You know the feeling. The sun is shining outside, the air is hot and stuffy, and suddenly dark storm clouds gather. Then a huge storm lets loose. Afterward, the air is wonderfully clear, at least for a while. That is in a sense what happened in the financial markets from Shanghai to Frankfurt to New York this week.
Yet this shouldn't come as a surprise. For far too long the markets have been disconnected from the real economy. In Germany, investors have ignored the fact that industry has been in a recession for months and the German economy as a whole is stalling. They also mostly ignored the trade war between the Americans and the Chinese, and even somehow priced in the costs of Brexit.
But all it takes is a small, largely unknown virus to really blow down this house of cards. And what a crash it was! Record losses wherever you looked. By points (which always looks pretty bold) and by percent (which is more meaningful). The day after the crash, the world looked a little better, at least in the big trading rooms. But whoever believes that was it, is wrong. The coronavirus crisis still has what it takes to plunge the global economy back into a bad recession.
Memories of Lehman Brothers
Suddenly memories from the 2008/2009 global financial crisis come rolling in. Here, too, a virus had eaten its way into the system. Though that time it was a very different kind of sickness — greed for seemingly endless profits, for a never-ending upswing.
The result was a near meltdown that could only be stopped by an unbelievably high financial commitment. Hundreds of billions of dollars, euros, yuan and yen in economic stimulus programs were pumped into economies worldwide. It was money that the governments actually didn't have. The consequences of which can still be felt today, for example in the form of low interest rates with all their negative consequences for banks and savers.
Speaking of banks, this Tuesday Deutsche Bank turned 150. The day before the anniversary the company's stock price, which had laboriously worked its way up in the first two months of the year, fell a whopping 17% to a new all-time low. It was a bittersweet moment.
But in such crisis situations, banks are punished most severely because it suddenly becomes likely that a lot of companies will not be able to repay their loans. The fact that Deutsche Bank canceled its big birthday party in Berlin the weekend after next because of the virus (really only because of the virus?) is now only a footnote in the wider story.
Send help, it's just going to get worse
Back to SARS-CoV-2 or COVID-19, or more simply the new coronavirus. Again, economic stimuli packages are being prepared to help companies that are already severely affected by the virus, like hotels, restaurants and trade fair operators. And unfortunately, that is just the beginning.
If the spread of the virus is not stopped, Germany will not be able to avoid measures as drastic as Italy. How will people get to work then? Can factory production continue? Could more people actually die if a major recession ultimately impacted the public health care system?
Of course, it is important that governments send a positive signal to companies in this situation like "We are behind you." Such words are not surprising from Germany's economy minister, Peter Altmaier. Yet now even the normally buttoned-up finance minister, Olaf Scholz, has said something similar. Not even he can ignore what could be coming.
But it won't be just small- and medium-sized companies that ask for help. So will big companies like Lufthansa, which has already cut its flight schedule in half. Still even with all that extra space in planes — who wants to fly somewhere just to be quarantined?
A wake-up call for the G20?
The German economy will probably feel the full effects of interrupted supply chains at the end of March. That's the time when the first containers that should have been shipped six weeks ago from China will not arrive, since they were never sent because of the coronavirus outbreak.
At the same time, some virologists, not to mention Germany's health minister, Jens Spahn, are pushing for much more draconian measures to contain the virus. If both things come together, Monday's crash will have just been a mild breeze before a real storm.
Germany has to arm itself for this, but so does the rest of the world. It could be a new opportunity for the G20 group, which worked together in an exemplary way at the outbreak of the 2008/2009 global financial crisis to prevent the worst. Currently the G20 is chaired by Saudi Arabia. Who is going to call Riyadh?