July 14, 2020

A Truce, Not a Peace Treaty: A Global Economic Body Warns of Risks

The coronavirus pandemic roiled markets in March and April, as countries outside Asia began to lock down operations and it became clear that the health crisis would inflict pain upon major economies other than China’s.

Central banks responded rapidly as businesses and individuals scrambled to sell assets and raise cash, and the real-world crisis began to infect financial markets — making it hard for corporations to issue debt and difficult to trade even U.S. Treasury securities, which are usually highly liquid. Monetary policymakers bought huge sums of bonds and stepped into new markets as lenders of last resort, intent on staving off a full-fledged meltdown.

Investors were soothed, and they began buying stocks and debt again as they became confident that the Federal Reserve and its global counterparts stood ready to provide a backstop. Global stock indexes have rallied, and corporations have been issuing debt at a breakneck pace.

But now they might be overdoing it, the Bank for International Settlements and its leaders warned.

“Financial markets may have become too complacent — given that we are still at an early stage of the crisis and its fallout,” Agustín Carstens, the group’s general manager, warned in a speech tied to the release. He pointed out that the path of the virus and its effects on businesses still posed risks.

“Importantly, the shock to solvency is still to be fully felt,” Mr. Carstens said, warning that banks, which have extended loans to companies and consumers, will find themselves on the hook as businesses crash, taking workers down with them. That situation, the group warned, could be “triggered by cliff effects as initial fiscal support runs out and payment moratoriums expire.”

Article source: https://www.nytimes.com/2020/06/30/business/economy/central-banks-economic-warning.html

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