Banks will be at the forefront of this given that missing interest payments will be the norm not an exception in a pandemic.


This will come in several forms:

1) Forbearance. These measures are already in place in China and I are beginning in Europe. Banks would be told not to foreclose of businesses and individuals who did not make interest payments. I also think that such a policy might be quite difficult to reverse as politicians might get a taste for this form of intervention. Given banks’ incomes would decline, they would need a cash flow to replace the missing interest payments and this would likely be in the form of loans from central banks.

2) Fiscal expansion & tax forbearance. Useful but hardly likely to close the gap if everybody is indoors but there are still things that can be done in terms of delaying tax payments. It might not have a lot of impact but it will get key players, such as Germany, over the Rubicon to a world where fiscal expansion is acceptable. It might be enough to get Eurozone countries to back Lagarde’s plan for “helicopter money”.

3) Purchase of corporate debt. Corporate debt is already on the balance sheet of the ECB and the BOJ and thus easy to expand. This time it could be newly created debt from corporations in need to liquidity to tide them over until the economy starts moving again.

The character of all of these will be temporary measures to deal with cash flow issues. The big question is whether and where they can they be reversed after economies have started to improve. I’d argue that there is a much higher likelihood of reversal in the US than the Eurozone.

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