‘Credit measures unleashed by economies to deal with Covid-19 proving to be very costly’

The earliest that economies will come back to full operation from the disruption caused by the Covid-19 pandemic is probably in the second or third quarter next year, according to former Reserve Bank of India Governor Raghuram Rajan.

Fiscal measures

He underscored that the fiscal and credit measures unleashed by economies to deal with the fallout of thepandemic is proving to be very costly across the world.

“We have just, in a sense, put economies into a temporary coma. But when they awaken, it’s going to be, I think, overly optimistic to assume that everybody will walk off the sleeping bed and come back to full life,” Rajan said at the DBS Asian Insights Conference.

When the economy opens up fully there will be a lot of damage, which will be uncovered and has to be dealt with, he added.

Rajan said: “Helping an economy in a lockdown survive is extremely costly. You lose 1/12th of GDP every month that you are in complete lockdown. Nobody goes into complete lockdown.

“Obviously, the measures are proving very, very costly across the world. The sooner we deal with the virus and contain it, the sooner we find a vaccine, obviously the better.”

Rajan is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business.

Bankruptcies

He felt that economies have to start planning how to allow companies to make the transition – transformation for some – recovery/ repair for others.

“Because in this process, if you are operating at 50 to 75 per cent of capacity for the next six to eight months, and you have your costs and revenues aren’t coming in, you are accumulating debt.

“So, there will be some companies that are significantly over-levered, which have to bring down leverage, which have to go through bankruptcy. Right now, we have put all that off. But it is coming. It is coming in a big way,” explained Rajan.

He cautioned that if the corporate sector has to write-down debts and undergo bankruptcy processes, that will imply that the costs will transfer over to the financial sector.

So, governments will have to sensibly think about the costs that the financial sector will have to bear, ensure that they are adequately capitalised.

“...the last thing you want over and above a corporate sector crisis is a financial sector crisis,” said Rajan.

He noted that there will be many companies that will close permanently. So, there are losses to come.

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