Merchants of doom: Covid-19 ‘more destructive’ than the Lehman crisis
Coronavirus has triggered a collision of unstable debt and an oil price crash – and a recession is imminent
The coronavirus has set off two parallel “doom loops”. An oil price crash is colliding with an unstable edifice of corporate debt. At the same time the closure of Italy’s economic heartland is triggering a surge in Italian risk spreads and an intertwined collapse in European bank shares.
The twin shocks come just as markets wake up to the grim reality that the US and Europe have missed their chance to control the pandemic. A global recession of some form is no longer a tail risk. It is imminent and inescapable. That is the screaming verdict of safe-haven bond markets.
The collapse in yields on 30-year US Treasuries to historic lows of 0.51% is a red warning of deflation. In Europe the trap has closed already. Bund yields fell to minus 0.87% on Monday. The Stoxx Euro 600 banks index slid 11% and is now below the depths of the Lehman crisis. European banks are shot below the waterline, too damaged to carry a recovery once Covid-19 is over...