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COVID-19 Requires Coordinated Global Policy Response
The impact on financial assets already exceeds prior crises, including that of the Global Financial Crisis (GFC)
The economic impact could be dire since consumers in lockdown around the globe
Coordinated response by the G20 necessary to combat the global adversary
Policy response has joined medical advice on the frontlines to counter the economic impact of the COVID-19 virus and we are encouraged to see vast sums under discussion in developed countries. Yet this crisis is different from past crises because many workers and consumers, the lifeblood of supply and demand, are restricted in their movement and, in some cases, are locked down. Brave, coordinated policy responses are needed to avoid a protracted recession and, ultimately, hasten recovery.
We got through many past economic and financial crises, and we shall overcome this crisis, too. Global policy measures have historically proven effective. Examples include the Baker Plan (1985) and the Brady Plan (1989), as well the quantitative easing programs of the GFC.
The COVID-19 crisis is unique and requires unprecedented global solidarity, cutting across public and private sectors. We need coordinated global policy responses – including fiscal and social measures as well as monetary and market policies – to prevent market dislocations, ensure liquidity, avoid panic-selling and stem extreme volatility spikes.
Previous Crises in Perspective
A comparison with previous crises provides helpful context. Macroeconomic crises typically can be categorised into currency crises (where currencies depreciate or get devalued), banking crises (where banks cannot meet their obligations) and debt crises (where countries cannot meet their sovereign debt obligations). In contrast, the COVID-19 is a medical and health care crisis.
The impact of COVID-19 on financial assets is already much larger than the impact in each of the 1987, 1998 and 2008 financial crises. Figure 1 shows the relative performance of equity and bond yields one month before and after a financial crisis.
Additionally, according to the Institute of International Finance, capital outflows from emerging markets (EM) during the current crisis have been greater than those during the 2008 GFC and dwarf those of the 1997 Asian financial crisis. That said, we believe that country-specific risks take precedence over sector- or security-specific risks in EM countries. The GFC of 2008, the Great Recession of 2008-09 and the European debt crises of 2010-2012 (Portugal, Ireland, Greece and Spain) led to sovereign debt defaults in developed countries, accompanied by the failure of financial institutions. These led to debt relief programs for debtor countries (which were not EM economies) as well as high unemployment rates and business failures combined with stringent solvency/liquidity measures initiated by governments and national banks.
The Human Toll and Demographics
Emerging patterns provide important directives for effective policy responses, particularly considering Italy and China. As serious as the circumstances were in China, Italy may be worse off because its fatality rate is much higher than in China. According to the World Health Organization, Italy’s fatality is about 5% versus around 2% for China and about 3.4% for the global average. While the data has its flaws, the difference is remarkable.
Our 2018 report titled “Italy’s Demographics Underpins its Growth, Debt, Stability and Politics” highlighted the country as the oldest in Europe with its fast growing 80-plus aged population as a source of a fiscal strain on its budgets. Further, Italy’s proportion of 80-plus aged population (Figure 2) is much higher than that of China. Italy’s high concentration of very old people in the Lombardy region helps explain its higher number of deaths.
Focusing public health efforts to isolate or protect regions with a higher percentage of the 80-plus aged demographic may help limit fatalities. Older men are especially at risk; fatality rates from Italy and China show a higher number of 80-plus aged groups and a significantly higher number of older males relative to older females.
A big country such as the United States (US) could focus on states with the highest percentage of elderly people (80-plus aged). As of 2018, the states with the highest percentage of the 80-plus population were Florida (5.3%), Hawaii (4.9%), Maine (4.9%) and Pennsylvania (4.8%).
Coordinated Fiscal and Social Policy Response
Experts from around the globe have stressed the importance of non-pharmaceutical, lifestyle changes to suppress infection transmission. The effectiveness of any one intervention in isolation is likely to be limited, so a combination of multiple interventions is crucial for a substantial impact. However, many governments are still acting in isolation.
It is paramount that the global macro-financial system coordinates across the G7 and G20 countries. In our opinion, a focus is needed on:
Marshalling public health resources – tests, masks, ventilators, doctors, nurses and hospitals.
Alleviating public health strains and transmission rates – necessary lockdowns, restricted movement and social distancing to mitigate and suppress the epidemic’s effects.
Supporting income and resources of the vulnerable – fiscal packages should be targeted to ensure equitable resource allocation. Global fiscal coordination within the European Union (EU) and across other regions must support income, credit lines, insurance and basic health care for the vulnerable.
o Germany’s offer to help Italy and issue EU-wide debt is a positive step in this direction. o The US$2+ trillion economic stimulus plan targets mortgages, student loans, credit cards and public housing and should set the tone for other countries.
Providing liquidity, purchasing bonds, initiating QE and supporting banks – in addition to the set of impressive funding facilities from central banks, regulators need to consider relaxing selected bank/market-maker laws instituted post-2009 to allow for more normal operations.
o Congressional mandate allowing Fed to buy corporate bonds may help as well.
Coordinating with multilateral agencies and regional development banks – the International Monetary Fund, the World Bank and the Inter-American Development Bank, among others, have a vital role to play in supporting national fiscal authorities and central banks in vulnerable EMs, particularly those that have high poverty rates, informal labour markets or high population density.
Leveraging the WHO-United Nations solidarity fund – governments could leverage this initiative, which could, in partnership with private sector, turn into a global change agent.
Joining forces with the G7 and G20 leadership – global leaders, along with local finance, health and social care ministers, among others, must expeditiously join forces for effective consolidated action.
The global COVID-19 pandemic may worsen the depth, duration and magnitude of a global recession. The importance of a coordinated global public policy cannot be overemphasized as we face volatile markets and profound family and societal challenges.
In market conditions such as these, the resilience of investors will be an important factor in determining the market’s aggregate future. In general gold, cash and US dollar-based Treasuries are relatively safer assets in periods of global contagion.
One-size-fits-all strategies rarely work in such dislocated markets and we standby to help clients and policymakers think through this unique period.
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