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The Liquidity Crisis Is Quickly Becoming A Global Solvency Crisis As FRA/OIS, Euribor Soar

April 8, 2020

The Liquidity Crisis Is Quickly Becoming A Global Solvency Crisis As FRA/OIS, Euribor Soar

One month after turmoil was unleashed on capital markets, when the combination of the Saudi oil price war and the sweeping impact of the coronavirus pandemic finally hit developed nations, what was until now mostly a liquidity crisis is starting to become a solvency crisis as more companies realize they will lack the cash flow to sustain operations and fund debt obligations.

As Bloomberg’s Laura Cooper writes, cash-strapped companies are finding little relief from stimulus measures, and from Europe to the US, cash in hand has been hard to come by even as governments pledge funds for small businesses to bridge the financial gap until lockdowns are lifted:

  • US: The March NFIB survey of U.S. small businesses noted challenges in submitting loan applications and the urgent need for federal assistance
  • UK: A British Chamber of Commerce survey showed only 1% of companies reported being able to access funds dedicated for business. A complex application process for the U.K. Coronavirus Business Interruption Loan Scheme comes as 6% of U.K. firms say they have run out of cash while nearly two-thirds have funding for less than three months
  • Canada: A proposed six-week roll out of emergency funds is unlikely to prevent 1 in 3 companies from laying off workers. More than 10% of the labor force has already filedemployment claims
  • Europe: existing structures are aiding in the deployment of funds, but concerns remain that more is needed with EU leaders failing to reach agreement on further initiatives

As we have noted previously, small businesses – everywhere from China, to Europe, to the US – make up the majority of firms in advanced economies and account for a sizeable share of private sector employment. Quick delivery of stimulus measures is needed to curb widespread insolvencies. This could mean the difference between a short, yet sharp recession and a prolonged erosion to the labor market and economy regardless of containment of the health crisis.

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