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COVID -19 from temporary health crises to looming economical financial crises

Updated: Mar 31, 2020

The UAE is trying to stop the outbreak. Schools and universities, malls and cinemas are shutdown. No international flights are allowed , skies of the UAE have never been so quiet like this week. Most of the people are staying in,

It is a health emergency as well as a financial crisis — and no one knows how grave this will be and how long this will last.

Even the preliminary estimates are deeply worrying. The International Labour Organization estimates that Covid-19 will destroy up to 25 million jobs.

According to the United Nations Conference on Trade and Development (UNCTAD), it will likely cost the global economy between $1 trillion and $2 trillion in 2020.

Covid-19 is pushing world’s economy into the ICU .The pandemic is inflicting on businesses and workforce. The horror story is unfolding across sectors.

Last week’s brutal drawdown in global financial markets might seem to indicate that the world economy is on a path to recession. Valuations of safe assets have spiked sharply, with the term premium on long-dated U.S. government bonds falling to near record lows at negative 116 basis points — that’s how much investors are willing to pay for the safe harbor of U.S. government debt. As a result, mechanical models of recession risk have ticked higher.

Yet, a closer look reveals that a recession should not be seen as a foregone conclusion.

First, take valuations of risk assets, where the impact of Covid-19 has not been uniform. On the benign end, credit spreads have risen remarkably little, suggesting that credit markets do not yet foresee funding and financing problems. Equity valuations have conspicuously fallen from recent highs, but it should be noted that they are still elevated relative to their longer-term history. On the opposite end of the spectrum, volatility has signaled the greatest strain, intermittently putting implied next-month volatility on par with any of the major dislocations of the past 30 years, outside of the global financial crisis.

Second, while financial markets are a relevant recession indicator (not least because they can also cause them), history shows that bear markets and recessions should not be automatically conflated. In reality, the overlap is only about two out of every three U.S. bear markets — in other words, one out of every three bear markets is non-recessionary. Over the last 100 years, we counted seven such instances where bear markets did not coincide with recessions.

There is no doubt that financial markets now ascribe significant disruptive potential to Covid-19, and those risks are real. But the variations in asset valuations underline the significant uncertainty surrounding this epidemic, and history cautions us against drawing a straight line between financial market sell-offs and the real economy.

This image of worlds debt is of early 2019, now we have to observe carefully that after real recession, financial recession and policy crises what will be the obvious change in the image below.

Composed by: Sheher Bano

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