A corporate crisis needs a corporate bailout
Central banks are dusting off the 2008 playbook, thrusting liquidity at the banking system and hoping some of it gets through to banks' end clients. It’s better than nothing, but the coronavirus crisis one primarily of corporates — and the rescue toolkit needs updating.
Repo lines of extraordinary size, aggressive rate cuts, unlimited dollar swaps, cheap liquidity, bond buying, and still nothing seems to stem the bleeding in markets.
Central banks across the world have rolled out the crisis toolkit developed in 2008 and the years following in record time, rattling through several years of extraordinary monetary policy in two weeks. These tools certainly don’t hurt, and perhaps conditions would be still worse without them.
Unlimited liquidity from the central banks can, perhaps, wall off the crisis, and prevent it spreading, morphing, and becoming a banking crisis. Despite the plunging stock prices and depressed trading levels of capital securities, few worry about the solvency of the systemic banks — a good thing too, because worries about the crucial nodes of the financial system would be a disaster on top of a disaster.
But it’s hard to escape the thought that the central banks are doing what they know how to do, rather than what’s actually required from the situation. To a man with a hammer, every problem looks like a nail.
Markets keep plunging despite the best efforts of the high priests of finance because the news from the real economy keeps getting worse — and because markets have woken up to the idea that it’s not just companies with complex supply chains, Chinese or Italian exposure, or those in transport or hospitality that will be affected.
Once everyone is stuck at home, social distancing, quarantining or otherwise, huge amounts of economic activity will shut down completely. All sorts of projects will be effectively on hold, whether formally or not — hiring and discretionary expenditure are already diving across almost every industry.
From the corporate treasuries of multinational conglomerates, to the spreadsheets of sole traders, the same dynamic is at work — as the banks did in 2008, corporates are aggressively hoarding liquidity.
Sometimes that means drawing credit lines in full; sometimes that means adding new credit lines, pledging new assets to secure funding, paying suppliers late and demanding payment early, stopping any unnecessary expenditure, suspending dividends, cutting staff hours, accepting voluntary redundancies — anything that companies can do, they are doing.
It is at its most aggressive and obvious in the worst-hit sectors. A swathe of airlines announced their emergency playbooks and their funding positions on Monday morning — but it will roll out across the economy.
Make loans so cheap
And so markets carry on down. What central banks — or preferably, governments, but good luck with that — need to figure out is how to calm this liquidity hoarding. They know how to stop it with banks, or at least stop it mattering. That’s the 2008 recipe of low rates, quantitative easing, swap lines and so forth.
Central banks can add awkward addendums telling the banks to make sure they pass on this cheap money to their corporate and SME clients, but there’s a long tradition of banks failing to do this. The UK's “Funding for Lending” and the ECB's TLTRO schemes all had features to force banks to push the cheap money out of the door. Not all of them have been successful.
Ideas already out there to target companies outright includes buying commercial paper.
A commercial paper intervention would certainly help keep a crucial short term funding market alive, and ease pressure on the banking system from companies wishing to draw their bank lines.
But it’s a highly elitist intervention, with no means of ensuring companies pass on the benefits. Only the largest companies are regular CP issuers, and so a rescue of that market would hit the same political problems as the 2008 rescues — but with corporate titans in the dock of public opinion, instead of bankers.
A better innovation might be the same as the bank approach — loans so cheap they’re better than free.
If a central bank could say tomorrow that any company can borrow half of its annual revenue for 12 months for free, with repayments that only need to begin 12 months from now, liquidity worries would melt away. Companies, unlike markets, can’t pledge much in return for these cheap loans — establishing security over operating businesses is time consuming and complicated — but these are extraordinary times.
The quid pro quo would be full sick pay and no lay-offs, with the hope that, when the pandemic recedes, the crucial economic infrastructure remains in place to bounce right back.
This would be tantamount to nationalising corporate lending, but why worry about that at a time like this? Central banks are supposed to be lenders of last resort, and have the incentives to worry about the system, while all around them are acting with extreme self-interest.
When corporates are the locus of concern, the supreme crisis fighters must deal with them — not refight the last one.