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ECONOMY| 04.07.2020

Expressions on the effect of the virus on the economy

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Since the pandemic was announced, concepts have both been created and re-emerged that illustrate the financial and economic impact of the coronavirus globally. There is talk of a 2020 economic war or crash, but there are many concepts that capture the economy’s rapid infection with Covid-19. Among the most commonly referred to, we have selected the following:

Essential activities: breakdown of businesses that governments consider “vital” for the maintenance of a given country in total confinement, such as food, pharmaceutical facilities, medical services, telecommunications, automotive fuel, among others. Several countries have encountered difficulties in setting the definition of the term.

Economic infection: transmission of the effects, in this case, of the virus, on the economy. In the current context, this is a metaphor used by the media a lot. Given the short time since the onset of the pandemic, the extent of its scope is not yet known. There is also talk of its transmission to revenues in the field of taxation and spread to a number of particularly hit sectors, such as tourism.

Coronabonds: Eurobonds are an item from 2011 that are now referred to as coronabonds, given that they may be used to finance measures against Covid-19. Also known as European stability bonds, they are theoretical public debt securities, to be issued by all countries within the eurozone, the amounts of which may not necessarily be expressed in euros. They will act, for the first time, as a debt instrument if the Heads of State and Government of the European Union agree to the implementation thereof. While this option has not yet been triggered, it would allow the debt and risks of all countries to be mutualized under the Community framework, given that the issuing company for these bonds would be the European Stability Mechanism (ESM).

“Helicopter” money: direct injection into citizens’ pockets to revive consumption. This is how this measure is known, as if cash were launched without the intervention of banks from a helicopter, based on a proposal by the Nobel Prize winner Milton Friedman, in 1969. The US Congress has recently approved this solution within its 2.2 trillion US dollars stimulus package to mitigate the effects of coronavirus on its economy. This includes a provision of approximately 250 billion dollars to be reserved for direct payments to individuals and families of 1,200 dollars, for those with an income of less than 75,000 dollars per year, to which 500 dollars will be added for every minor of under 17 years old.

Circular economy: As opposed to the current linear economy, this is the economy that enables the exploitation of natural resources (raw materials and energy), and the decrease and recovery of waste to become more sustainable and competitive, which will protect society more from uncertain scenarios such as the current scenario.

European rescue fund: Also on a Community level and in accordance with the European Stability Mechanism (ESM), this fund could grant loans to European countries to cushion the negative impact of Covid-19 on their economies. The ESM is part of the EU’s strategy to ensure financial stability in the eurozone. Established in March 2011, this is a permanent mechanism for crisis management.

Trust Fund for Disaster Relief and Containment: the International Monetary Fund (IMF) Instrument to provide debt relief grants to the neediest and most vulnerable countries to help address public health disasters, such as that of Covid-19.

Capital flight: The pandemic has unleashed the biggest capital flight from emerging markets since records began. This is the biggest disposal of assets or money on record, being a recurring phenomenon in times of crisis or in response to some economic event that has occurred.

Economic hibernation: This is the name given to the measure adopted by Spain to paralyze economic sectors that are not considered essential, such as construction and some industrial activities. Although the verb is normally used to describe the refuge status of some animals in winter, this economic expression takes center stage in spring.

Massive liquidity injection: a stimulus launched by the European Central Bank (ECB) to cushion the economic impact of Covid-19, consisting of massive injection of cheap liquidity for banks, with the aim of keeping firms in distress in credit, and strengthening the debt purchase program. In the US, the Federal Reserve has implemented the largest financial stimulus package since the financial crisis, with unlimited asset purchases.

Unemployment reinsurance mechanism: Employment is the main focus of attention. According to the International Labor Organization (ILO), an estimated 25 million people worldwide may lose their jobs. In view of this situation, the European Commission has announced the creation of a Community unemployment fund, which will mobilize 100 billion euros through an issuance of bonds or, if necessary, through those remaining or by using up the spending ceiling of the EU budget. This temporary scheme, known as Sure, will be dedicated only to those affected by the coronavirus.

[New] European Marshall Plan: As was the case with the officially named European Recovery Program (ERP), which, after World War II, allowed for the reconstruction of various European countries, funded by the US with around 14 billion dollars, the world is now talking about a new Marshall Plan to counter the impact of Covid-19. It has been requested by the OECD (Organization for Economic Cooperation and Development), as well as by various governments, including the US Congress, which has just committed to inject two trillion dollars to strengthen the economy.

Oil, another victim of Covid-19: The price of a barrel of Brent has reached levels due to the pandemic that have not been seen in two decades, as the paralysis of activity caused a sharp drop in demand. The price war between two heavyweights of international production, Saudi Arabia and Russia, does not help either. Faced with a 60 percent cut in the Brent quote, the next scenario is an unprecedented decrease in production at the hands of partners of the Organization of the Petroleum Exporting Countries (OPEC), which will reach 10 percent of global supply.

Economic resilience: The buzzword returns this year in reference to the economy’s ability to resist external shocks, like Covid-19, and is also prematurely associated with learning from the crisis and the future ability to regain a resilient and sustainable economy. Used by France to baptize the name of the operation with which it mobilized its army, it also applies to the business world and in the socio-economic context refers to the protection of employment, which has been so badly hit by the current crisis.

Socially responsible Investment (SRI): a financial concept that integrates environmental, social impact, and governance projects. It is expected that this may be a decisive approach to identifying strong companies in times of uncertainty, such as the current scenario.

Dollar Smile: a theory by former Morgan Stanley analyst Stephen Jen, according to which the US currency is strengthened, as a safe haven, during difficult times.

Smoothing the loss curve: the objective that many experts allude to: smoothing the economic loss curve, using an expression that, in managing the health crisis, seeks to flatten or smooth the infection curve. With respect to the economic cycle curve, experts expect it to maintain a V-shape, recording a fall in response to isolation measures and a subsequent rise. Another option is a U scenario, should such measures tend to be extended, or a feared L scenario, which is more unlikely, if the economic downturn were to be followed by further stagnation.

Third biggest shock of the century: According to the OECD, the pandemic has become the third major economic, financial, and social blow of the twenty-first century, following the attacks of September 11, 2001, and the global financial crisis of 2008.

A flurry of rating cuts: Economic impairment is causing a wave of downgrades from the rating set by the rating agencies. The most affected sectors are cars, airlines, energy, and hospitality. From February to the end of March, S&P had taken 682 downgrade actions and Moody’s lowered the rating for 300 companies worldwide last month alone.