This might not be a crisis!

This might not be a crisis!

May 9, 2020 0 By Michel Santi


The comparison between the Covid-19-stamped economic crisis and the 2007-2008 crisis is fascinating. Do you remember: at the time, the real economy was suffering the direct consequences of an overindebted banking system that made heavy use of leverage. Faced with this existential threat, the response was rather classic, in that it consisted of creating relief mechanisms for these banks, together with changes to prudential rules. In the post-lockdown world, the situation will be the total opposite because it’s the banking system that, henceforth, will be confronted with a real economy that – in turn – will find itself overindebted.

A restructuring

During the lockdown, many companies’ liquidity and incomes have been hung out to dry, and production meant to happen during this period has been lost forever. This is why companies that are still standing and will remain alive for the weeks to come are hoping for a resurrection of these cash flows, but with the clear objective of recovering as quickly as possible, of reassuring their employees, and of rekindling their previous revenue projections, and not to redirect a huge part of this liquidity to paying off their borrowings or even the interest on their debts. It is therefore a restructuring that must be introduced in order to definitely avoid a situation where bank loans cause more harm to – or even spell the end for – our economic conditions. It is therefore crucial for all actors, like for the recovery of a seriously compromised growth rate, that simplified administrative procedures be put in place that would allow a debt restructuring for businesses, because their insolvency is not at all their own doing nor the result of poor management but – as well all know – the direct consequence of the pandemic.

Buying bad debtsback from banks

Additionally, if our politico-economic leaders’ worry is indeed about relaunching the economy in the best conditions and in the shortest timeframe possible, it is also just as important to encourage banks to lend, but they will only be motivated to do so – and will not be able to from the simple point of view of regulations – if they are relieved of their bad loans. In fact, even if the government acts as guarantor for the borrowings of enfeebled companies, the banks will only be able to involve themselves in matters of new loans that would allow us to rebuild and facilitate new investments if the previous loans disappear from their balance sheets! The government – or Europe rather – will therefore have to hastily introduce a vehicle that will buy back these bad, rotten loans from the banks, and as quickly as possible, so that their cleansed balance sheets allow them to fund the recovery.

The alternative?

So yes, it’s us the taxpayers who, ultimately, will have to foot the bill and we have known since 2008 that it’s us – and not the central banks – that are the real lenders of last resort. But we live, progress, consume and invest in a Western world that we know is crumbling under debt. This is why our toolbox is alas now reduced to its most basic form, and is why the alternative to the aforementioned solution would be a headfirst plunge into catastrophe.

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