Policymakers have to step up support measures

Central bank action has helped to a certain extent but more needs to be done

LONDON/BOSTON: Central banks have offered trillions of dollars of support to markets in recent days to keep them from freezing up, as investors worried about the economic damage from the coronavirus and made a chaotic dash for the exits.

While the intervention helped bring back some order to markets, policymakers may need to do more.

Investors, economists and bank strategists said they expect policymakers will have to step in with more support in the coming days to prop up both markets and the real economy companies losing customers and workers thrown out of jobs.

There is a limit for now to how effective authorities can be, however, some said. Before investors calm down, these observers said, they will need to see a peak in new virus infection rates, an improvement in hospitals’ ability to cope with an influx of patients, and an end in sight to the economy-killing quarantines, travel bans and other restrictions being imposed to save lives.

“The best that economic and financial policymakers can do right now is limit the damage. They cannot turn the economy around because this is a health issue, not an economic or financial issue,” said Mohamed El-Erian, chief economic adviser to the German insurer Allianz SE , in an interview.

Estimates of the sums required to keep Corporate America afloat are reaching eyepopping levels. Ray Dalio, founder of hedge fund giant Bridgewater Associates LP, estimates the financial losses for US companies from the coronavirus-induced slump could be about US$4 trillion (RM17.6 trillion). That’s nearly one-fifth the value of America’s total economic output last year. The government will have to come to the rescue, Dalio told Reuters via email, backed by a central bank that prints money.

Governments ramped up their support quickly in recent days as it became clear that the scale of the hit from the virus is likely to be huge.

Less visible is the stress building up in other markets that keep the real economy humming, such as the markets where companies go to raise short-term cash to pay staff and where cities go to raise money for roads and schools.

Many central bank measures have been aimed at reducing the strain in those areas.

These steps have eased the strain, but analysts and investors said they didn’t go far enough.

One success: The Fed has made it easier for other nations’ central banks to obtain dollars to meet runaway global demand for the greenback. But in a sign that the thirst for dollars globally remained unsatiated, the US currency remained strong.

Some analysts and industry sources argued for loosening of bank regulations which, in their view, are restricting liquidity – the ability to easily buy and sell assets. Suspending these rules, they argue, will make it easier for banks to step in as market makers and lenders in a bigger way.

“The next crucial step in aiding liquidity will be to ease bank regulatory constraints,“TD Securities strategists wrote in a note.

One sign that the measures so far are insufficient: persistent volatility in markets. Volatility - large ups and downs in asset prices – is at extreme levels.

High levels of volatility have forced funds and banks to sell their positions or step back from market-making, the all-important role of go-between in big trades, as they try to keep the amount of risk in their portfolios in check, bank strategists said. That, in turn, has led to more sellers than buyers, resulting in gaps between bid and offer prices of assets, which exacerbates market volatility. – Reuters