Gluttony once triggered a meltdown. Today a contagion triggers a shutdown. In 2008, greed and avarice were the pollutants that ruled over us. Regulators and politicians became the cheerleaders for the continued deregulation of finance. The dance macabre that started under Ronald Reagan, culminated in inordinate levels of debt, and unsustainable levels of consumption, triggering a meltdown of the global financial system.
In 2020, it’s quite different. Now, we must shut down the world economy to barricade the spread of a contagion, first reported in Wuhan in 2019, and later declared a pandemic on March 11, 2020 by the WHO. On March 12, 2020, markets continued to suffer, with trading halting twice amid growing concerns over the Coronavirus outbreak. The S&P 500, Nasdaq and Dow were all down at least 7% after about two hours of trading as Trump halted all travel to the US from the emerging European epicentre of the contagion to contain the spread of the septicity.
All three averages dropped 5% in pre-market activity triggering an initial stop. Then, only minutes after markets opened, trading was frozen again, following the S&P 500 diving 7% and triggering a circuit breaker, pausing trading on the New York Stock Exchange for fifteen minutes. This was the second time in one week that the S&P hit the 7% threshold stopping trade during regular market hours for fifteen minutes to ensure order in the marketplace.
By March 16, 2020, the U.S. Federal Reserve intervened in the U.S. economy by announcing a dramatic interest rate cut and a new $700-billion-dollar round of quantitative easing. The dramatic interest rate drop of 100 basis points—taking the target range for the federal funds rate down from the 1 to 1.25 percent range to the 0 to 0.25 percent range shows the urgency with which the Fed views the economic situation after witnessing extreme market volatility.
In a superb display of monetary policy support, the Monetary Policy Committee of the Central Bank of Trinidad and Tobago reduced the Repo Rate by 30% with the expectation that the Prime Lending Rate will decline from 9% to 6% thereby compressing the spread and creating the conditions necessary for greater liquidity and stimulating economic growth. In addition, the reserve requirement was shifted downwards from 17% to 14% to make 2.7B available to commercial banks for lending at lower interest rates.
Jamaica’s prophet provocateur, Dr Nigel Clarke, has devised a $25B CARE package to mitigate the negative impact of COVID-19 on the Jamaican economy. Jamaica’s stimulus package includes: (1) transfers to businesses in targeted sectors based on the number of workers they retain during the crisis (2) transfers to individuals who become unemployed during the COVID-19 crisis (3) soft loans to individuals and businesses who/which have been disrupted (4) COVID-19 grants for the vulnerable (5) cuts in the General Consumption Tax (GCT) to 15 per cent to put $14 billion back into the hands of citizens (6) tax credits of $1 billion to SMEs (7) removal of regulatory fees to incentivise coconut, coffee, cocoa and spice farmers to greater production (8) bankers having agreed to forgo the reduction in the Asset Tax will add $3 billion to the Government’s COVID Contingency Plan (9) a waiver of the Special Consumption Tax (SCT) on 100,000 litres of alcohol to be used to make hand sanitiser and (10) a waiver of customs duty on the importation of mask, gloves and soap. Lastly, companies will be allowed to move equipment offsite to allow working from home. However, the devil is always in the details. Dr. Clarke therefore plans to unmask accountability procedures related to the rollout of these measures.
We must appreciate that two pivots now punctuate our existence. One behind us. The other is a messianic prospect galloping towards us. The one that is behind us is refusing to stand still and is leaping over us and reaching far into the forthcoming. The other on the horizon will build on the emptiness carved out by what preceded it.
Wuhan 2019 is a hinge behind us. The fulcrum ahead is an economic quagmire that is skulking towards us. We are between a devil and the deep blue sea. Detailing a sequence of discrete plans with identifiable areas of overlap is important in the interregnum between these two monarchs.
Building a robust recovery plan necessitates consideration of a post crisis resolution framework. Such a framework sets out measures that can be executed in the event of a deterioration of financial institutions, companies, the financial situation and state agencies in order to restore their viability and to support a speedy return to “business as usual.” It is also vital to devise intra-group financial support agreements (IGFSAs) as a preventative tool to strengthen the financial position of groups.
These allow participating institutions that experience financial difficulties to receive financial support, in the form of loans, guarantees, or the provision of assets for use as collateral in transactions, from other participating entities – subject to approval by the supervisory authorities and the shareholders of each entity that is party to the agreement.
