Coronavirus, Market news | 27 April, 2020

Long-term economic risks associated to Coronavirus crisis

Diego Balsa Portfolio Manager

The substantial fiscal and monetary stimuli being implemented around the world are, from our point of view, essential to counter the strong negative effects of the paralysis we are currently suffering from many segments of the economy.

The problem is that even before the coronavirus crisis there was already an unprecedented level of debt at a global level (meaning the sum of both government debt and the corporate and household debt). Together with a possible bubble in many assets as the result of many years of low-interest rates, this has obliged investors to take risks in order to obtain some kind of return.

These low or even negative rates leave little room for the authorities to stimulate the economy. They are being obliged to allow further deterioration in their accounts by increasing public spending and implementing fiscal incentives in what is a very difficult context for companies and families.

We consider that all these factors could end up generating major imbalances in some countries, leading to very damaging and dangerous structural problems.

The main risks to be monitored in the long term would be:

  • Financial repression: the scenario of low-interest rates and low return on many assets, which could lead to a significant loss of investors’ purchasing power.
  • Severe downward pressure on economic and productivity growth in some regions.
  • The insolvency of some companies and even countries.
  • Increased political tensions at a global level; the rise of populism and extremist parties; a further increase in protectionist threats.