Certain companies risk becoming insolvent as governments speed up fiscal support, a former member of the European Central Bank warned Tuesday.
Many governments have deployed a massive fiscal stimulus to mitigate the economic consequences of Covid-19. In most cases, this has allowed companies to avoid bankruptcy and employees to have a job to return to once the locks are lifted. However, as this fiscal stimulus eases and without a fully open economy, some companies will have a hard time keeping their doors open.
“When it comes to corporate solvency, we have problems ahead,” CNBC Benoit Coeure, who is now head of the Innovation Center at the Bank for International Settlements (BIS), told Karen Tso.
“We will see what the underlying problems are as governments gradually withdraw their support,” added Coeure.
In a report released Tuesday, the BIS warned that underlying financial weaknesses exist despite some confidence among market participants in recent weeks regarding the reopening of many economies.
“A wave of downgrades has started, along with concerns that losses may cause widespread defaults,” the BIS said in its annual economic report.
ECB President Christine Lagarde said on Friday that the recovery “will be incomplete and could be transformative,” as some companies will struggle to survive and adapt to a new reality. On the other hand, she also said that other companies will emerge to address a changed reality.
This crisis could leave lasting scars.
Benoit Coeure
Head of the BIS Innovation Hub
Speaking to CNBC, Coeure said that addressing corporate solvency is a matter for national governments and not for central banks.
“Perhaps the challenge for central banks is to make sure that liquidity support … does not carry over to solvency support, which is a fiscal function. So when necessary, we need governments to be aware of this, not central banks, “he said. .
Central bankers quickly responded to the crisis and moved ahead with government action. In the United States, for example, the Federal Reserve cut interest rates by about two weeks in March. In Europe, the ECB designed a new quantitative easing program to keep borrowing costs low.
“There is a risk that economists will call fiscal dominance, that is, that fiscal policy will take over monetary policy, there is also a risk that the financial dominance will be too timid, because they fear damaging markets or damaging markets. banks, and safeguards are needed here. But the safeguards are very clear: it’s about sustainable public finances and good bank supervision and market supervision, “said Coeure.
However, as some countries reopen their economies, analysts have begun to consider what the recovery phase will be like, and some are still waiting for a V-shaped recovery.
Coeure said “it is clearly too early to say what the recovery would be like,” and warned that the Covid-19 crisis “could leave lasting scars.”
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