BearingPoint: COVID-19 Capital Markets normalisation plan: A guide for liquidity management

By BearingPoint

It was not long ago, when Dr. Nouriel Roubini (or infamously called “Dr. Doom” for having predicted the 2008 financial crisis back in 2006) was speaking of a necessitated market correction and was calling for the repricing of riskier assets; predicting a continuation of a global financial slowdown, or even a global recession starting in 2020. That was based on known factors affecting the global economy, such as the US and China trade war, Brexit, Middle East friction between US & Iran and the reduced forecasts of global economic growth to an estimated 3% compared to 3.4% the year before.

What that prediction did not take into account, was the unforeseen outbreak of COVID-19 and the increased volatility this has brought to global financial markets. Three months on from the initial outbreak, and we have already witnessed the biggest intraday drop in the Dow Jones Industrial Average. The outbreak, coupled with the oil price shock, triggered responses from the Federal Reserve, the Bank of England and Central Bank of Canada to cut benchmarks rates in an effort to even out the shock to the wider economies.

There is a high degree of uncertainty on how the coronavirus crisis will unfold. We could experience only a temporary disruption – lasting from a few weeks to a few months, or a prolonged stress in markets, assuming that it will be months until vaccine clinical trials begin and with rate cuts (already reaching bottom) having limited effects on the required stimulus.

Banks have undeniably improved their liquidity following regulatory guidance post financial crisis, however, treasury departments will need to prepare and caveat for a wide range of possible outcomes. Traditional stress testing, scenario development and re-calibration have not taken into account conditions such as the ones experienced with the COVID-19 outbreak or the speed with which things evolved.

At a generic level, there are three key steps Treasurer’s should look to take…

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