LONDON (Reuters) – The coronavirus panic is jolting stock exchange, with high drops in significant indexes getting the general public’s attention. However behind the scenes, there is less understood and possibly more worrying proof that stress is constructing to harmful levels in crucial arteries of the financial system.
Bankers, companies and specific investors are dashing to stock up on cash and other possessions considered safe in a recession to ride out the chaos. This sudden flight to security is causing havoc in markets for bonds, currency and loans to a degree that hasn’t been seen considering that the financial crisis of a dozen years earlier.
The crucial concern now, as in 2008, is liquidity: the ready availability of cash and other easily traded monetary instruments – and of buyers and sellers who feel secure sufficient to do deals.
Investors are having trouble buying and selling U.S. Treasuries, thought about the safest of all possessions. It’s an extremely unusual incident for among the world’s most easily tradable financial instruments. Funding in U.S. dollars, the world’s most traded currency, is getting harder to get outside the United States.
The cost of funding for money that business use to make payrolls and other essential short-term needs is increasing for weaker-rated firms in the United States. The premium investors pay to buy insurance on scrap bonds is increasing. Banks are charging each other more for overnight loans, and business are drawing down their credit lines, in case they dry up later on.
Taken together, caution some lenders, regulators and investors, these warnings are starting to paint a troubling picture for markets and the worldwide economy: If banks, companies and customers panic, they can set off a chain of retrenchment that spirals into a bigger funding crunch – and ultimately a deep economic downturn.
Francesco Papadia, who managed the European Reserve bank’s market operations throughout the region’s financial obligation crisis a decade earlier, said his greatest fear is that the “illiquidity of markets, created by severe uncertainty and panic reaction” might “cause markets freezing, which is a financial life-threatening event.”
” It does not appear to me we exist already,