COVID-19 and Global Financial Crisis

When the global financial crisis began thirteen years ago, somewhat more slowly and less dramatically than the corona(COVID-19) crisis today, some Landesbanken wobbled quite quickly. It had gotten caught with poisoned US papers, and there were threats of billions in losses. In the summer of 2007, the emergency sale to the Landesbank of Baden-W├╝rttemberg took place within four weeks. One involved later said that the moment the bank’s misalignment and the vast risks became clear, they “looked into a deep black hole”. The Saxons were not the only ones back then. Those in charge worldwide in banks, financial firms, companies in other sectors, and politicians looked into deep black holes. Especially when the bankruptcy of the US bank Lehman Brothers, which was not averted by the American government, began the hot phase of the financial crisis. It caused the euro crisis in Europe.

The disruption in the supply chain has probably not yet reached its peak, because the sea route from China to Europe takes about six weeks – that is, the failures are only now becoming noticeable until well into spring. “The less the companies have until then been able to find company-specific solutions and to fill the gap with alternative offers or their own production, the more serious they become,” says a paper by seven economists who raised the alarm last week. This dangerous mix – declining supply of essential products, declining consumption – can now rock up. In a scenario of the OECD, which assumes that the virus will spread more widely worldwide, a global growth slump of 1.5 percent is expected. Many economists are already anticipating a global recession, i.e. a loss over several quarters

The difference to the financial crisis after 2007, when the stock markets also collapsed massively: At that time, overindebtedness in the real estate sector of the USA and some other countries spilled into the financial system and caused the banking crisis, which quickly spread around the world after the bankruptcy of the US bank Lehman Brothers. Back then, it was about the bank bailout. Production and consumption losses are now the trigger in the commercial economy. But the downturn can also infect the financial sector – when companies get into trouble and can no longer service loans. The corona crisis has also been a test of bank stabilization since 2008.

Within a few months, the global economy has entered a crisis that is unique in many ways. The health emergency and the measures to curb the spread of viruses hit the global economy abruptly from the supply and demand sides. They overshadowed the decline in overall economic output triggered by the financial crisis in 2009. The effects are widespread, both geographically and in comparison to other industries. The economic policy response came in a short time and on a large scale in many developed countries. However, the measures are less of a stimulant than of a saving character, because the demand-side impulses are currently of little use to the current lockdown. The situation is even more dramatic in many emerging and developing countries, especially since the state’s financial scope is often limited. Capital flight of historical proportions and health emergencies paint the overall socio-political and economic picture. This situation has prompted the International Monetary Fund (IMF) to revise its historical scope. The decline in global economic output as a result of the lockdown, which is forecast for 2020, is said to be the largest since the Great Depression (IMF, 2020). The IMF divides economic policy responses into two phases: containment and stabilization, followed by the recovery phase. Quarantines, bans, and social distancing remain critical to slowing transmission in the first phase so that the health care system can meet the increasing demand for its services. However, these measures also give researchers time to develop therapy and vaccines. While parts of the economy are closed, policymakers need to ensure that people can meet their needs and that companies get a handle on the acute phase and the related liquidity shortages. Targeted fiscal, financial and monetary measures are necessary to secure economic relationships as well as commercial and business structures. Advanced economies with strong governance, well-stocked health systems, and the privilege of spending reserve currencies are better placed to weather this crisis. In contrast, several emerging and developing countries are currently experiencing health, economic and financial crises at the same time and will urgently need help from advanced economies and international institutions. The global economic development, the shock of demand and the impairment of international supply chains are currently also shaping the development of the global economy, primarily since more than half of goods imports are related to intermediate products for domestic production 

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