Stefan Gerlach: «Liquidity Is Not the Problem in This Crisis»

Liquidity in the banking system drying up isn't the problem in the current coronavirus crisis, EFG Bank chief economist Stefan Gerlach tells finews.com. He urges central banks to lower capital requirements for lenders.

The injection of liquidity into the markets by major central banks on Sunday hasn’t alleviated the problems – stocks keep falling?

No – and this suggests that liquidity wasn’t the problem. If liquidity had been the problem, then the announcement would have triggered a big change in market sentiment.

Liquidity might become an issue later on, once the crisis develops, but at the moment, it is not.

What was the trigger for the massive drop?

Obviously, it was the coronavirus as such. In a financial crisis, the problem is in the banking system. That’s not what we see today.

What we have now is a fundamental shock to the real economy, similar perhaps to the oil-price shock in 1974. In the case of a financial markets shock, it makes sense to pump in liquidity because financial institutions then will demand a lot of it.

«Central bank policy is not a very powerful instrument to stop the crisis»

But it is not a fundamental lack of liquidity that is driving the crisis. The stock market crash can perhaps be best described as collateral damage from the health crisis that constitutes the crisis.

The center of the crisis is the virus and the fact that consumer and investment spending is falling and the economy is grinding to a halt as a consequence of this. That’s why central bank policy is not a very powerful instrument to stop the crisis.

Will we have a recession?

The number of infections is picking up so rapidly that the solution inevitably will be a lock-down of our societies. Then, companies won’t have any workers in the factories anymore, which will lead to a deep global recession.

The pick-up in activity in China isn’t strong enough to sustain the world economy?

If people here aren’t going shopping, if companies here stop buying inputs and investing, we will inevitable have a recession irrespectively of what happens in China.

How deep do you expect the recession to get?