Major Liquidity Crisis Likely As Covid-19 Spreads
The corona-virus has the potential to foster a major liquidity crisis, call it a liquidity issue if you want but the system could be on its way to freezing up! People and companies may decide to, or be forced, to hoard the money they have when they begin to fear new cash will not be rolling in. Paying existing bills becomes difficult when you are not working or find you must close your business for an extended length of time. At this point, the one thing that is crystal clear is that it is impossible to know how severe this will be or long how long this will go on.
Liquidity Is The First Casualty In A Financial Crisis
As to the long and short term economic consequences of this outbreak, it is difficult to say. certain sectors of the economy will without a doubt take it squarely on the chin. Businesses involved in events or dependent on people gathering or moving about are in peril. Also, thedisruption of production and deliveries will have a massive effect on business. Many small businesses simply do not have the financial resources to absorb losses and weather this storm. this means they will fail. This will create a large number of defaults on loans to lenders, suppliers, workers, and landlords.
All these people also have financial obligations that will continue. Things such as taxes, insurance, utilities, loan payments, and more. Those businesses and people in the weakest condition will be unable to borrow and this creates the possibility of a domino effect starting that could ripple through the financial system. It is difficult to argue this won’t develop into an adverse feedback loop. History shows that banks have a way of failing us when we need them most and that is why liquidity is generally the first casualty in a financial crisis.
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