Pandemic Crisis is Actually Three Crises in One

The current crisis stemming from the COVID-19 pandemic is actually three crises in one, in the view of Reonomy market analyst Omar Eltorai. More to the point, each of these crises—a health crisis, a liquidity crisis and a solvency crisis—grew out of the preceding one.

The health crisis, of course, stems from the virus itself. “It is a capacity strain on the healthcare system, and has put pressure on governments and people to drastically change their business practices and social behaviors through travel bans, social distancing, and large-scale economic shutdowns,” Eltorai writes.

We’re beginning to see some easing of the lockdowns as economies start to open, writes Eltorai. “But, these will likely be only partial until we find a vaccine or cure that can be produced at scale and distributed to the majority of the population; or until we achieve herd immunity.”

The liquidity crisis, in turn, results from the “massive disruptions in supply chains and not-so-temporary changes in consumer behaviors,” he writes. “As a result, many businesses have faced significant challenges when trying to meet their near-term financial commitments.” That has led to significant reductions in budgets and headcount.

“This component crisis was triggered by the health crisis (pandemic) disruptions and mitigation efforts such as social distancing and economic shutdowns,” Eltorai writes. “Despite the very large efforts put forth by both the Federal Reserve and the federal and local governments, the duration of this component crisis remains unknown and will remain unknown until the economy fully opens again, business resumes or businesses close permanently.”

It’s important to note, he adds, that government stimulus efforts have been largely targeted at providing liquidity to troubled firms and market functions. “While these measures have been more significant than any stimulus efforts in the past, the amounts allocated to firms are finite and will run out.”

As the liquidity crisis continues and cash reserves dwindle, “many companies and individuals begin to see challenges with meeting long-term financial commitments and their solvency comes into question,” according to Eltorai. He adds that the onset of the solvency crisis is “likely not far away.”

As courts reopen, we’re likely to see “a gradually building wave of bankruptcies and foreclosures that have been backlogged,” Eltorai writes. The buildup of this wave will build political and social pressure for state and federal governments to open economies; he notes. “However, as many scientists and doctors have made clear, if done too soon this could trigger a second wave of a health crisis – and we would be back to the first component crisis for the virus crisis wheel to start again.”

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