For every debt there is a creditor and this makes the government’s efforts to support the economy extremely tricky.
Consider a hypothetical apartment building with a significant number of tenants working in restaurants or other retail operations that are now closed. With no money coming in, these tenants might be able to make April 1st rent but the May payment becomes an impossibility for most of them.
Assume the government offers rent forgiveness to these tenants in some way, a humanitarian initiative. The problem here is that most building owners financed the purchases with large bank loans. These loans require monthly payments to the bank funded by rents that are now not coming. Payment forgiveness for the building owners too?
Then it’s the bank’s problem, along with all the other thousands of similar cases - Tim Hortons franchise owners, optometrists, restauranteurs, auto plants halted because of supply chain issues - everybody.
The Bank of Canada would need to support all the banks and other lenders in the same predicament, at a huge monetary scale.
In a Tuesday research report, Citi’s U.K.-based credit strategist Matt King expressed skepticism that government support can prevent mass credit defaults,
“Emmanuel Macron has bravely pledged that ‘no business will be at risk of bankruptcy’ and ‘no employee will lose a cent’ as a result of coronavirus restrictions… Other governments are rapidly trying to come up with relief schemes of their own. Unfortunately we struggle to see how they can achieve this. … Even more daunting than the magnitude are the logistics…. Which businesses deserve bailing out, especially when they operate internationally?... Given that many businesses have payments coming due in a matter of days, how can you hope to get the right amount of money to the right places in time? ... the risk that missed payments start to create a cascade of credit defaults seems quite high”
Mr. King’s perspective is global and among the more pessimistic, I’ve seen. Canada, importantly, is much better positioned to handle these problems than most countries.
The financial system is healthy and centralized, making it easier for the central bank to support them. The health care system has, so far, held up tremendously and faith remains in the other necessary government bureaucracies that will get us through what will hopefully be a short-term crisis.
The challenge remains less one of scale – the funds will be there – than speed and complexity, as Mr. King notes. The goal is to prevent temporary economic dislocations from becoming permanent through business closures and unemployment. To accomplish this, government support will have to reach literally millions of Canadians, directly and indirectly, and very soon.
-- Scott Barlow, Globe and Mail market strategist
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