This post will be a bit scattered due to competing obligations yesterday, but I wanted to register some indicators that coronavirus-induced economic stresses are becoming more acute. This isn’t surprising since the coronavirus hasn’t peaked in most countries, plus the severity of the shock means that knock-on effects will not only continue but also have the strong likelihood of reinforcing each other.
A big concern is whether social unrest starts. Arab Spring demonstrated that mass uprisings can feed each other. But the need for social distancing would seem to greatly reduce the odds of food riots, which you saw in Indonesia and Thailand in the 1997 Asian crisis.
As it did in the 2008 crisis, the US has expanded food stamps, formally called the Supplemental Nutrition Assistance Program. But the increase is $16 billion, or about 30% more than its 2018 level of $54 billion. Given the GDP collapse predicted for the second quarter, with Goldman expecting a 34% fall, accompanied by 15% unemployment, that boost looks light. Admittedly more bailouts are coming and the powers that be presumably recognize that hungry people with guns are a bad mix. But homeless around the world are in even more dire straits than before (one hates to say it, but thinner dumpster-diving pickings) and cutbacks on food pantry and soup-kitchen type services are also squeezing the poor. From ABC:
By 8 a.m. on Wednesday, the line outside St. Paul and St. Andrew United Methodist Church in New York City stretched around the block.
But this wasn’t any ordinary morning.
Fixed-income residents like 66-year-old Patricia Sylvester faced an agonizing choice — weighing the risk of catching the coronavirus or going hungry in the pandemic that has seized America’s largest city.
Sylvester, a mother of two and a grandmother of three, conceded to being nervous waiting on line for the church’s food pantry and made a valiant attempt at social distancing.
“I’m a senior citizen and I’ve been coming here since before the crisis. I knew a lot of things were closed down, but once I got the call Monday from the church, I was like, ‘Wow, let me go.’ I hate to take the chance of getting sick, but I need some food in the house,” Sylvester told ABC News….
“What happens whenever you have epidemics and pandemics is they expose the already existing inequities in our society, the things we didn’t address before the epidemic,” Rev. William Barber II, co-chair of the nonprofit Poor People’s Campaign, which advocates for economic justice, told ABC News. “What we are seeing around the country is that we’re operating and telling people to do things from the position of wealth. We say, ‘Go home and buy groceries.’ Well, if people weren’t making a living wage how are they going to do that? Most of them don’t have $300 in the bank, if that.”
But another sign of how far we are from the old normal is barter going mainstream. From Bloomberg:
Social networks Facebook and Nextdoor are flooded with posts from neighbors and friends seeking to swap eggs for toilet paper. Small and midsized businesses, whose cash trade has dried up from the economic fallout of shelter-in-place orders, are turning to online barter exchanges.
“When cash is extra tight, it behooves us to buy as much as possible on trade,” said David Yusen, director of business development for Seattle-based Heavy Restaurant Group, which recently bought 56 cases of Malbec wine for $15,000 worth of barter credits. The company’s 10 restaurants have closed, but some locations will start offering pick-up and delivery this week. “It saves us money, it helps cash flow.”
In normal times, the roughly 200 barter exchanges in the U.S. let roofers fix leaks and get paid in restaurant takeouts or accounting services. With tens of millions of Americans under lockdowns, those cash-free trade systems are seeing an influx in participants….
Roger Becker owns home building and remodeling companies in Puyallup, Washington, the state that saw the first outbreak of the epidemic in the U.S. He expects business to drop by at least 30% this year, and signed up to the barter exchange BizX in February.
“A couple of months ago, I never would have thought of it,” Becker said. “It’s going be a game changer, because we are all starting to get pretty fearful about people tightening up their pocketbooks.”
Here’s how it works: Becker recently poured in $260,000 to remodel a 4,000-square-foot home in Leavenworth that was listed for $1.2 million. He is willing to accept a portion of the home’s price in so-called BizX dollars from the barter exchange, and will use these credits to buy services of other exchange members — plumbers, electricians or nurseries — so he can build and remodel other homes.
Erm, so a builder is extracting equity from one of his projects to get the barter equivalent of walking around money to continue building. While this is clever, it isn’t clear his business works any more. But sadly this will prove to be true for quite a few ventures.
On a completely different front, the IMF is already at double the 2008 level of requests for support when we haven’t yet seen the worst:
Eighty-five countries have approached the IMF for short-term emergency assistance in recent weeks — around double the number in the immediate aftermath of the 2008 financial crisis.
let's see whether the Fund responds with 'austerity, now!'https://t.co/BqtxqV04VN
— Daniela Gabor (@DanielaGabor) April 1, 2020
But the Fund doesn’t have a central bank deep pocket to tap:
Interestingly, the #IMF does not have enough resources to respond to all these demands and to distribute the 'promised' loans. "Total IMF resources are $1.3 trillion, unchanged from the end of 2012. However, only half is available for lending."https://t.co/51p7CQ8WK9
— Med Dhia Hammami – محمد ضياء الهمامي (@MedDhiaH) April 1, 2020
Yet the IMF is also warning of banking system collapses. Note the “baseline scenario” seems unduly cheery when compared to the high level of appeals for aid coming in. From Reuters:
Tobias Adrian, the director of the IMF’s monetary and capital markets department, told Reuters in an interview that in a ‘baseline’ scenario that would be a repeat of a 2009-type growth path, banks could withstand the adverse impact. Adrian cautioned, however, that conditions could deteriorate….
Adrian, in a blog post with Aditya Narain, deputy director in the IMF’s Monetary and Capital Markets Department, outlined a number of measures regulators should take to mitigate the effects of the economic crisis on banking systems, including suspending new rulemaking, encouraging loan modifications and urging banks to use their liquidity reserves – measures many regulators are already taking.
“What banks are expected to do now is loan modifications … look through the loans on their books and say: ‘OK, a large fraction of my borrowers are not going to be able to pay interest for some time … but in a year they will,’” said Adrian.
“So (the banks) modify the loan … and forgo the interest payments and that’s a hit to their baseline and that’s why the banks stopped paying dividends and repurchases, so they are better prepared to take those hits.”
Notice how unwilling the IMF is to have banks write down loans in a meaningful manner. A one year interest moratorium isn’t much relief, particularly when the global economy is in free fall. Banks are supposed to serve the real economy, and if the loans are too far under water, they need to be written down or off. Some companies won’t make it in the post-coronavirus world even with their debts written down, but others would. And governments know how to bail out or nationalize banks if they have to eat too many loan losses (although governments are still way too reluctant to turf out management and board members, but that’s a separate conversation). This isn’t the hard part of the equation but the IMF seems to want it to be so.
And no, the Fund not planning to be nicer in the face of a pandemic, even when it has just announced a “global recession”:
For Africa, the IMF is suggesting strict fiscal policies "consistent with debt sustainability once the crisis has passed". The main of the fund is clear: making sure that African countries continue to pay their debt despite the reality on the ground. https://t.co/KmMOwoepxx
— Med Dhia Hammami – محمد ضياء الهمامي (@MedDhiaH) April 1, 2020
Closer to home, Bloomberg warned of an unwinding of leveraged trades, while at the same time saying the magnitude doesn’t look as bad as 2008. However, this time it’s corporations that have gone on a borrowing spree and even ones that weren’t necessarily overleveraged are facing gunshot-wound level damage to their businesses. For instance, Macy’s, which had made improving its balance sheet a big priority in recent years, has had to shut its stores due to coronavirus and has laid off 130,000 workers. Its stock fell by 70% this year, and it was just removed from the S&P 500, which further dented the share price. And despite Macys long looking like yesterday’s retailer, it had had a good fourth quarter and was looking as if it might be on the mend. So what will the next leg look like when even companies that didn’t go crazy on share buybacks can’t service their borrowings due to the red ink in their operations?
Even if the lockdowns were lifted now, a lot of damage has been done, and as the actual and self-imposed constraints on consumption deepen, we’ll see more and more knock-on effects. Brace yourselves.