Money

The coronavirus panic is creaking stock markets & endangering financial systems

The coronavirus panic is jolting stock markets, with steep drops in major indexes grabbing the public’s attention. But behind the scenes, there is less understood and potentially more worrying evidence that stress is building to dangerous levels in crucial arteries of the financial system.

Bankers, companies and individual investors are dashing to stock up on cash and other assets considered safe in a downturn to ride out the chaos. This sudden flight to safety is causing havoc in markets for bonds, currency and loans to a degree that hasn’t been seen since the financial crisis of a dozen years ago.

The key concern now, as in 2008, is liquidity: the ready availability of cash and other easily traded financial instruments – and of buyers and sellers who feel secure enough to do deals.

Investors are having trouble buying and selling U.S. Treasuries, considered the safest of all assets. It’s a highly unusual occurrence for one of the world’s most readily tradable financial instruments. Funding in U.S. dollars, the world’s most traded currency, is getting harder to obtain outside the United States.

The cost of funding for money that companies use to make payrolls and other essential short-term needs is rising for weaker-rated firms in the United States. The premium investors pay to buy insurance on junk bonds is increasing. Banks are charging each other more for overnight loans, and companies are drawing down their lines of credit, in case they dry up later.

Taken together, warn some bankers, regulators and investors, these red flags are starting to paint a troubling picture for markets and the global economy: If banks, companies and consumers panic, they can set off a chain of retrenchment that spirals into a bigger funding crunch – and ultimately a deep recession.

Francesco Papadia, who oversaw the European Central Bank’s market operations during the region’s debt crisis a decade ago, said his biggest fear is that the “illiquidity of markets, generated by extreme uncertainty and panic reaction” could “lead to markets freezing, which is an economic life-threatening event.”

“It does not seem to me we are there already, but we could get there quickly,” Papadia said.

Source
Reuters

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