Some companies run the risk of becoming insolvent as governments raise the pedal of financial support, a former member of the European Central Bank warned on Tuesday.
Many governments have deployed massive tax incentives to mitigate the economic impact of Covid-19. In most cases, this allowed firms to avoid bankruptcy, and workers to return to work after the lock was removed. However, since this fiscal stimulus is weakening even without a fully open economy, some companies will struggle to keep their doors open.
“When it comes to corporate solvency, we are in trouble,” said Karen Tso of CNBC Benoit Kure, who currently heads the Innovation Center of the Bank for International Settlements (BIS).
“We will see what the main problems are, as governments will gradually give up their support,” added Coor.
In a report released on Tuesday, BIS warned that there were financial instabilities, despite some confidence among market participants in recent weeks regarding the opening of many economies.
“A wave of decline has begun, along with fears that losses could cause widespread defaults,” the BIS annual economic report says.
ECB President Christina Lagarde said on Friday that the restoration “will be incomplete and may be transformational,” as some enterprises will struggle to survive and adapt to a new reality. On the other hand, she also said that other firms would appear to tackle the changed reality.
Speaking to CNBC, Coeure said solving corporate solvency was a matter for national governments, not central banks.
“Perhaps the challenge for central banks is to make sure that liquidity support … does not go over to support solvency, which is a fiscal function. Therefore, if necessary, we need governments, and not central banks, to be at the top, ”he said. ,
Central banks reacted very quickly to the crisis and got ahead of the government. For example, in the United States, the Federal Reserve lowered interest rates in March by about two weeks. In Europe, the ECB has developed a new quantitative easing program to keep borrowing costs low.
“There is a risk that economists call fiscal dominance, which is fiscal policy that takes on monetary policy, and there is a risk of financial dominance when central banks are too shy because they are afraid that they will hurt markets or hurt banks, and here you need precautions. But the precautions are very clear – these are sustainable public finances and good banking and market surveillance, ”said Kour.
However, as some countries reopen their economies, analysts have begun to ponder what the recovery phase will look like, and some are still awaiting a V-shaped recovery.
Coeure said it was “too early to talk about what the recovery would look like,” warning that the Covid-19 crisis “could leave lasting scars.”