Can the Fed’s stimulus measures stop the stocks sell-off? What actions are needed?Posted on Monday, March 16 2020 at 3:55 pm GMT+0000
The exceptional stimulus measures by the Fed and other central banks reveal the depth of the crisis facing the world and the financial system today.
In less than two weeks, the Federal Reserve cuts interest rates to 0% (150 basis points), and injected 2.2 trillion dollars of liquidity into the markets. But unfortunately, markets reacted negatively. Failure of the markets to stage even a minor rebound or to stabilize, confirms that the world is going through an unprecedented extraordinary crisis that requires exceptional proactive measures addressed directly to the companies and sectors that are the most harmed.
Interest rates cut allow companies to reduce their debt cost by replacing outstanding debts with new low-interest debts, but I think cutting interest rates is not enough to face the virus crisis. Companies are suffering a shortage in cash-flow, as increasingly frightened consumers reins back spending. That’s why I think targeted measures should be taken to counter the virus shock, measures that can delay companies’ failure to paying debts or declaring bankruptcy, the correct cure may be direct and indirect tax exemptions for a specific period, or the declaration of a grace period for debts due to banks, and here the banks are compensated by reducing their reserves at the central banks.
The main cure is by finding a vaccine or treatment that limits the spread of the virus, but the big challenge is the time factor. Such cure must appear before companies start declaring default and bankruptcy, otherwise the entire world will enter into an unprecedented financial crisis. The companies and sectors that are the most harmed are airlines companies and the entire tourism sector, including hotels, restaurants … and oil companies, then banks and the banking sector.