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Home > Legal & Financial > When the money runs out.

When the money runs out.

It seemed like a good idea at the time, in fact it was more or less the only idea at the time. Around the first world economies, as the prospect of a lockdown to limit the devastating spread of Covid19 became inevitable the knock on effects to the economy were obviously stark. Lots of businesses were going to struggle, and many were going to lose their jobs. Governments had to act fast. Around the world the approaches varied slightly but they more or less amounted to the same thing. Throw money at the problem, and worry about paying for it later. The plan was to tide over previously viable businesses through the lockdown period, and they could simply open up the following month, the cash registers would start ringing again and we could slowly pay back the money. It hasn’t quite worked out that way however. As the lockdowns extended from weeks into months in some cases, and businesses remained closed, finance ministers were getting hot under the collar as they watched the earmarked funding begin to dry up, with the risks of financing for an extended period unviable they looked for an exit. We are now facing the prospect of these safety nets being removed gradually over the next few weeks and months, with very few signs of optimism that economies are even close to bouncing back.

Initial hopes that the lockdown was going to be a short, temporary pause to economic activity have faded as we are staring down the barrel of the biggest recession in a century. Businesses that could sustain a few weeks, or months at best of closure are now looking at years, before they can hope to turn a profit again. Travel firms, airlines, restaurants, hotels, cinemas, theatres and many many more industries are facing existential threats with no light at the end of the tunnel, at least not yet. This is presenting governments and business owners with heartbreaking decisions. At what point do you say ‘enough’. The initial intentions to provide grants or loans to keep a chef, a pilot, or a cinema afloat for a few weeks seemed like the right thing to do, but can you pay a waiter 80% of their salary for a year, two years or more to remain at home?. At what point does a business owner conclude that taking on government backed loans while keeping the doors closed becomes throwing good money after bad? The truth, with hindsight, is that many businesses were effectively insolvent from the first days of the lockdown, and the government schemes were doing nothing more than animating a corpse.

The decision to switch off the life support is an agonising one, and it goes without saying that it is going to be unpopular, but popularity often clouds the decision making process. Governments the world over have been shrinking from taking this decision, optimistically attempting to reopen the economy in the face of a virus that has not gone away and shows little prospect of doing so in the near future. Desperate to get the tills of the economy open again, to get people back to work, into the bars and restaurants and the rest, to get the kids back to school so their parents can get back to work and start contributing to the economy rather than being supported by it. Spain, whose lockdown was the strictest in Europe and succeeded in sharply reducing cases, experimented with welcoming tourists back to help fill the 12% of the national economy that holiday makers contribute. The result, predictably, has been an increase in infections. It’s the same story, more or less, wherever you look. A second wave of infections in Europe now looks inevitable if it isn’t happening already. The governments had to roll the dice, and it seems not to have gone their way. If indeed we do face a second wave the strategy has to be different, the money has effectively run out, borrowing endlessly to keep ghost businesses alive is not a solution and will saddle economies with huge debt piles that will take decades to pay back. Do we collectively have to accept that large chunks of our economies are dead from the neck up? Do we let them fail, and use the finance to support the unemployed and rebuild from the ground up? All decisions facing governments recently seem to be difficult ones, with only downsides whichever way you take them. I don’t envy them, having to take this one.

by Phill McCoffers – Economics Correspondent