As many instabilities currently going on in the world the global loan market is pretty much turbulent at the moment. With the US-China trade war ongoing, European Union embargo on Russia, constant wars in the Middle East, and now with the stoke of the pandemic of Coronavirus, everything is very much in the shadows, and can’t be seen clearly in the global loans market.
Global loans market
The latest disaster that hit the world (and is still going on), is the Coronavirus pandemic. In terms of economy, this hit had many impacts on the corporate sphere. It weakened many business, which caused them to rise urgent loans, which was described by IMF as risky credit which raised a red flag. Also, there must be added that some states like Italy, USA, Brazil, Spain… who had a total breakdown of the medical system, faced almost full shutdown of any kind of work or business, in some of those listed, for months. This had as the effect that many companies were forced out from business, and those others, who managed to survive, were depending on the loan with low interest, provided mostly by the state itself. But the main problem lied in the fact that it was estimated that almost half of the loans, which were granted, were undrawn by the companies. This ensured that companies have some shored up cash for refinancing, but also was quite risky because, not drawing it, and just keeping it on companies’ account was a huge breakdown in money circulation.
The second part of this problem is vulnerabilities in risky credit markets, which were growing. The highlighted vulnerabilities by IMF such as drop in the quality of the borrowers or liquidity risk in investment funds could be a problem. However, there are some advantages to this situation. According to IMF, financial leverage ,and direct exposures, which were the main enhancers of the crisis in the previous global one, are now dropping, which is reducing risk greatly.
The thing that everyone must be aware of is the, quite certain, economic crisis that is about to come. Since almost everything stopped in the whole world in some moments, the crisis is almost inevitable. In terms of surviving companies had to ask for credit, also, because of the leverage, banks had to grant it because the circumstances were almost the same for them too, which ultimately led to states taking the loans from IMF. All those actions were quite risky, since it can return in boomerang effect, throughout unpaid loans, something similar to 2008. World economical crisis, but with far much worse consequences.
If we take everything that is currently happening in the world, we can see that there is a lot of uncertainty in the loan market. At the moment, loans are a necessity for many companies to survive, which pulls the whole bank system as well as the state’s financial entities in providing risky loans. The key is in making the balance between those because business can’t be just left there to shut down and the loans can’t be just given to anyone, both these scenarios would cause huge crises. Finding the right measure with this is something that will assure recovery from a very hard period.