Coronavirus credit crunch could make 2008 look like 'child's play' - MW

A worldwide credit crisis triggered by coronavirus will create a wave of corporate bankruptcy that will make the global financial crisis look like the childish game of Drake, an investor. warned.

With the most advanced economies in the world, all entering a month-long shutdown, companies that have earned money in the past decade face business with cost. major loans in the international monetary market.

The sudden loss of revenue that airlines, travel-related businesses and carmakers make are extremely vulnerable to, the rating agencies say, with parts of the industry. energy is also at risk when oil prices fall to their lowest level in 18 years. from under its feet.

The issues were highlighted on Thursday when the Australian national carrier, Qantas, canceled all international flights and fired 20,000 employees. Dozens of companies in Europe and the United States issued a profit warning as they prepared for a big push on sales. The financial position of the UK's North Sea petroleum industry is on thin paper. Currencies like the British pound and the Australian dollar have been banned because safety calls have drawn money into holding US dollars.

US Treasury Secretary Steve Mnuchin said the unemployment rate could rise to 20% in the US in what the rating agency Moody's said was an unprecedented shock to the system. S&P warned this week that these factors will lead to a sharp surge in corporate bankruptcy.

Angus Coote, of Jamieson Coote Bonds in Melbourne, said the crisis could soon burst a huge debt bubble due to low interest rates and cheap money inflation.

These are really extraordinary times, he said, and he's very alert. I have been working for 25 years and this makes the GFC [global financial crisis] look like a child's play.

The problem is particularly serious in the company's loan market, he said, where many companies will struggle to refinance their debt due to the repetition of a sudden change in credit conditions that caused the credit crisis. In 2007, the bank collapsed and then GFC. The prospect of no revenue for months means that creditworthiness has plummeted in the areas of exposure and cut off access to funding.

Companies are fine to build debt and continue to handle debt when borrowing costs are low, Coote told the Guardian. However, now the market is completely non-trading and companies trying to overcome bonds face higher costs and the result will be a bankruptcy event.

A $ 2 million corporate debt will be rolled out this year but the market has completely frozen. The market is basically closed. It was a disaster. "

In the UK on Wednesday, managers of several major asset funds banned investors from withdrawing their funds. In one sign, the crisis could spread across all assets, saying the coronavirus crisis made it impossible for the buildings they own to be priced.

The US-based Vanguard investment group told clients on Wednesday it had been forced to hike its fees for anyone who wanted to withdraw their money from investments known as exchange traded funds (ETFs), blaming a "significant" rise in trading costs. There is an estimated $ 6.4tn in ETFs around the world.

Lindsay David, of independent consultancy LF Economics, said the coronavirus shutdown had exposed longstanding imbalances in the financial system that had been disguised by more than a decade of ultra-low interest rates and trillions of dollars from quantitative easing schemes in the major economies.

"We know everyone is overleveraged, full bore, full risk," he said. "All we were waiting for was a trigger and unfortunately that has come in the form of a health crisis."

Both he and Coote cited the example of the Australian airline Virgin Australia, which has seen its market value more than halve this year to $ 500m while still saddled with $ 5bn of debt, which it will need to roll over. "No one in their right mind is going to lend Virgin Australia money," Coote said.

The situation could be repeated across the world with the US shale oil industry seen as one of the highest-risk sectors after a rapid expansion fuelled by easy credit. S&P Global Ratings' head of research, Alexandra Dimitrijevic, said tightening credit “will likely result in a surge in defaults, with a default rate on non-financial corporates in the US that may rise above 10% and into the high single digits in Europe over the next 12 months ”.

Banks are also in jeopardy, according to David, and could soon require the kind of bailout packages that saved them in the GFC and which are now looking certain to be rolled out for airlines, carmakers and a whole range of other sectors.

A full repeat of the post-Lehman Brothers crisis was on the cards, he said, as banks scrambled to hold on to liquidity.

“Let’s say you are a pension fund in Canada and six years ago you gave a bank $ 1bn. Every year you roll over that bond and the deal remains in place. But now Ira said, ‘you know what, can I have that money back now?’. ”

“So the problem for the company is, where will I find $ 1bn? Not from its deposits or its liquidity because Apparently got more money going out than coming in. ”

MW