cuts
and lay-offs are likely.
Making matters worse, shale firms were
suffering even before the latest sell-off, as
investors questioned their capacity for sus-
tained profits. Capital markets have all but
closed to the industry. It will not collapse;
many shale firms are hedged against fall-
ing prices this year. Those on their knees
may well be taken over by bigger competi-
tors. Analysts say larger rivals such as
ExxonMobil have the balance-sheets to
cope with cheap oil.
Russia may fail in its attempt to kill off
America’s shale industry. Moreover, weak
oil prices will hurt its economy. But unlike
Saudi Arabia, whose currency is pegged to
the dollar, the rouble floats. When oil
prices fall, the currency does, too, lowering
production costs. On March 10th Russia’s
finance ministry said that the country had
enough foreign-currency reserves to with-
stand a decade of prices hovering between
$25 and $30. It seems in no hurry to go back
to negotiations with opec.
With some of the world’s cheapest oil,
Saudi Arabia may be able to pile more pres-
sure on the Russians. Aramco has more
than 50 years of reserves, and costs per bar-
rel of less than $9, according to Rystad En-
ergy, a data firm, compared with $15 for
Russia. Still, Saudi Arabia may struggle to
maintain production—even 12.3m b/d will
require tapping its vast inventories.
Moreover, the kingdom’s budget re-
quires an oil price of more than $80, esti-
mates the imf. Goldman Sachs, a bank,
reckons that if it increases output and oil
prices recover, its finances will weather
temporary pain. But if the virus persists
and demand keeps plunging, the damage
may be more lasting. It is a price war that no
one looks likely to win. 7

F

ew people would wish to trade places

with Giuseppe Conte, Italy’s prime min-

ister. As covid-19 spread he put the entire

country into lockdown for the first time

since the second world war. Now he must

try to contain the economic effects. But he

is finding that tackling them also depends

on lenders and Europe’s institutions.

The immediate prognosis is a severe

contraction. Economists at JPMorgan

Chase, a bank, expect gdpto fall at an annu-

alised rate of 7.5% in the first quarter of the

year. The hope at least is that recovery is

rapid. To that end, Mr Conte said on March

11th that he would set aside €25bn ($28bn,

or 1.4% of gdp)in order to cushion the epi-

demic’s economic effects. The precise

measures were yet to be agreed as The Econ-

omistwent to press, but were expected to

include compensation for companies that

lose revenues and workers who are laid off.

Ministers have also promised to help banks

suspend repayments on mortgages and

small-business loans for a year.

As people fall ill and quarantines are

imposed, businesses and households face

abruptdisruptionstotheirincome.That

meansquickfixesareinhighdemand.Un-

likepublic-spendingmeasures,bankfor-

bearancedoesnotneedlegislation,and so

can take immediate effect. But Italy’s lend-

ers, which already have higher non-per-

forming loan ratios than the euro-area av-

erage, warn that they cannot cope with the

loss in interest income unless the govern-

ment guarantees unpaid loans, so that they

do not have to hold more provisions.

In any case, leniency from lenders will

helpsomeofthosemostdisruptedbythe

epidemic,butnotall.Smallfirms,which

aremorelikelytorelyonbankfinance,will

The economic response depends not

only on ministers in Rome

Italy in crisis

Mr Conte counts

the costs of covid

Closing time, not foreclosing time

Howlowcantheygo?

Realstockmarketreturnsduringsixworstperiods*,%

Source:“CreditSuisseGlobalInvestmentReturnsYearbook2020”

byElroyDimson,PaulMarshandMikeStaunton,LondonBusinessSchool *Calendaryears

Secondworldwar(1939-45)

Firstworldwar(1914-18)

Globalfinancialcrisis(2008)

Dotcomcrash(2000-02)

Oilshock/recession(1973-74)

WallStreetcrash(1929-31)

-30-40-50-60 -10-20 3020100

UnitedStates World

It may have been lost amid the stockmarket panic but on March 9th America’s bull

market turned 11 years old. Two days later, it was history. Concerns about the covid-19

epidemic have caused a rout in the Dow Jones Industrial Average, pushing it down more

than 20% from its high on February 12th—a fall that fits the definition of a bear market.

The worst sell-off in history began with the Wall Street crash of 1929. Two big bear

markets have occurred this century. For this one to become truly grizzly will probably

require a severe economic downturn, not just a temporary halt to growth.

The bear facts

1