Pandemics and pandemonium – COVID-19’s impact on credit

The recorded impact of major pandemics on economies stretches back to at least medieval times and, serious though the current crisis is, it’s important to keep some perspective about where COVID-19 sits in historical terms.

The Black Death, the bubonic plague that raged from approximately 1347-1351, is estimated by some historians to have killed more than 20 million people, a significant percentage of the estimated European population of the time.

The spread of the Black Death was tied to the rise of regular trading routes – an early harbinger of globalisation – and, as today with COVID-19, increased global connectivity also provided a path for the disease to spread.

One of the key impacts of the Black Death on European economies of the time was its effect on the relationship between feudal landowners and the peasants who worked for them. As labour became increasingly scarce, peasants began to demand higher wages and, eventually, wages did increase.

Nearer to our own time, we have seen the Spanish flu. Death estimates vary, but it is thought at least 50 million people may have died – certainly more than were killed in the First World War, which had just concluded. 

In terms of global recessions, the reparations imposed by the victors on post-war Germany were followed by rampant inflation, which fed into the rise of Hitler and World War Two.

The most significant events in terms of global economies have been the 1929 US financial crisis, followed by the Great Depression of the 1930s. As noted in a 2012 paper by the Federal Reserve Bank of San Francisco, the Great Depression took a huge toll on commercial bank lending, which then represented the bulk of total lending in the US economy.

As the paper notes, the Great Depression had a far greater impact on the global economy than the recent Global Financial Crisis, which peaked in 2008. The decline during the Global Financial Crisis wasn’t nearly as dramatic as the downturn during the Great Depression.

In terms of economic and credit impact, the pandemics of SARS, MERS, Ebola and other disease eruptions had relatively small effects on the global economies of their time.

However, COVID-19 has fuelled a significant downturn in global economic confidence, despite a relatively low total of global fatalities compared to some other major pandemics.

What is different with this pandemic is the amount that major countries are willing to pay to avert a global recession. CNN’s Charles Riley, in a recent analysis, warned readers to get ready for levels of national debt not seen since World War Two.

“The… borrowing binge could result in national debt mountains to rival those last seen in the late 1940s,” he says.

Financial markets should easily absorb the new wave of debt, especially because central banks have committed to buying huge amounts of government bonds as part of their own stimulus efforts, says Riley. But once the crisis passes, the accumulated debt will remain on government balance sheets and will need to be serviced, cutting into other spending plans, he says.

A recent report by MSCI Research notes importantly that, while newspaper headlines are focused on volatile stock markets, credit markets are not immune. MSCI Research says that COVID-19’s market impact has not yet led to the steep losses in some credit markets seen during the depths of the Global Financial Crisis.

However, they point out that the recent sudden widening of credit spreads has followed an economic environment that was generally positive and had until recently kept spreads at relatively tight levels.

It could get worse, depending on how COVID-19 develops. According
to MSCI Research modeling, the spreads of companies in IT and health care could
be impacted least, while energy and financial companies could see their spreads
widen.

But the reality is that at the moment nobody can predict what will happen. In part this is because developed countries are in many cases pursuing differing strategies and a more unified response has yet to emerge. Meanwhile, the true extent of the impact in developing countries has yet to be seen.