UK no relation Corporate debt bubble
So far, the only European countries forced to put in place short-selling bans are Italy, Spain and France: three of the four largest economies in the enfeebled European Union." He believes the financial vulnerability of Madrid, Milan and Paris is due to an often-overlooked geo-economic reality, which could come to the fore in the coming days. "By OECD standards, Spain, Italy and France have very weak pension assets bases. Their combined pension wealth is more than 15 times smaller than that of jurisdictions such as the UK or Australia. In times of acute crisis, like today, they lack cash-rich domestic buyers of last resort for the bonds and equities traded on their financial markets. Their national economies will suffer as a result, and their political sovereignty itself may be severely eroded."
The OECD points out that businesses in many countries have become highly indebted, while the very low cost of borrowing and accommodative monetary policy has contributed to unprecedented corporate debt issuance.Businesses in European cohesion regions are more concerned about the pandemic's consequences. Companies in affected areas anticipate long-term effects on their supply chain from the outbreak. A bigger proportion of businesses anticipate permanent employment losses as a result of the digitalization transformation brought on by COVID-19.Consequently, the corporate debt stands at very high levels in many G20 countries. Also, lower-rated credit issued in the form of BBB bonds, non-investment grade bonds, and leveraged loans has risen to elevated levels, the OECD warns, meaning businesses will have little choice but to reduce costs and employment to withstand insolvency pressures.Economic activity decreased by almost 4% in the majority of sub-regions of Europe and Central Asia in 2020, which was similar to the global average of 3.2%. However, the high infection and mortality rates of the pandemic in countries in the Western Balkans, the Eastern Neighborhood, and Central and Eastern Europe meant they faced deeper recessions.Central Asian countries are predicted to be hit the worst especially poor countries  Only 4% of permanently closed businesses anticipate to return in the future, with huge differences across sectors, ranging from 3% in lodging and food services to 27% in retail commerce.At the international and national levels, however—as Helmut Ettl, head of the Austrian financial market authority, said—there is no reliable empirical data to gauge the ongoing effects of the COVID-19 disease on the economy and the environment, as this type of crisis is unprecedented. Companies that were already financially weak before the crisis are now further destabilized. All that is known, Ettl said, is that the crisis will be profound.Bond and debt markets
Prior to the coronavirus pandemic, a massive amount of borrowing by firms with ratings just above "junk", coupled with the growth of leveraged loans, which are made to companies with significant amount of debt, created a vulnerability in the financial system. The collapse of this corporate debt bubble would potentially endanger the solvency of firms, potentially worsening the next recession. In January, new U.S. corporate debt fell 10% from the previous year, potentially indicating more caution from investors. As the economic impact of the coronavirus began to be felt, numerous financial news sources warned of the potential cascade of impacts upon the outstanding $10 trillion in corporate debt. Between mid-February and early March, investors increased the premium, or additional yield, to hold junk bonds by four times the premium demanded of higher credit lenders, indicating increased wariness.During the 2020 stock market crash that began the week of 9 March, bond prices unexpectedly moved in the same direction as stock prices. Bonds are generally considered safer than stocks, so confident investors will sell bonds to buy stocks and cautious investors will sell stocks to buy bonds. Along with the unexpected movement of bonds in concert with stocks, bond desks reported that it had become difficult to trade many different types of bonds, including municipal bonds, corporate bonds, and even U.S. Treasury bonds. The New York Times opined that this, coupled with the fall in gold futures, indicated that major investors were experiencing a cash crunch and were attempting to sell any asset they could. As big investors sought to sell, the spread between the prices sellers and buyers wanted has widened. As banks were unable to sell the bonds they were holding, they also stopped buying bonds. As the number of traders fell, the few trades remaining wildly swung the bond prices. Market depth in Treasuries, a measure of liquidity, fell to its lowest level since the 2008 crisis. Over the week of 9 March, investors pulled a weekly record of $15.9 billion from investment-grade bond funds, as well as $11.2 billion from high-yield bond funds, the second-highest on record. Also, prices for bond exchange-traded funds began dropping below their net asset values.On 12 March, the U.S. Fed took almost unprecedented action to, in its words, "address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak". The Federal Reserve Bank of New York announced that it would offer $1.5 trillion in repurchase agreements in U.S. Treasury securities to smooth the functioning of the short-term market that banks use to lend to each other. The New York Fed further announced that it would buy $60 billion of Treasury bonds over the next month to keep the bond market functioning. The seizing up of markets was a critical step in the subprime mortgage crisis that led to the financial crisis of 2007–08 and the Fed appeared to want to act quickly. On 15 March, as well as dropping interest rates, announced it would buy at least $500 billion in Treasures and at least $200 billion in government-backed mortgage securities over the next few months. On 16 March, as the stock market plunged, bond prices jumped according to their historical inverse relationship.On 17 March, the Fed announced that they would use the Commercial Paper Funding Facility (CPFF). The CPFF was first used in the 2007–08 financial crisis to buy about $350 billion of commercial paper (CP), thereby increasing the amount of cash in the CP market, used by business to pay bills and other short-term demands. CP most directly affects the mortgage and auto loan markets, as well as credit to small and medium-sized businesses. The U.S. Treasury Department authorized $10 billion to backstop any losses incurred by the Fed using the Treasury's Exchange Stabilization Fund. U.S. stock markets rallied on the news.On 19 March, the European Central Bank announced a 750 billion euro ($820 billion) bond-buying program, named the Pandemic Emergency Purchase Programme, to mitigate market turmoil. Unlike in previous ECB asset-purchases, Greek government bonds were included. Markets reacted positively, with the yield on Italian government bonds dropping to 1.542% from 2.5% the day before.In the week of 23 March, investors attracted by Fed guarantees of market liquidity and comparatively high bond yields rushed into the U.S. corporate debt market. Investment-grade firms issued $73 billion in debt, about 21% more than the previous weekly record. Many U.S. firms sold debt in an attempt to build cash reserves in anticipation of future financial strain.Meanwhile, Chinese corporate bond defaults fell 30% in the first quarter, year on year, as the Chinese government directed banks to supply loans to corporations to avoid defaults and job losses. Interest rates in China fell to a 14-year low due to government efforts.On 30 March, Moody's downgraded the outlook on U.S. corporate debt from 'stable' to 'negative,' focusing in particular on the global air travel, lodging and cruise ships, automobiles, oil and gas, and the banking sectors. Fitch forecast a doubling of defaults on U.S. leverage debt from 3% in 2019 to 5–6% in 2020, with a default rate up to 20% for retail and energy companies.
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