Fed sets up scheme to meet booming foreign demand for dollars

Central bank meets global shortage of greenbacks after scramble for safety

James Politi and Brendan Greeley in Washington, and Colby Smith in New York


Investors and companies have flocked to the safety of US dollars to offset the blow to revenues from widespread economic shutdowns



The Federal Reserve has taken a new step to meet the global demand for dollars, setting up a facility that would allow central banks and international monetary authorities to enter into repurchase agreements with the US central bank and trade US Treasuries for dollars.

The Fed said the new facility would work in tandem with the dollar swap lines already established by the central bank with its peers across 14 different countries as the coronavirus pandemic has spread across the world.

In recent weeks the greenback’s value has risen sharply as investors have flocked to safe assets, and companies have scrambled to offset the blow to revenues from economic shutdowns.

This has resulted in a global shortage of dollars that has hit emerging markets particularly hard, adding to concerns about the fallout for the global economy.

Volatility in the Treasury market — the world’s largest and most liquid debt market — has further added to investors’ angst, having surged this month to its highest level since the global financial crisis, according to a Bank of America measure implied by options prices.

The temporary facility for foreign and international monetary authorities, or FIMA, will allow foreign central banks and international organisations with accounts at the New York Fed to “temporarily exchange their US Treasury securities held with the Federal Reserve for US dollars, which can then be made available to institutions in their jurisdictions,” the Fed said in a statement.

“This facility should help support the smooth functioning of the US Treasury market by providing an alternative temporary source of US dollars other than sales of securities in the open market,” the US central bank added.

Brad Setser, senior fellow for international economics at the Council on Foreign Relations, said the Fed’s scheme would mostly help countries that already had a significant stockpile of foreign reserves, such as Taiwan, Hong Kong and Thailand — and potentially even India and China — support their financial institutions.

However, it would not be as useful for countries lacking in foreign reserves, such as Turkey, South Africa, Lebanon or Indonesia, which would still have to turn to the IMF to weather the crisis.

Gennadiy Goldberg, a rates strategist at TD Securities, said the Fed move was important because it simultaneously addressed the global scramble for dollars as well as strains that have emerged in the Treasury market.

“It allows foreign central banks to very quickly raise cash instead of exacerbating illiquidity in an already illiquid market,” he said.

Moreover, according to Seema Shah, chief strategist at Principal Global Investors, it should help to improve sentiment among market participants. “It should take out some of the panic that investors were starting to feel when they saw such a deep and liquid market shut down.

”The move is part of a flurry of actions taken by the Fed to contain the damage from the coronavirus to the US and global economies.

The US central bank has lowered its main interest rate close to zero, announced unlimited purchases of US Treasuries and mortgage-backed securities guaranteed by government agencies, and resurrected a series of facilities dating back to the 2008 financial crisis to support ailing credit markets.

The Fed also has a crucial role in providing loans, loan guarantees and other help to corporate America as part of the $2tn stimulus package recently passed by Congress.

On the international front, the Fed this month established swap lines with the European Central Bank, Bank of Japan, and the Bank of England, and their counterparts in Canada and Switzerland. It then extended those facilities to include other central banks including Mexico, Brazil, Australia and Singapore.

Mr Setser said that even central banks that had established a swap line with the Fed could make use of the new dollar facility as an alternative, depending on their needs.

Creating the coronopticon

Countries are using apps and data networks to keep tabs on the pandemic

And also, in the process, their citizens




Having been quarantined at his parents’ house in the Hebei province in northern China for a month, Elvis Liu arrived back home in Hong Kong on February 23rd. Border officials told him to add their office’s number to his WhatsApp contacts and to fix the app’s location-sharing setting to “always on”, which would let them see where his phone was at all times. They then told him to get home within two hours, close the door and stay there for two weeks.

His next fortnight was punctuated, every eight hours, with the need to reactivate that always-on location sharing; Facebook, which owns WhatsApp, requires such affirmation so people do not just default to being tracked. Compared with his first lockdown—in a spacious apartment, with family and dogs for company—the ten-square-metre flat with two tiny courtyard-facing windows was grim.

When he emerged, on March 8th, he immediately donned mask, goggles and gloves and took a ferry to the island of Lamma where he galloped down lush forest trails for 30km, high on freedom, injuring his knees in the process. He still has trouble sleeping. But he is fit to work, and Hong Kong is content that he poses no risk to the health of his fellow citizens.


Mainland China and South Korea have reduced the number of reported new covid-19 cases down to around 100 a day or less; Hong Kong, Singapore and Taiwan never saw steep rises in the first place (see chart 1). Now they all face the same challenge: how to limit the all-but-inevitable rise in cases that will follow when they relax current controls, a rise which can already be seen in some places. To meet that challenge they are all turning to information technology.




Their efforts, like others elsewhere, are experimental. They risk failure; they also risk adverse side-effects, most obviously on civil liberties. But around 2.5bn people have now been put on some sort of lockdown during the pandemic (see chart 2). Only a fraction of them have been or will be infected, and thus become immune. The rest, when they emerge, will need watching—for their own sakes, and for the sakes of those around them.



The tools in use fall into three categories. The first is documentation: using technology to say where people are, where they have been or what their disease status is. The second is modelling: gathering data which help explain how the disease spreads. The third is contact tracing: identifying people who have had contact with others known to be infected.

When it comes to documentation, most of the action is in quarantine: replacing phone calls and home visits with virtual checking-up. While Hong Kong uses WhatsApp, South Korea has a customised app that sounds an alarm and alerts officials if people stray; as of March 21st 42% of the 10,600 people under quarantine there were using the app. Taiwan uses a different approach, tracking quarantined people’s phones using data from cell-phone masts. If it detects someone out of bounds, it texts them and alerts the authorities. Leaving quarantine without your phone can incur a fine; in South Korea fines for breaking quarantine are hefty, and will soon be accompanied by the threat of prison.

Phones need not just send data back to the government; they can also pass data on to third parties. China’s Health Check app, developed by provincial governments and run through portals in the ubiquitous payment apps Alipay and WeChat, takes self-reported data about places visited and symptoms to generate an identifying qr code that is displayed in green, orange or red, corresponding to free movement, seven-day and 14-day quarantines. It is not clear how accurate the system is, but Alipay says people in more than 200 cities are now using their Health Check status to move more freely.

Cellular biology

A group of academics, developers and public-health officials from the World Health Organisation (who) and elsewhere are building a similar who MyHealth app. When reliable tests for immunity—whether gained through infection or, one day, vaccination—become available, such documentation apps may be used to communicate their results in some places, too.

When it comes to helping with modelling and situational awareness, there is a wealth of data. Phone companies know roughly where all their mobile customers are from what cell their phones are using. And because advertisers will pay to tailor ads, internet companies such as Bytedance, Facebook, Google and Tencent gather scads of data about what their billions of users are doing where. Modellers can use data from both kinds of company to fine-tune predictions of the spread of disease.

Governments can use the same data to check how their policies are performing at a district or city level. In Germany Deutsche Telekom has provided data to the Robert Koch Institute, the government’s public-health agency, in an aggregated form which does not identify individuals. The British government is in talks with cell-phone carriers about similar data access.

It could simply require it: the Investigatory Powers Act of 2016 gives it the power to take whatever data it wishes from any company within its jurisdiction in order to fight the virus, and to do so in secret. In practice, negotiation and openness make more sense. The belief that personal data are being passed to the government in secret could erode exactly the sort of trust on which an “all in it together” fight, as called for by Boris Johnson, the prime minister, depends.

Google, which may well have more information about where people are than any other company around, says that it is exploring ways in which it could help modellers and governments with aggregated data. One example could be helping health authorities determine the impact of social distancing using the sort of data that allow Google Maps to tell users about how congested streets or museums are.

Computational social scientists, who use data from digital systems to study human behaviour, are mulling over other ways that this kind of data might inform and improve epidemiological models. One problem with current models, says Sune Lehmann of the University of Copenhagen, is that they assume that people mix and interact in a uniform manner; that passing a friend and a stranger in the street is exactly the same sort of interaction.

His research group has written machine-learning software which can sift through historical records from mobile-phone providers to diagnose and explore how relationships modulate such interactions. Applied to current data this understanding might show that interactions between friends in coffee shops are not that important for the spread of disease, but that the delivery of packages is—or vice versa. During an extended pandemic, such information could, if reliable, be a great help to policymakers trying to keep bits of the economy running.

The use of data becomes most fraught when it moves beyond modelling and informing policy to the direct tracking of individuals in order to see from whom they got the disease. Such contact-tracing can be an important public-health tool. It also has a resemblance to modern counter-terrorism tactics.

“The technology to track and trace already exists and is being used by governments all around the world,” says Mike Bracken, a partner at Public Digital, a consultancy, and former boss of the British government’s digital services. To what extent those capabilities are now part of the fight against covid-19, no one will say.

One reason governments keep secret the procedures and powers by which they seize and make use of data is a concern that informed enemies would thus evade them. When it comes to public health, this is unconvincing. Complex as it is by the standards of rna-based viruses, sars-cov-2 is not going to change its behaviour because of what the spooks are doing. But their adversaries are not the only people that spooks like to keep in the dark.

Citizens concerned with civil liberties fit the bill, too. This is why Mr Bracken expects governments not to be forthcoming about any use they are making of such capabilities in the fight against covid-19: to be frank would, he says, “expose the power that governments have very quickly”.

Apparently unworried about doing so, on March 16th Israel’s government authorised Shin Bet, the internal security service, and the police to use their technical know-how to track and access the mobile phones of those who have been infected. Israel’s High Court initially limited the powers; after parliamentary oversight was established, though, they were good to go.

South Korea, too, is using digital systems to ease the load on its human contact tracers. At the beginning of the outbreak the Korea Centers for Disease Control and Prevention ran their requests for location histories through the police, who used their channels to data controllers to retrieve the required information. But the kcdc says that system was too slow, and it has now automated the request process, allowing contract tracers to pull data in automatically through a “smart city” dashboard. This data-request system was put into operation on March 16th. Korean news reports say that the automation has reduced contact-tracing time from 24 hours to ten minutes.




It might also be possible to do something similar from the bottom up, thus limiting government snooping. Start with an app that sends coherent health and travel data to a central registry, as China’s Health Check purports to.

Then add sufficiently smart and powerful number-crunching for the system to be able to find all the places where two people’s histories cross. When someone gets sick, the system can then alert all the other users whose paths that user crossed. Because the infrastructure would be separate from that of the spooks, it could be much more open, scrutable and trustworthy.

Such approaches, though, face serious problems. The number of people an infectious person actually infects will almost always be much smaller than the number they encounter. Sean McDonald, an expert on public health and digital governance, says a system which alerted all the people that an infected person had been near over the past week could lead to a demand for tests that would entirely overwhelm the capacity available in most countries.

If the relative risk of, say, walking past someone on the street and drinking from the same water fountain an hour apart were known, and if the data picked up such niceties, things might be different. But they are not.



An alternative to too much testing would be not enough. Annie Sparrow, an epidemiologist who advises Tedros Adhanom Ghebreyesus, director-general of the who, points out that modellers without field experience tend to misunderstand the psychology of testing. The stigma associated with a disease, she says, is likely to outweigh the rational pull of keeping oneself and one’s family safe.

And both Dr Sparrow and Mr McDonald point out that any solution which relies on smartphones and internet access inherently ignores the half of the planet which does not have internet access. Mr McDonald says he would prefer to see the data wizards apply themselves to easier problems such as optimising the supply chains for medical goods like masks and ventilators.

Big brother is contact-tracing you

Google says that, having heard epidemiologists make such points, it is not planning to use the location data it collects to do contact tracing. The data-collection mechanisms built into products like Android or Google Maps are “not designed to provide robust or high-confidence records for medical purposes and the data cannot be adapted to this goal”, the company says.

Facebook says something similar. Both companies can be assumed to think that talking explicitly about how well they might be able to do such things would raise concerns about privacy.

What Google and Facebook will not do, though, the government of Singapore is quite up for. Its Government Technology Agency and health ministry have designed an app which can retrospectively identify close-ish contacts of people who come down with covid-19.

When two users of this new app, called TraceTogether, are within two metres of each other their phones get in touch via Bluetooth. If the propinquity lasts for 30 minutes both phones record the encounter in an encrypted memory cache.

When someone with the app is diagnosed with the virus, or identified as part of a cluster, the health ministry instructs them to empty their cache to the contact-tracers, who decrypt it and inform the other party. It is especially useful for contacts between people who do not know each other, such as fellow travellers on a bus, or theatre-goers.

The app’s developers have tried to assuage concerns about privacy and security. Downloading it is not compulsory. Phone numbers are stored on a secure server, and are not revealed to other users. Geolocation data are not collected (though Google’s rules governing apps that use Bluetooth mean that they will be stored on Android phones running the app). They are planning to publish the app’s source code and make it free to reuse, so that others may capitalise on their work.

Singaporeans trust their government. Since TraceTogether was released on March 20th it has been downloaded by 735,000 people, or 13% of the population, according to government data. Several Singaporeans your correspondent spoke to one overcast day in the business district were unaware that they could be prosecuted for refusing to hand over their data to the health ministry. But they had no intention of frustrating the authorities. “I’d rather be responsible than irresponsible,” said one trader.

In an attempt to get past the uproar about the security services tracking the infected, Israel’s Health Ministry has launched a similar app that allows people choosing to use it to see if they have come into contact with other users who subsequently took ill. The government says that the app, which uses open-source software, does not share data with the authorities. The who MyHealth app, also open-source, might in time take on a similar contact-tracing function.

This patchwork of global systems presents its own challenge: how to make them talk to each other so that they can stimulate a global response to the disease, not just one that operates at a national or city level. Yves-Alexandre de Montjoye, who studies computational privacy at Imperial College, in London, says that governments should come together to agree on common protocols for handling covid-19 data, making it easier to pool their resources. Compared with finding ventilators and protecting health-care workers, though, this is pretty low down the list of anyone’s must-dos.

And there’s the rub. Covid-19 demands an array of drastic, immediate responses. It also requires thinking that looks beyond the next two weeks. The network of computers built for entertainment, convenience, connection and security is helping in all sorts of quotidian ways, from video-conferencing to team-working to gaming for rest and recuperation.

But it also provides a network of sensors that can co-ordinate the responses of both individuals and whole populations to a degree unimaginable in any previous pandemic. Countries are learning how to make use of that panopticon’s power in a pell-mell, piecemeal way. The systems that they lash together may last a long time. It would be best to keep an eye on them.

How coronavirus became a corporate credit run

Central bankers are going to have to keep the money taps on

Rana Foroohar

World Coronavirus Economy Health
© Matt Kenyon


It was only hours after US president Donald Trump told us, in an address from the Oval Office last week, “this is not a financial crisis”, when markets began acting very much as though it was.

Investors dumped assets resulting in the worst trading day since 1987. Bond markets seized up, putting pressure on banks, and the US Federal Reserve swooped in with yet more emergency funding for short-term borrowing markets (known as repurchasing or repo markets), a tactic which suggests we may see quantitative easing to infinity — and beyond.

So when exactly does a coronavirus-triggered corporate market meltdown officially turn into a full-blown financial crisis? That’s a question many market participants, and banks in particular, must be asking themselves.

If there has been any silver lining to the current market shock and the recession that is likely to follow, it is that it hasn’t been a 2008-style banking crisis — of the kind that jumps like a virus between highly leveraged global financial institutions and causes them to bleed dry.

The Dodd-Frank and Basel III regulations that followed in the wake of the subprime crisis were designed to mitigate that risk. Banks, required to hold larger quantities of high-quality assets, were made to do less trading, and more traditional lending.

That worked, up to a point. The virus-induced brake on consumer activity and labour markets, which has in turn triggered a corporate credit run, is what caused the market panic this time, rather than risky trading on the part of global banks.

Today, it is not Wall Street financial institutions, but companies in a variety of industries that are stressed, as a simultaneous supply and demand shock means they need to tap credit lines to pay their bills. With flights halted, supply chains disrupted and the consumer economy gutted, companies are trying to stockpile cash, whether they need it immediately or not.

It’s one thing for the aircraft manufacturer Boeing to draw down its entire $13.8bn credit line.

It’s another for multiple big corporations to draw theirs at the same time. Still, as a recent Credit Suisse report pointed out, “we now have a global banking system where all major banks have to pre-fund 30-day outflows” with high-quality liquid asset portfolios.

This is one important reason why these corporate funding stresses haven’t caused a real time banking crisis in the way that the 2008 subprime crisis did. Another reason is that the Fed is backstopping the banking system with its repo operations, as banks exchange Treasury bills for cash.

All of this underscores a fundamental truth — regulators usually tend to fight the last war. The dollar deposits that corporations are currently drawing down are one of the highest-quality types of funding for banks, the same kind that the Basel III rules stipulate they should keep on hand.

Nobody assumed that a pandemic would result in huge credit drawdowns by many companies all at once. Losing these deposits so quickly threatens the liquidity profile and regulatory compliance of banks themselves. And that is before we start to see the spike in corporate downgrades and defaults that will create even more funding pressure.

The fact is that the banking system has already been pulled into the corporate credit crisis that many people predicted would be the cause of the next big market downturn. It’s all too easy to see how the problems of individual companies — technology firms, retailers, airlines and insurance companies — could be passed to individual banks and then to countrywide banking systems. Ultimately, they could spread throughout the global financial system, leaving central bankers once again the lender of last resort, standing between us and another global financial crisis.

That is pretty much what is already happening, and we haven’t even seen the next phase of falling dominoes — the meltdown of passive and algorithmic investing, the unwinding of exchange traded funds, and the sale of even the highest quality assets by people who are desperate to raise cash in the midst of a liquidity crisis.

All this means that central bankers will have to keep the money taps on, and probably increase the variety of assets that they are buying or backstopping.

We shouldn’t mistake all that easy money for a cure. As Credit Suisse managing director Zoltan Pozsar points out, “QE isn’t a vaccine for this outbreak.” Even if the Fed can offset pressures within the banking system, that doesn’t replace the loss of private-sector spending.

What’s needed is something more akin to a wartime fiscal stimulus programme, in which the government replaces lost consumer demand, ideally with a major public health spending programme. We might start by bolstering the number of available hospital beds in the US, which is woefully behind other developed countries. Sadly, the only wartime reference in Mr Trump’s ill-advised speech was to the US “fighting a foreign virus”.

Covid-19 is, of course, an equal opportunity pandemic. Being asymptomatic doesn’t mean you aren’t contagious. The corporate crisis roiling the markets has already infected the banking system.

Whether unlimited central bank injections of liquidity are enough to keep it healthy over the next few weeks and months, as both the pandemic and the market crisis plays out, remains to be seen.

The World Is at War

Western countries are finally waking up to the sheer scale of the COVID-19 crisis, and now must marshal a society-wide response. All countries should be following China in confronting the coronavirus directly with all available resources, and they should take a lesson from Germany in managing the economic fallout.

Hans-Werner Sinn

sinn91_Sean GallupGetty Images_germanhealthministerangelamerkelcoronavirus

MUNICH – The fight against COVID-19 is a full-on war. China seems to have won the first battle. Hong Kong, Taiwan, Singapore, and Japan have also chalked up visible successes in mitigating the outbreak, no doubt owing to their experiences in dealing with the 2003 SARS epidemic.

Europe and the United States, on the other hand, are only just awakening from their illusions of invulnerability. As a result, the epidemic is now raging across the West.

The hardest-hit Western country so far is Italy, which has particularly strong economic ties to China. Northern Italy is now the new Wuhan (the Chinese megacity where the coronavirus first emerged). With its health system overwhelmed, the Italian government has slammed on the brakes, shutting down the retail economy and quarantining the entire country. All shops except pharmacies and grocery stores are closed.

People have been instructed to stay home and may enter public places only for necessary shopping or commuting to work. Many public and private debt obligations (such as housing rents and interest payments) have been suspended. Italy is attempting to slow down the economic clock until the coronavirus dies out.

Meanwhile, although Germany has had very few coronavirus deaths so far, the number of infections is now skyrocketing as quickly as anywhere else. In response to the crisis, the German government has introduced a short-time work allowance and granted generous credit assistance, guarantees, or tax deferrals for distressed companies. Public events across the country have been canceled.

Schoolchildren have been told to stay home. And Austria, for its part, has long since closed its border with Italy. Austrian schools, universities, and most shops have also been closed. Initially, France pursued a more relaxed approach, but it has now also shuttered its schools, restaurants, and shops, as has Spain. Denmark, Poland, and the Czech Republic have closed their borders with Germany.

US President Donald Trump has declared a national state of emergency. Congress has approved an $8.3 billion emergency program to fund efforts to contain the epidemic. Even larger sums are awaiting passage by the Senate. The federal government has also barred foreign travelers, first from China and Iran, and now from Europe.

Globally, not all responses to the crisis have been well targeted, and others have not been strong enough. Most worryingly, some governments have convinced themselves that they can merely slow down the spread of the virus, rather than taking the steps needed to halt it entirely. The predictable overcrowding of hospitals in many heavily affected areas has already exposed the folly of such complacency.

On the economic front, a severe recession can no longer be avoided, and some economists are already calling for governments to introduce measures to shore up aggregate demand. But that recommendation is inadequate, given that the global economy is suffering from an unprecedented supply shock.

People are not at work because they are sick or quarantined. In such a situation, demand stimulus will merely boost inflation, potentially leading to stagflation (weak or falling GDP growth alongside rising prices), as happened during the 1970s oil crisis, when another important production input was in short supply.

Worse, measures targeting the demand side could even be counterproductive, because they would encourage interpersonal contact, thus undermining the effort to limit transmission of the virus. What good would it do to give Italians money for shopping trips, when the government closes the shops and forces everyone to stay home?

The same arguments apply to liquidity support. The world is already awash in liquidity, with nominal interest rates close to or below zero pretty much everywhere. More interest-rate cuts into deep-red territory might help stock markets, but they also could trigger a run on cash.

The brutal decline in economic activities that epidemiologists say is required make crashing stock markets inevitable, given that central banks’ policy of excessively cheap money and pooled liabilities caused an unsustainable bubble. Because they used up their ammunition at inopportune moments, central banks bear responsibility for the bubble that has now burst.

What is really needed are fiscal measures to save companies and banks from bankruptcy, so that they can recover quickly once the pandemic is over. Policymakers should be considering various forms of tax relief and public guarantees to help firms borrow if necessary. But the most promising option is a short-time work allowance.

This approach, which has been tried and tested in Germany, compensates for the underemployment of the workforce through the same channels that are already used for unemployment insurance.

Better yet, it costs hardly anything, because it prevents the losses that would follow from increased real unemployment. All countries should be replicating this part of Germany’s policy to prevent job losses.

But, most important, all governments need to follow China in taking direct action against COVID-19. Nobody on the front lines should be constrained by a lack of funds. Hospital intensive-care units must be expanded; temporary hospitals must be built; and respirators, protective gear, and masks must be mass-produced and made available to all who need them.

Beyond that, public-health authorities must be given the resources and funds they need to disinfect factories and other public spaces. Hygiene is the order of the day. Large-scale testing of the population is particularly important.

The identification of each case can save multiple lives. Surrendering to the pandemic simply is not an option.


Hans-Werner Sinn, Professor of Economics at the University of Munich, was President of the Ifo Institute for Economic Research and serves on the German economy ministry’s Advisory Council. He is the author, most recently, of The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs.

This Is How the Coronavirus Will Destroy the Economy

This once-in-a-century pandemic is hitting a world economy saddled with record levels of debt.

By Ruchir Sharma


Credit...John F. Malta


Though the Federal Reserve moved over the weekend to slash rates and buy treasuries, markets around the world fell on Monday anyway. The coronavirus threatens to set off financial contagion in a world economy with very different vulnerabilities than on the eve of the global financial crisis, 12 years ago.

In key ways the world is now as or more deeply in debt as it was when the last big crisis hit. But the largest and most risky pools of debt have shifted — from households and banks in the United States, which were restrained by regulators after the crisis, to corporations all over the world.

As businesses deal with the prospect of a sudden stop in their cash flows, the most exposed are a relatively new generation of companies that already struggle to pay their loans. This class includes the “zombies”— companies that earn too little even to make interest payments on their debt, and survive only by issuing new debt.

The dystopian reality of deserted airports, empty trains and thinly occupied restaurants is already badly hurting economic activity. The longer the pandemic lasts, the greater the risk that the sharp downturn morphs into a financial crisis with zombie companies starting a chain of defaults just like subprime mortgages did in 2008.

Over the last century, recessions have almost always been started by a sustained period of higher interest rates. Never a virus: The damage such contagions inflicted on the world economy typically lasted no more than three months. Now this once-in-a-century pandemic is hitting a world economy saddled with record levels of debt.

Central banks around the world are waking up to the prospect that the cash crunch can beget a financial crisis, as in 2008. That’s why the Federal Reserve took aggressive easing measures on Sunday that were straight out of the 2008 crisis playbook. While it is unclear whether the actions of the Fed will be enough to prevent the markets from panicking further, it’s worth asking: Why does the financial system feel so vulnerable again?

Around 1980, the world’s debts started rising fast as interest rates began falling and financial deregulation made it easier to lend. Debt tripled to a historic peak of more than three times the size of the global economy on the eve of 2008 crisis. Debt fell that year, but record low interest rates soon fueled a new run of borrowing.

The easy money policies pursued by the Federal Reserve, and matched by central banks around the world, were designed to keep economies growing and to stimulate recovery from the crisis. Instead, much of that money went into the financial economy, including stocks, bonds and cheap credit to unprofitable companies.

As the economic expansion continued, year after year, lenders grew increasingly lax, extending cheap loans to companies with questionable finances. Today the global debt burden is again at an all-time high.

The level of debt in America’s corporate sector amounts to 75 percent of the country’s gross domestic product, breaking the previous record set in 2008. Among large American companies, debt burdens are precariously high in the auto, hospitality and transportation sectors — industries taking a direct hit from the coronavirus.

Hidden within the $16 trillion corporate debt market are many potential troublemakers, including the zombies. They are the natural spawn of a long period of record low interest rates, which has sent investors on a restless hunt for debt products that offer higher reward, with higher risk.

Zombies now account for 16 percent of all the publicly traded companies in the United States, and more than 10 percent in Europe, according to the Bank for International Settlements, the bank for central banks. A look at the data reveals that zombies are especially prevalent in commodity industries like mining, coal and oil, which may spell upheavals to come for the shale oil industry, now a critical driver of the American economy.

Zombies are not the only potential source of trouble. To avoid regulations imposed on public companies since 2008, many have gone private in deals that typically saddle the company with huge debts. The average American company owned by a private equity firm has debts equal to six times its annual earnings, a level twice what ratings agencies consider “junk.”

Signs of debt stress are now multiplying in industries impacted by the coronavirus, including transportation and leisure, auto and, perhaps worst of all, oil. Slammed on one side by fear that the coronavirus will collapse demand, and on the other by fears of a supply glut, oil prices have fallen to below $35 a barrel — far too low for many oil companies to meet their debt and interest payments.

Though investors always demand higher returns to buy bonds issued by financially shaky companies, the premium they demand on U.S. junk debt has nearly doubled since mid-February. By last week the premium they demand on the junk debt of oil companies was nearing levels seen in a recession.

Though the world has yet to see a virus-induced recession, this is now a rare pandemic. The direct effect on economic activity will be magnified not only by its impact on balky debtors, but also by the impact of failing companies on the bloated financial markets.

When markets fall, millions of investors feel less wealthy and cut back on spending. The economy slows. The bigger markets get, relative to the economy, the larger this negative “wealth effect.” And thanks again to seemingly endless promises of easy money, markets have never been bigger. Since 1980 the global financial markets (mainly stocks and bonds) have quadrupled to four times the size of the global economy, above the previous record highs set in 2008.

On Wall Street, bulls still hold out hope that the worst can pass quickly and point to the encouraging developments in China. The first cases were reported there on Dec. 31, and the rate of growth in new cases peaked on Feb. 13, just seven weeks later. After early losses, China’s stock market bounced back and the economy seemed to do the same. But the latest data, released today on retail sales and fixed investment, suggest the Chinese economy is set to contract this quarter.

While China is no longer center stage, as the virus spreads worldwide there are renewed fears that the crisis could circle back to its shores by hurting demand for exports. Over the last decade China’s corporate debt swelled fourfold to over $20 trillion — the biggest binge in the world. The International Monetary Fund estimates that one-tenth of this debt is in zombie firms, which rely on government-directed lending to stay alive.

In other parts of the world, including the United States, calls are growing for policymakers to offer similar state support to the fragile corporate sector. No matter what the policymakers do, the outcome is now up to the coronavirus, and how soon its spread starts to slow.

The longer the coronavirus continues to spread at its current pace, the more likely it is that zombies begin to die, further depressing the markets — and increasing the risk of wider financial contagion.


Ruchir Sharma is the chief global strategist at Morgan Stanley Investment Management, author of the forthcoming book, “The Ten Rules of Successful Nations,” and a contributing opinion writer. This essay reflects his opinions alone.