Not all market crises are the same. Some are more severe than others and there are different type of crisis. A financial crisis originates in the banking system, but can spread to the broader economy. An economic crisis originates in the real economy but can spread to the banking system.
These distinctions are important to understand the current market environment and to forecast what comes next. So, where are we now?
The 2020-2021 crisis so far has been economic and not financial. The economy is limping, unemployment is high, but the banking system has held up well. We have had the worst recession since the Great Depression, but no financial panic yet. But, what is next to come?
A financial crisis may be on the horizon if the pandemic and recession are not over soon. Carmen Reinhart, chief economist of the World Bank and former Harvard professor believes, the longer the recession goes on, the more bankruptcies will pile up and the more credit losses will fall on the banks. At some point, the economic crisis could also turn into a financial crisis as stress builds on the bank balance sheets. So far, it is too early to call, but the worst may still be ahead of us.
Sven Franssen