Make money easily available for companies with cash flow problems but make it convertible to equity at a penal rate if they can’t pay back in 18 months

March 10, 2020

Cebr analysis of the impact on world and UK Economy from the 2020 COVID 19 outbreak

 

Cebr’s Forecasting Eye from 31 January was amongst the first to warn that Coronavirus could cause a world recession this year. With equity values worldwide down a fifth from their peak and oil prices roughly halved (see chart) there is mounting evidence that our fears might be justified.

 

What should be done?

 

First, this is a time when central banks should ensure that there is no shortage of liquidity. The riskier end of the bond market has dried up and this is likely to spread to the mainstream. Authorities need to be cognisant of the pressures and prevent damaging runs in advance. Europe is in particular difficulties because of the weakness of its banks, many  of which will require substantial injections of public money.

 

Second, companies in the luxury goods sector, retail, tourism and catering as well as others were already hard pressed in many countries. There isn’t time for proper due diligence and our recommendation is that money should be made freely available BUT will be converted to equity at a penal rate if the loans can’t be repaid within an appropriate time, e.g. 18 months if the virus can be contained by the summer.

 

Third, is there a case for a tax cut as in Singapore and as is being considered by President Trump? On 10 November 2008 I wrote What is needed now is an early and possibly temporary tax cut. A reduction in VAT at least until the end of 2009 to 12.5% would be a good start. The gross cost would be £24 billion. But the net cost would be much less –possibly even nothing if the impact on confidence is sufficient to stop the recession from intensifying.’ The call was widely publicised and the Chancellor followed my advice in his budget a few weeks later.

 

Our view is the time for this is not yet but this is an option the Chancellor needs to keep under consideration and the time may come quite soon when it becomes the right thing to do.

 

Contact: Doug McWilliams dmcwilliams@cebr.com  020 7324 2860

 

 

This report is produced by Centre for Economics and Business Research ltd (Cebr) as part of our macroeconomic trends, analysis and forecasting advisory membership service, the prospects service. This report and all associated material shall remain the property of Cebr and are only made available to bone fide employees of organisations with a current and fully paid-up membership of the prospects service. Such materials may not be disclosed or transmitted to individuals or organisations outside the member organisation without prior written permission from a director of Cebr. Cebr is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act 2000. Any client considering a specific investment should consult their own broker or other investment adviser. Any views on investments expressed by cebr, or on behalf of Cebr, are intended to be generic only. cebr accepts no liability for any specific investment decision which must be at the investor’s own risk. Whilst every effort has been made to ensure the accuracy of the material in this report, neither the authors nor cebr will be liable for any loss or damages incurred through the use of this report or associated materials.