March 13, 2020 1:02 pm

Financial world in a corona stranglehold

The Corona crisis is keeping the world in suspense and has long since reached the European financial sector. Admittedly, it is still far too early to make substantiated statements about the actual consequences of the pandemic for Europe’s banks and companies. At least for the time being, experts in the sector do not expect any long-term disruptions.

March 9 will probably go down in history as “Black Monday”. Stock markets around the world crashed on this day, triggered above all by spreading coronavirus and falling oil prices. The shock is still deep. However, Marcel Fratzscher does not believe that the corona pandemic will plunge Europe and the world into a deep economic crisis like that of 2008. “At that time there was a fundamental problem in the financial system with a systemic significance for the national economy. Today, we are dealing with a slump in the real economy, but it is not structural,” explains the head of the German Institute for Economic Research (DIW) in an interview with the German newspaper taz.

More stable banking system than in 2008

Peter Riedel, Head of Illiquid Products at Debitos, shares this opinion: “There will definitely be a recession – you don’t have to be a prophet to make this statement based on current developments. However, we believe that the economy will only be affected for a short period of time and then it will pick up again quickly”. Of course, the banks are of particular importance in this situation – and the financial institutions are in a much better position today than they were before the euro crisis: “The supervisory authorities have massively increased the pressure on the banks in recent years. This is reflected today in higher equity ratios. The central banks will also continue to support the banks in the current weak phase,” explains Riedel.

The rating agency Moody’s also believes that European banks would survive a short-term period of weakness unscathed, as the Handelsblatt reports . However, if the crisis lasts longer, there could be more loan defaults – especially among small and medium-sized enterprises. The cost of refinancing has already risen significantly. “The iTraxx Crossover Index for companies with a BBB or BB rating has jumped from 215 to now over 600 basis points within a very short time, a strong indication of increased uncertainty in the financing market. Paul Watters, credit expert at S&P Global, warns that in view of the recent price turbulence, increasingly risky types of financing must also be expected.

External help

Germany’s Federal Economics Minister Peter Altmaier has already emphasized that the government will take measures to support companies in Germany damaged by the corona virus: “We want to ensure that, if possible, no company in Germany has to go bankrupt just because of the corona epidemic,” he said after a meeting with the Economics Ministers of the federal states in Berlin. The EU also stresses that it will help European companies in the event of a crisis. Member states are planning to set up their own €25 billion corona fund to support healthcare and businesses. The ECB will likewise launch a new commercial banking programme called TLTRO III from June onwards, which is designed to help small and medium-sized enterprises in particular.

For financial investors, the corona dip currently offers buying opportunities. The Singen-based investment boutique TBF Global Asset Management has reinvested in all equity funds after the stock market crash. Managing director Peter Dreide explained that the corona losses on the stock exchange had been the breeding ground for the massive purchases. Apollo boss Leon Black also said at this year’s “Super Return” industry meeting that a downturn would not be bad for his company. During the 2008 financial crisis, Apollo invested 50 billion dollars in a very short time. If there was a downturn, he emphasized that such sums would be invested again this time.  Jason Thomas of financial investor Carlyle also said that loans are undervalued in crises: “This creates buying opportunities. But how the Corona crisis will actually affect the distressed sector in the medium to long term, for example, is still entirely up in the stars, according to Debitos manager Peter Riedel: “Credit markets correlate strongly with the stock markets. So if the stock market shows signs of easing, this will also have positive consequences for the credit market. However, if the crisis lasts longer, there will of course be more defaults.”

This post was written by Jens Secker

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