Coronavirus rampages across markets which look to have been ill-prepared for the doomsday scenario that has been evident for so long.Overly consensus-driven thinking on the part of too many market commentators and institutional group think “creep” is leading to a panic response in markets already vulnerable to sentiment-driven, rather than rational decision-making. With even stronger markets in freefall and even regular safe havens like gold – both coming down from relative highs, it must be noted – and the US dollar on the receiving end, even weaker markets look highly vulnerable. The Eurozone is in extreme danger, with Italy bearing the brunt of the COVID-19 outbreak, its economy already in a fragile state, and Germany and the Eurozone over-exposed to China.
Rudderless Eurozone with Von der Leyen and Lagarde unconvincing
The Eurozone appears rudderless with Von Der Leyen at its head, highly unconvincing Christine Lagarde as President of the European Central Bank – stripped of any monetary power due to its hapless lack of fiscal construct and years of low rate policy. It was Lagarde, after all, who led the disastrous Eurozone and Greece debt crisis rescue and who hardly excelled as IMF Head nor French Finance Minister. Her role in the catastrophic IMF bail-out of Argentina does not bode well, either. In turbulent and ever-changing global turmoil, you need flexible, capable hands – not the typical Lagarde penchant for rigid orthodoxy in situations which demand far more economic and financial creativity than her civil code, legal-centric background offers. Mario Draghi is sorely missed at this crucial juncture for the Eurozone. As for Von der Leyen, former, much-criticised German Defence Minister with no great leadership background of note, is hardly striking a chord with Member States in terms of EU solidarity in the throes of Coronavirus. Leadership crisis at the top of the EU is hardly compelling at this hour of need.
EU Schengen “open border” policy in tatters – Eurozone teetering on the brink
EU “open border” confusion reigns as EU Member States like Germany, Denmark, Poland and Czech Republic as some of up to a dozen Schengen EU Member States have closed borders in defiance of Brussels. This is further indication of the disintegration of civil society order as governments fight vainly to contain Coronavirus within their physical borders, in contravention of existing, fundamental EU freedom of movement. Anti-EU sentiment is on the rise in Italy as people are frustrated with lack of assistance from Brussels, which only seemed to react with tangible assistance when Germany and France started to suffer the consequences of the Coronavirus outbreak. With major dependence on China, the Eurozone is looking increasingly vulnerable, with productivity already at relative lows and an impotent ECB, led by Lagarde whose leadership of the IMF was far from convincing, running an overly politically-driven currency, the Euro, with no clear fiscal direction nor monetary purpose. As ever with the Eurozone, rigid Teutonic inflexibility abounds whilst others get to suffer.
China faces a very hard landing – India could be the beneficiary
Make no mistake – there will be long-lasting ramifications with China and Iran likely vilified as rogue, untrustworthy states by sovereign and global bodies alike. India may well be the ultimate beneficiary and proxy for over-dependence on China – a ready Commonwealth ally and in many ways a far better commercial partner to the likes of the US and post-Brexit UK than China. US overtures to India of late suggest that the penny has dropped in Washington. One very much gets the sense that China has cooked the golden goose in global terms – this “Black Swan” event could easily herald a change in fortunes for the second largest global economy, as trust is very thin on the ground now. China’s Belt and Road Initiative could so easily end up being “Belt and Braces” for a China trying to absorb a very hard landing after a major post-Coronavirus economic shock. Naturally there will be knock-on impact as China represents some 15-17% of the global economy – but for how long?
Data transparency is key to global trading partners
In terms of critical transparency between global trading partners, flawed data from sovereign states – many of whom have highly dubious governance controls and rule of law – could prove fatal. China continues to produce somewhat dubious data over Coronavirus cases and deaths, with Iran’s Resistance group reporting over 4,500 deaths against the official Iranian government number of 724 as per 15 March 2020. Turkey, Russia and Pakistan, India and Afghanistan are other countries somewhat peripheral to Iran whose current tally of Coronavirus victims and deaths makes little to no sense at all, given the acute issues faced by the likes of Italy – in far less proximity to Iran and China. As for China, the devastating impact of the Coronavirus in Q1 and the first two months of 2020 is coming through in the data, and there is every chance that a double whammy of successive Q1 and Q2 devastation will hit the global economy in 2020 – provoking a global recession and the sort of market panic which could have a very profound negative impact with global debt positions so shaky.
Global economy woefully prepared for a lasting recession
The global economy is barely in a position to weather the impact of a longlasting recession, after all, with record debt ratios at $257 trillion, some 322% of global GDP. Estimates from UNCTAD indicate that the global economy could lose $2 trillion in the Coronavirus crisis. Levels of near-junk level BBB rated debt at $3.4 trillion are 5 times higher than prior to the Lehmans “moment”. Subsequent downgrades – remember that outright defaults are not the only criteria applied – mere technical momentary lapses or financial restructuring would suffice for, say, a “Selective Default” or SD employed by the likes of Standard & Poors (S&P) to warrant a downgrade. In such fragile market sentiment and global economic and commercial shutdowns and supply chain chaos in the wake of the Coronavirus outbreak, swift downgrades are somewhat inevitable.
Back to square one on junk debt levels a decade post-GFC? Pitiful
This is a shocking testimony to the years of low interest rate policy following the GFC, and the willingness of speculators to engage in, and regulators not to take action on, highly fragile near-junk status positions. Worse still, even more fragile debt vehicles backing major commercial activity at junk bond status account for a record share. Their status is frightening – at a debt-to-earnings ratio of six times. There are $2.4 trillion of leveraged loans packaged into securities on largely “Cov-Lite” terms with little or no creditor protection. The US Treasury has stated that these are far more problematic than back in 2008.
Central banks lack meaningful firepower
Unfortunately central banks and global bodies lack firepower – in monetary policy terms, neither the Federal Reserve (interest rate now at 0.25%) nor the European Central Bank (ECB), with interest rates at -0.50% have much room for manoeuvre. Recent attempts by the Fed and the ECB have done little to calm market nerves. The Fed decided on anemergency 1.0% rate cut to 0.25% on Sunday evening, 15 March 2020 and an extra $700 billion in quantitative easing QE on Treasury bonds and mortgage-backed securities, after its previous emergency cut to 1.25% on 3 March 2020. The ECB – with little room for manoeuvre at -0.50% rates decided upon no basis point cut but a highly superficial, largely inconsequential expansion of its asset purchase programme by EUR 120 billion, or $135.28 billion on 12 March 2020 – which, if anything, worsened already febrile market sentiment.
ECB “rescue” measures from unconvincing Lagarde spectacularly ineffective
The week of the Lagarde-led ECB “rescue” announcement predictably saw spectacular subsequent losses in equities markets, with even safe haven assets like gold falling some 8% – albeit still recording levels at relative long-term highs. Optimists might suggest that major indices like the Dow Jones and S&P500 have a long way to fall after sustained gains in recent years. But this will not allay the fears of major investors trading on positions on non-dividend paying stocks tanking in the markets. Lagarde has a lot to do to convince that she is the right person at the helm of the ECB, after a consistently poor showing at the head of the IMF and as French Finance Minister. She presided over a French budget deficit rise from EUR 56 billion to EUR 193 billion and an unreformed French economy. Small wonder that the then-President Sarkhozy failed to be re-elected. As French Finance Minister and then IMF Head she had a leading role in the shameful Greek crisis which led to the destruction of the Greek economy, and her dubious links to French tycoon Bernard Tapie led to charges of negligence. How all of this qualifies her to be ECB President is a mystery.
IMF powerless – “Eurozoned” out by Lagarde in her previous role…
No need to look to the IMF for any great rescue strategies after its Eurozone-obsessed, misguided policy imperatives of the past decade. In classically short-sighted and Euro-centric fashion (IMF leaders have been woefully misrepresentative of the global economy and wider extra-EU issues), the IMF used much of its firepower to shore up the Eurozone in the sovereign debt crisis of 2010-12. This neither benefited the Eurozone nor global economy much – nor placed it in a strong position to weather future crises. Hoisted by former IMF Head Lagarde’s own petard for her role in the Eurozone sovereign debt and then Argentina IMF bail-out crisis which achieved little more than a drag on IMF resources. It is therefore somewhat ironic that neither the ECB nor the IMF now have much ammunition left with which to tackle the ongoing Coronavirus crisis, which is crippling the global economy.
Global leadership lacking – Get ready Coronavirus Recession, Eurozone Crash
In the absence of so much global leadership (or the presence of so little…), the die seems cast as we prepare for inevitable market downturn, Coronavirus-led Recession and Eurozone Crash. As ever, the truism applies to the Coronavirus-driven crisis – hope for the best, expect the worst. Let us not forget that the globalised powers did not exactly excel in the run-up to, and aftermath of, the GFC. This time around, there is arguably even less cause for optimism, given fast-fragmenting geo-politics in a climate of populist, anti-globalisation fervour. Spare a thought for the hapless Eurozone, with Italy’s $2 trillion economy teetering on the brink against a rampaging Coronavirus crisis. Two short, successive quarters of global GDP falls and we have a ready-made Global Recession amidst an apparent inflection point in the global supply chain of, inter alia, latrinariam. Start reaching for the Kleenex.