Ever since the coronavirus health crisis began, investors have been flooded with negative economic data. In a way, one cannot expect economic growth when people lose their jobs and businesses shut down. Yesterday, the United States revealed that another three million people applied for unemployment benefits the week after – and continuing claims rise as well.
Unfortunately, it is not only the United States. In the Euro area, GDP projections for the current year were again slashed . From an initial estimated -5.5% for 2020, the new downward revision points to -10.1%. However, 2021 looks optimistic as GDP was revised to the upside to 7.5%. But there is a caveat – many variables about the coronavirus remain unknown.
For instance, at this point, the revision does not consider a second or third wave of infections, or how long will it take until economies are as fully functional as before. As such, markets are taking the data with a grain of salt.
Someone is Preparing for the Worse
Banks always sit at the forefront of an economic crisis. They know the value of their balance sheets’ and the proportion of NPL (Non-Performing Loans) they carry.
Judging by the data, banks have increased the credit provisions dramatically as percentages of loan books already during Q1 of 2020. Considering that the coronavirus pandemic intensified in March, most likely, those actions were taken during that month.
Barclays stands out of the crowd, followed by Santander and Standard Chartered. If anything, this is the way banks are preparing to face the wave of businesses going bankrupt and people turning insolvent.
As always, there is always a risk to any business or credit line. As tough the credit review process may be, there is always a risk that the borrower will default. Therefore, banks always carry provisions for bad loans on their books.
Yet some events, like a pandemic, are not considered. When millions of people lose their jobs, the chances are that the banks will suffer from the second wave effect as they will not be able to collect interest on their loans. Unless the state intervenes, there must be a better way to solve the illiquidity problem. Well, governments can intervene, and they have. However they cannot and will not bail everyone, for the simple reason that such a task is impossible.