Virus crisis will trigger debt restructuring wave: BIS

The coronavirus crisis will test the sturdiness of small and medium-sized enterprises in the coming months, the Bank for International Settlements said Tuesday, predicting a wave of debt restructuring.

“The shock of the COVID-19 pandemic has turned out to be a defining moment,” said BIS general manager Agustin Carstens, as the central banks institution presented its annual economic report.

“The containment measures are inflicting an enormous economic blow, and the long-term effects will be profound.”

The BIS is often described as the central bank of central banks.

It was established in Basel in Switzerland in 1930 and is owned by 62 central banks, representing countries accounting for about 95 percent of global gross domestic product.

“In the next phase of the crisis the focus will move from liquidity — making sure firms have enough cash to operate — to solvency, where the long-term viability of many companies will be tested,” it said.

“The strength of the recovery will depend on how the pandemic evolves and how much economic damage it leaves in its wake.

“Debt restructuring will be required as resources shift from shrinking to growing sectors.”

Hit hard by lockdown measures, many companies have already suffered “huge income losses”, which are likely to increase further, the report said.

Given the circumstances, “a surge in corporate defaults is on the cards.”

If this does transpire, banks “will incur losses”, the report said.

“Depending on how large these turn out to be, banks’ ability to support the recovery could be badly affected.”

It added: “Balance sheet clean-ups are critical in re-establishing the conditions for a sustainable recovery.”

In the first weeks after measures to restrict the spread of the virus were introduced, the world’s central banks stepped up measures to support the economy, notably in the liquidity markets.

The moves helped to stabilise the financial markets.

But in the coming phase, monetary policy is “badly suited to dealing with insolvency: central banks lend but cannot spend”, warned the BIS, which said it would be up to governments to take charge of this issue.

“The worst outcome would be failing to address the debt overhang altogether and allowing a persistent misallocation of capital,” the report warned.