Crises are different

2020-03-24 at 12:45 Timo Löyttyniemi

With the spread of the coronavirus, we people tend to seek guidance from the past. Are there any past events similar to current developments? Would they give us pointers as to the future? There is no shortage of information, particularly for those active in the financial market. Many have discovered, however, that crises differ.

Is this like SARS or the Spanish fever? Experts monitoring the economy and equity markets have tried to identify similarities with the responses to the SARS in 2003 and the devastating Spanish fever in 1918.

While virus-induced diseases have something in common, it is impossible to draw any straightforward conclusions as to the development of the economy and the equity markets. Each economic environment has its own special features. At the end of 2003, the world was recovering from the dot-com bubble and in the autumn of 1918 World War I had just ended.

Uncertainty increases in the face of a crisis. As the coronavirus spreads, everybody wants to know more. What is this virus? What is it like in terms of infectiveness, prevalence, lethality and seasonal variation? Information has been trickling, little by little. The market reacted to this ignorance-induced uncertainty by a fall in stock prices. Gradually, we know more, although we will not have the full details until afterwards. 

The equity markets serve as a good indicator for the future, but the markets are not reliable. Aside from economic prospects, the equity markets are affected by sentiments, fear and uncertainty as well as technical and even forced selling. Equity prices are an aggregate of these and numerous other variables. Additionally, the equity markets are affected by government action and the timing of such actions.

“Looking forward, the current market reaction conveys a lot of information. Looking back, yesterday’s price was wrong.”

Sufficient information is not available until afterwards. Equity prices may under- or overreact as market partners try to interpret new information. Some may say that the markets are always right while others may claim that they are always wrong. Both views are valid. Looking forward, the current market reaction conveys a lot of information. Looking back, yesterday’s price was wrong. Tomorrow, we will have a better idea of the future than today.

The state plays a key role in this. In the current pandemic, the business and economy are brought to a standstill of unknown duration. It is clear that corporate financing and citizens’ income streams should be secured to prevent a temporary crisis from causing immoderate harm to businesses and citizens.  Luckily, there is widespread consensus on the role of the state. People understand and accept emergency measures.

Central banks play a limited yet important role. They have tried to calm the financial markets by cutting benchmark rates and ensuring access to financing. The first-mentioned measure has, at best, a psychological effect on the current situation. Securing access to financing under all circumstances is a central bank’s core mission. As states become increasingly indebted, the asset purchases by central banks help keep interest rates low and maintain liquidity.

Companies have prepared contingency plans and tested them in exercises. What sort of disruptions may occur and what are the critical operations that companies must be able to keep running without disruptions? Even if the processes had been thoroughly tested, every crisis is different. Yet each exercise improves capabilities in a new crisis.

“Finland leads the way in teleworking and rank among top European countries in terms of digital capabilities.”

Each crisis is also an opportunity. Finland’s preparedness for this crisis is high. We lead the way in teleworking and rank among top European countries in terms of digital capabilities. This gives Finland, Finnish companies and citizens the possibility of continuing operations without disruptions and harness the opportunities offered by this competitive edge during the next few months.

A crisis sows the seeds of the next one. Economic uncertainty, an imminent downturn, falling share prices and the powerful and necessary actions taken by governments make the economy fragile. If prolonged, uncertainty will undermine economic prospects. Indebtedness will grow and it will become increasingly difficult to deliver on promises.

“The coronavirus crisis is different from both past and future crises. This underlines the importance of being prepared for a wide range of threats.”

One lesson we could perhaps draw from this is that buffers should be built by states, companies and individuals. This was also the lesson learnt from the financial crisis of 2008, when banks were over-indebted. Since then, banks have reinforced their balance sheets. The coronavirus crisis is different from both past and future crises. This underlines the importance of being prepared for a wide range of threats.


The writer is VER's CEO Timo Löyttyniemi.

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