The Covid-19 pandemic, like other previous crises, will certainly leave lasting economic scars around the world in the years to come, but hopefully, it will also become the catalyst of a brighter and more sustainable future, thanks to the acceleration of industries’ transformation, digitalization, consolidation, reconfiguration of supply chains, productivity enhancements, and invention of new business models. The article aims to explore some of the greatest challenges facing the world economy in the post-COVID-19 era and the major casualties and potential risks related to dramatic externality. The article also aims to highlight unique and specific fragilities at the onset of this pandemic crisis and the urgent need to address them in order to make the world economy more resilient.

1. | The Global ANALYST || August 2020 |32
Photo:Instagram
Resilience or Great Reset?
The Covid-19 pandemic, like other previous crises, will certainly leave lasting economic scars around the
world in the years to come, but hopefully, it will also become the catalyst of a brighter and more sustainable
future, thanks to the acceleration of industries’ transformation, digitalization, consolidation, reconfiguration of
supply chains, productivity enhancements, and invention of new business models.
T
he coronavirus disease, also known as Covid-19, which was first reported in Wuhan, China in December 2019,
has spread rapidly worldwide evolving into a full-blown pandemic. To curb the spread of the virus, authorities
around the world have implemented lockdowns that have brought much of global economic activity to a halt.
Social distancing, quarantining citizens, restrictions on traveling and social gatherings, and business shutdowns
have partially helped contain the spread of this very contagious virus, while, unfortunately, they have also brought many
world economies to their knees. Many companies have been hard hit by the aftermath of the Covid-19 pandemic due to
severe disruptions to global supply chains and global trade operations, and tough restrictions on people’s mobility.
The countries that have immediately adopted bold approaches to contain the rapid spread of the virus through
contact tracing, testing and treating patients, and encouraging the use of face masks, seem to have had so far better
response to the healthcare crisis such as stabilizing the Intensive Care Unit admissions in the hospitals or containing
new coronavirus flare-ups at an early stage.
Yet, today, it is still very difficult to determine how long this pandemic will last, if new stringent lockdowns might be
required in the future, or what will be the long-term effects of this health crisis on humanity, health systems, financial
markets, real economy, and the sustainability of our social contract.
Some experts argue that this pandemic outbreak could potentially turn into the second most severe health crisis
since the Spanish flu pandemic of 1918.
As indicated in Figure 1, about 17.3 million cases of Covid-19 have been reported worldwide, including about
673,000 deaths as of July 31, 2020 (ecdc.europa.eu, 2020).
The US economy suffered its worst period ever in the second quarter of 2020, with GDP falling by a historic 32.9%
amid virus-induced shutdown (Figure 2) (Cox, 2020).
Germany’s GDP also contracted sharply in the second quarter 2020 (–10.1%), its largest decline since 1970, while
Mexico’s economy contracted 17.3% in the same period, its fifth fall in a row. Furthermore, in the first half of 2020, UK
car manufacturing fell to the lowest level since 1954.
World Economy
S P O T L I G H T

2. | The Global ANALYST | 33| August 2020 |
International institutions and mul-
tilateral organizations have lately re-
vised their economic outlook for the year
2020, forecasting a tough recession for
most countries worldwide, but they
have also predicted a likely quick recov-
ery (V-shaped) for the subsequent two
years (2021 and 2022), although new
flare-ups in coronavirus cases across
many parts of the world are raising con-
cerns of a rockier recovery (IMF, 2020).
The International Monetary Fund
(IMF) predicts, for the year
2020, a very sharp slump in
the global economy real glo-
bal GDP, which is expected
to fall at –4.9%. The unique
magnitude of this shock is
confirmed by a marked dif-
ference between the current
recession and the one fol-
lowing the Global Financial
Crisis (GFC), which reached
only a –0.8% fall in real
GDP in 2009 (IMF, 2010).
The looming sovereign
debt crisis
Another element of differ-
ence with the GFC of 2008
and great concern regarding
the current sharp recession
is represented by the global average cu-
mulative debt levels on the onset of the
Covid-19 crisis. As indicated in Figure
3, the global debt (financial, sovereign,
and private nonfinancial) at the begin-
ning of the coronavirus crisis reached a
record level of over $250 tn in 2019, led
by a surge in borrowings in the US and
China, whereas the same figure in 2009
was approximately $200 tn
(Srivastava, 2020). Furthermore, in ma-
ture economies, total debt at the end of
2019 was $180 tn or 383% of these coun-
tries’ combined GDP, while in emerging
markets it was double of what it was in
2010 at $72 tn, driven mainly by a $20 tn
surge in corporate debt (Jones, 2020).
Of course, due to the damage caused
by the Covid-19 pandemic, the average
cumulative debt levels of the post-
Covid-19 era are expected to be even
higher than those reported in 2019. Af-
ter the GFC of 2008, emerging markets
have boosted debt-driven growth strat-
egies, in particular in the private nonfi-
nancial sector. Much of this debt has
been denominated in ‘hard foreign cur-
rencies’ such as US dollar and euro (Fig-
ure 4) (Jones, 2020).
China’s debt in 2019 was approach-
ing 310% of its GDP—one of the highest
in emerging markets. Despite the
country’s attempts in the past years to
push for deleveraging to avoid poten-
tially risky asset bubbles, on the onset
of the Covid-19 pandemic crisis, house-
hold debt, government debt, and corpo-
rate debt surged again (Jones, 2020).
These figures alone give a clue to the
magnitude of this unprecedented shock
to the global trade, economy, and finan-
cial markets and provide a clear warn-
ing sign about a potential gloomy sce-
nario for the poorer and more fragile
emerging and developing economies,
the ones more likely to be hit by a loom-
ing sovereign-debt crisis. In April 2020,
analysts of the World Bank have pre-
dicted that the Covid-19 pandemic will
probably have a lasting impact on
poorer and more vulnerable emerging
and developing economies. They have
argued that the pandemic crisis will
cause a sharp increase in global poverty
pushing about 40-60 million
people into extreme poverty.
The Covid-19 pandemic, how-
ever, has caused millions to
lose their jobs or rely on govern-
ment furlough schemes even in
advanced economies (Gerszon
Mahler, et al., 2020).
Governments, central
banks, health organizations,
and multilateral institutions
(i.e., IMF, World Bank, UN, and
WHO) have ensured important
rescue measures to help shield
national and global communi-
ties from the health and hu-
manitarian crises since the un-
veiling of the virus outbreak.
Yet, it is hard to determine to-
day if their rescue plans will be
sufficient to weather the looming “per-
fect storm” on these economies. On a
positive note, it is worth mentioning
that since the beginning of the Covid-19
pandemic crisis (March 2020), emerg-
ing and developing economies’ liquidity
Figure1:GeographicDistributionofthe14-DayCumulativeNumberofReported
Covid-19 Cases per 100,000 Population, Worldwide, as of July 31, 2020
Source:ecdc.europa.eu.(EuropeanCentreforDiseasePreventionandControl)
Several economies, which
have been more successful
with their emergency
containment strategies of
the Covid-19 pandemic, are
more likely to avert a
prolonged recession and
achieve a faster recovery if
they manage to curb the
new waves of coronavirus
without imposing stringent
and prolonged lockdowns.
IvoPezzuto
ProfessorofGlobalEconomics
and Competitiveness, Disruptive
InnovationandEntrepreneurship,
InternationalSchoolof
Management, Paris, France
World Economy

3. | The Global ANALYST || August 2020 |34
Figure2:USEconomicBoomsandBusts
Source:(Cox,2020)CNBCEconomy
Figure 3: Global Debt
($ tn)
Source:Srivastava,2020
crunch issues and deep market sell-offs
have been alleviated by the massive fi-
nancial intervention of the US Fed,
which, as mentioned by former Fed
economist Nathan Sheets, “has vigor-
ously embraced its role as a global
lender of last resort.”
The Federal Reserve has warned
that the potential shock may impact in-
ternational financial markets, such as
international shortage of dollars, and
therefore has decided to provide emer-
gency swap liquidity lines with some
central banks and temporary repur-
chase agreement facilities to interna-
tional monetary authorities (and not
only in the emerging and developing
markets). By stabilizing overseas mar-
kets, the Fed’s actions helped avert
higher disruptions to overseas econo-
mies and world markets; to assure
proper functioning of the monetary mar-
kets, and to avoid that traders would
sell treasurys and different dollar-de-
nominated assets to lift money (Ng and
Timiraos, 2020).
The Fed has dollar swap lines with
the Central banks of Australia, Brazil,
South Korea, Mexico, Singapore, Swe-
den, Denmark, Norway and New
Zealand and also permanent standing
swap line arrangements with key central
banks such as the ECB, the Bank of Ja-
pan, the Bank of England and the Bank
of Canada (Politi and Smith, 2020).
Role of central banks
Central banks have also undertaken ex-
ceptional measures to support domestic
economic recovery and financial stability
offering all-time low interest rates, pur-
chasing massive quantities of govern-
ment debt, mortgage-backed securities,
corporate bonds, ETFs (i.e., US Fed),
and offering low-cost loans to business.
In case of a prolonged and more
stressed adverse scenario, the central
banks might even take bolder uncon-
ventional measures to rescue their
economies such as introducing negative
rates, yield curve controls, or buying eq-
uities, relying on debt monetization, he-
licopter money, and so on to mitigate
potential systemic risks.
In many countries, even the fiscal
policy response has been quite rapid
and aggressive in order to offset the im-
mediate economic fallout and to sus-
tain employment and consumer spend-
ing. In fact, a number of governments
have provided exceptional fiscal stimuli
such as government-backed credit fa-
cilities and loan guarantees, morato-
rium on debt repayments, temporary
nationalizations of firms, subsidies for
bank recapitalizations, government
guarantees on bank risk, unemploy-
ment insurance benefits, and even for-
givable loans to small firms that would
not lay off workers.
The EU insights
In Europe, the European Union (EU)
leaders agreed in July 2020 to a €750
bn (circa $860 bn) recovery fund (Next
Generation EU) to guarantee the sur-
vival of the EU project, to help weaker
European economies recover from a very
deep recession and a severe health cri-
sis, and to help them close the persis-
tent economic gap vis-à-vis more devel-
oped and competitive European coun-
tries. This event might set a turning
point for the EU since it is the first
time, due to the pandemic crisis, that
EU countries seem committed to issu-
ing a sort of “EU-bond” (debt mutual-
ization) on the market to finance the
EU recovery fund and to offer to weaker
economies worst hit by the Covid-19 cri-
sis, a mix of grants and loans. The EU is
rated as a triple-A issuer by Fitch and
Moody’s, and double-A by Standard &
Poor’s. Thus, the recourse to the EU Re-
covery Fund is also a ‘breakthrough’ for
the creditworthiness of member states
and the sustainability of their sovereign
debt ratings (Stubbington, 2020). The
EU Recovery Fund might take the bloc
closer to potentially becoming a “fully-
fledged fiscal union” and could bolster
the euro’s status as a reserve currency
by creating a new set of large liquid
bonds for central banks to buy
(Stubbington, 2020).
Spot Light

4. | The Global ANALYST | 35| August 2020 |
Figure 4: Emerging Markets’ FX Debt
($ tn)
Source:Srivastava,2020
Figure 5: Stock Market’s Wild 2020 Ride (S&P 500)
Source:Imbert,Fitzgerald,2020
The announcement of the EU Recov-
ery Fund has had a positive effect on the
southern European sovereign bond
yields and has reduced the threat of a
potential downgrade by the credit rat-
ing agencies for the most vulnerable
European economies that remain just
one notch above “junk” borrower status
(Stubbington, 2020). The EU leaders
have also temporarily suspended some
of EU’s economic governance rules (i.e.,
the Stability and Growth Pact and
State Aid rules) and they have offered
the European Stability Mechanism
(ESM) funds with “light” conditionali-
ties (ESM is eurozone’s bailout fund)
and the SURE fund (a European instru-
ment for temporary support to mitigate
unemployment risks in an emergency).
However, in exchange for access to the
EU Recovery Fund, the European coun-
tries receiving the grants and loans are
obliged to undertake the long-awaited
structural reforms.
Of course, some challenges persist
for the formalization of the EU Recov-
ery Fund since the EU treaties require
that the agreement must be ratified by
national parliaments of the EU mem-
ber states. The EU is also planning to
soften the Mifid II regulation and other
regulatory requirements (i.e., loosened
loan-loss provisioning requirements to
keep credit flowing) to boost the region’s
economic recovery and to facilitate ac-
cess to funding for small companies, al-
though some analysts have warned
against assuming that the economy will
automatically bounce back as a result
of government relief efforts.
Staring at a recession?
Several economies, which have been
more successful with their emergency
strong antibody production with toler-
able side effects. Yet, currently, there is
no assurance from experts that the
vaccine’s protections will build perma-
nent immunity to the virus (Imbert and
Fitzgerald, 2020; Feuer W, 2020; Jee,
2020; and Patel, 2020).
As lockdown measures begin to re-
lax in several countries and people are
starting to interact more, it is likely
that the chances for a second wave of
infections will increase. Since an effec-
tive therapy or vaccine is not yet avail-
able, the reopenings are intended to
take place safely while maintaining so-
cial distancing, and masking and hand-
washing, but some people relaxed these
infection prevention efforts; in fact,
cellphone data are showing decreased
social distancing. Of course, mass test-
ing and contact tracing may mitigate
the impact of a potential second wave,
but such measures are not easily en-
forceable in all countries.
Empirical evidence seems to indi-
cate that the first wave of the epidemic
resulted in a level of immunity well be-
low herd immunity levels. According to
the experts of the Johns Hopkins Uni-
versity, about 70% of the population
needs to be immune to this coronavirus
before herd immunity can work. Thus,
the pandemic is still evolving. There are
pockets of a population in which the vi-
rus not only survives but continues to
spread. The World Health Organization
(WHO) has warned about a resurgence
of Covid-19 in the coming months. Of
course, one of the key priorities for the
containment strategies of the Covid-19
pandemic, are more likely to avert a
prolonged recession and achieve a
faster recovery if they manage to curb
the new waves of coronavirus without
imposing stringent and prolonged
lockdowns. Stringent lockdowns repre-
sent one of the biggest potential down-
ward risks to economic recovery.
Due to the exceptional mobilization
of global medical resources dedicated to
the Covid-19 vaccine, however, it is easy
to understand the great hopes and ex-
pectations people have in a soon-to-
come discovery of a safe, effective and
accessible vaccine against the
coronavirus. There are, in fact, promis-
ing progress on vaccine research and
testing from Pfizer, BioNTech,
Moderna, AstraZeneca, Johnson &
Johnson, Sanofi, Jenner Institute of Ox-
ford University, IRBM, and others
which raise positive expectations. The
results of the vaccine’s testing seem so
far to be very encouraging in providing
World Economy

5. | The Global ANALYST || August 2020 |36
Figure7:NumberofMajorInsolvencies*inH12020bySector
andSizeofTurnover(inEURMillion)
Note:*CompanieswithaturnoverexceedingEUR50mn. Source:EulerHermes,AllianzResearch
Figure6:NumberofMajorInsolvencies*byQuarterandSizeofTurnover(inEURMillion)
Note:*CompanieswithaturnoverexceedingEUR50mn. Source:EulerHermes,AllianzResearch.
world community and its institutions in
the post-Covid-19 era is to reduce the
risk of future epidemics (Kleczkowski,
2020; and Lockerd Maragakis, 2020).
Analysts and savvy investors are
fully aware of the fact that record-high
market valuations cannot be sustain-
able for long without a robust economic
recovery, a strong corporate earnings
season, pre-Covid-19 consumer confi-
dence and spending levels, robust dis-
posable incomes, and low rates of un-
employment. A speedy rebound from
the Covid-19 crisis in Q3 and Q4 of 2020
as well as in the following quarters of
2021 will be essential to avoid a poten-
tial correction in the equities market.
Governments are doing all they can in
tandem with central banks, health au-
thorities, IMF, and biotech firms re-
searching and testing Covid-19 vac-
cines, to win the race against time to
avoid a “Big Reset” in debt, credit and
securities’ markets and an even worse
health crisis and economic fallout (Fig-
ure 5).
The prolonged and sharp economic
fallout following the Covid-19 pan-
demic crisis will probably have a last-
ing impact for years which will affect job
creation, firm’s insolvencies, and coun-
tries’ and corporate debt hangovers.
Regarding the risks of over-indebt-
edness, it seems that debt-for-equity
swaps have emerged in recent times as
the preferred method to clean up bad
loans and reduce leverage in the
economy in some emerging markets.
Debt rescheduling and debt restructur-
ing are also critical measures to the
resolution of severe debt crisis. Among
the casualties of Covid-19 pandemic,
there is also the wave of corporate insol-
vencies and companies filing for Chapter
11 bankruptcy due to the prolonged
lockdown and subdued consumer de-
mand, disrupted supply chains, and glo-
bal economic slowdown and a sharp con-
traction of global trade. Notable compa-
nies include Thomas Cook, Cirque du
Soleil, Hertz, Advantage, Chesapeake,
JCPenney, Neiman Marcus, Brooks
Brothers, J Crew, and Virgin Atlantic
Airways Ltd. (Rennison; Fontanella-
Khan, 2020; and CB Insights, 2020). Ac-
cording to Euler Hermes (Figures 6 and
7), in the second quarter of 2020, close to
150 large companies with a turnover of
above €50 mn went insolvent, repre-
senting an increase by +70 cases com-
pared to Q1 2020 (Lemerle, 2020).
Euler Hermes warned that the Covid-
19 pandemic is an insolvency time
bomb. They expect a stronger risk of
domino effects, notably on fragile pro-
viders along supply chains (Lemerle,
2020).
Easing insolvency laws
In several countries, insolvencies have
been delayed since governments have
temporarily suspended their insolvency
law, allowing companies to put off de-
claring bankruptcy for a few months.
However, as time goes by and new po-
tential waves of viral shedding in-
crease, the scenario may become much
more challenging for all stakeholders,
also affected by a massive increase of
additional savings of the consumers
during the strict lockdowns. Thus, in a
worst-case scenario, since fiscal funds
are not unlimited, many firms may in-
crease their layoffs due to overcapacity
and a sharp contraction in revenues, li-
quidity, and earnings.
Continued ultra-expansionary mon-
etary policies of central banks, tempo-
rary suspension of insolvency laws, and
massive fiscal stimuli and subsidies of
the governments may probably allow
weathering the perfect storm for a
while, but adverse market conditions
and additional severe waves of the
Covid-19 pandemic may severely com-
plicate the picture in a worst-case sce-
Spot Light

6. | The Global ANALYST | 37| August 2020 |
Reference # 20M-2020-08-08-01
Figure8:USCorporateDebtatanAll-TimeHighintheDecadeSincetheFinancialCrisis
Source:USGlobalInvestors,2020
Figure9:USNonfinancialCorporateDebtRatedBBBHasExplodedinRecentYears
Source:USGlobalInvestors,2020
nario since after the GFC of 2008 there
has been a spike of nonfinancial corpo-
rate debt and low-quality corporate
debt in the US (Figures 8 and 9).
The EU’s banking watchdog, the
European Banking Authority, expects
banks might suffer a capital loss of up
to €380 bn as a result of the economic
disruption from coronavirus
(Corbishley, 2020). As reported by
Euler Hermes’ Economists, Ozyurt and
Utermöhl, public loan guarantee
schemes are likely to be extended to
2021 in most Eurozone countries;
meanwhile, the ECB is likely to boost
its support to the banking sector raising
the tiering multiple (to shield more of
banks’ liquidity), further sweetening
the terms on Targeted Longer-Term Re-
financing Operations, (TLTRO) loans
and/or including bonds that have lost
their investment-grade status, in its
asset purchase programs. If the sce-
nario eventually further deteriorates
and a protracted crisis materializes
with the Eurozone NPL ratio rising to
around 20%, then the creation of a Euro-
pean bad bank might be the solution
(Ozyurt and Utermöhl, 2020). A TARP-
style bad debt fund would issue bonds
that commercial banks would buy in ex-
change for NPL portfolios. These bonds
in turn would be eligible to be posted as
collateral with the ECB to attain more
funding (Ozyurt and Utermöhl, 2020).
The ECB, however, would need other in-
stitutions such as the European Stabil-
ity Mechanism (ESM) to enter the scene
to act as guarantors. The ESM is already
able to recapitalize banks, and with a
treaty, change might gain the right to
purchase NPLs. Yet, to raise the level of
competitiveness of European banks, it is
critical to tackle the long-overdue struc-
tural weaknesses of the sector in Europe
with incentives to embrace efficiency and
digitalization and progress with the
sector’s consolidation process (Ozyurt
and Utermöhl, 2020).
What next?
According to NYU Professor, Edward
Altman, and creator of the Z-score, a
stressed credit cycle with a deep reces-
sion is a potential “perfect storm”. The
catalyst for the next market crisis could
be a major stock market correction or a
significant decline in economic growth
in a systemically important country or
region—say, the US or China (Altman,
2019).
For a decade since the GFC of 2008,
central banks have injected massive
amounts of liquidity at record-low in-
terest rates into financial markets,
much of which has been used by corpora-
tions to boost billions of debt-driven
buybacks of equities to push asset
prices higher. Based on his well-known
models for predicting corporate insol-
vencies, he has warned US credit inves-
tors in July 2020 of the start of a wave of
mega bankruptcies. He reported that
more than 30 American companies
with liabilities exceeding $1 bn have al-
ready filed for Chapter 11 since the
start of January 2020 (Wee, 2020).
He stated that while the stimulus-
fueled rally in US credit markets since
March 2020 has helped borrowers stay
afloat during the coronavirus crisis, he
believes that many companies are just
delaying an inevitable reckoning. Ac-
cording to Prof. Altman, companies are
doing the opposite of what they should
be doing, which is to de-leverage as the
banks did after the global financial cri-
sis of 2008 instead of increasing debt,
which eventually increases the risk of
default (Wee, 2020).
Excluding other stringent
lockdowns, it is possible to envision a
more optimistic and promising outlook
with safe reopening and a gradual re-
turn to economic growth driven by envi-
ronment-friendly investments, improv-
ing consumer confidence and discovery
of effective Covid-19 vaccines or treat-
ments. The Covid-19 pandemic, like
other previous crises, will certainly
leave lasting economic scars around the
world in the years to come, but hope-
fully, it will also become the catalyst of
a brighter and more sustainable future,
thanks to the acceleration of industries’
transformation, digitalization, consoli-
dation, reconfiguration of supply
chains, productivity enhancements, and
invention of new business models.
World Economy