COVID-19 effects pandemic on financial markets cannot yet be quantified

Aurel Constantin 13/03/2020 | 12:32

The coronavirus crisis is in full development around the world. This means that developments in financial markets are almost impossible to predict at this time. The comparison with the financial crisis of 2008 can work to a point, if we only refer to the financial losses generated by the coronavirus, shows an analysis Alexandra Smedoiu, Fiscal Services partner at Deloitte Romania.  

The only certainty at the moment is related to prevention: no action in this direction can be considered excessive, whether we speak of actions at the personal or institutional level. At the same time, the messages of confidence and support from the regulatory institutions are important at this time, given that the evolution of financial markets is extremely sensitive to the indicator “confidence”.

In the field of financial services, prevention costs in establishing the business continuity plan as detailed and applied for situations of this kind. But, some companies may not have such a plan already approved and tested, so the situation can be complicated.

Which areas are the biggest risks for financial markets?

The existence of these plans is all the more important since, already, measures have been announced that will cause losses to financial institutions beyond those already estimated, arising from the difficulties of the companies directly affected to meet their financial obligations in time (transport, tourism, etc.).

A first measure with strong effects on the financial market is the one announced by the Italian authorities, regarding the suspension of the payment of the mortgage loans throughout the country. At the same time, darker scenarios are advancing. Goldman Sachs investment bank estimates that European banks could lose EUR 30 billion in profits over the next three years due to the current crisis.

In Romania, the supervisory authorities also asked the financial institutions (banks, insurance companies, etc.) to update their business continuity plans to the new international financial context. Moreover, institutions operating in the financial and banking industry are required by law to implement such plans, which they should periodically test.

At the local level, we must also take into account the fact that, during times of turbulence, investors withdraw from emerging markets and take refuge in stable assets, such as gold or bond investments. In these conditions, we can witness, in the following period, a depreciation of the RON against the EUR and a decrease of quotations on the Bucharest Stock Exchange (BVB). Their magnitude will depend to a large extent on the degree of panic they will reach.

Already, both on the stock market and on the foreign exchange market, the effects of developments in international financial markets are being felt, which, increasingly, are compared with those of the last financial crisis for more than ten years. An encouraging aspect, however, may be the fact that many of the investors in the international financial market have now gone through the previous financial crisis and are expected to be more cautious in making emotional decisions.

Measures and messages of encouragement globally

In addition, the general perception is that the reaction rate at the institutional level, with messages and measures designed to induce confidence in financial markets, but not only, is much faster than in 2008.

The International Monetary Fund (IMF) has announced that it is making available to emerging and low-income states USD 50 billion through its rapid financing facility against the backdrop of the coronavirus pandemic. For low-income countries, the IMF will provide USD 10 billion in emergency funding.

At the same time, the European Commission announces that it will make available to the Member States a first package of EUR 7.5 billion and a total of EUR 25 billion to support the economies suffering from the pandemic.

The Organization for Economic Co-operation and Development also suggests that central banks should send encouraging signals to alleviate turbulence in financial markets, indicating that they should be prepared to further relax monetary policy and provide liquidity to banks, if they will be necessary.

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