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1. Where’s the Money Going?
Another way of putting it would be: who is being saved in this crisis? As new measures get
announced regularly by governments and central banks across the globe to stave off
recession/ fight unemployment/ provide a backstop to the common man it’s beginning to
get hard to keep track of how much money is being given or loaned or used as collateral or
as a liquidity infusion. It is difficult to know how effective any of this is going to be so early in
the process but if we had an idea of the goals, we would be able to assess the success or
failure of the policy measures. And a good place to start would be to look at how much is
being committed to what end.
We need to first acknowledge that there is going to be a drop in the trajectory of global
growth. In January 2020 the predictions for global GDP growth was 3.3% according to the
IMF and has now been revised down to -3% in their April assessment- in other words the
Covid pandemic is responsible for a potential hit of 6.3% to the world’s annual expected
output. The financial crisis of 2008-9 led to a fall from 4.3% growth in ’07 to 1.8% in ’08 and
a contraction of 1.7% in ’09. That marked the first- and last time since WW2 that the world
output shrunk over the previous year. This year will be the second and it will be a more
severe fall. Also remember, that it took the better part of a decade for the world to recover
from the last crisis.
The first effect that we should focus attention on is the impact on global poverty. Since the
overall mortality rate will still not make a big impact on the overall population growth rate
of the planet the per capita GDP will be lower, i.e. individual net worths’ are set to fall. Since
this never happens proportionately (Jeff Bezos’ net worth is up $27 billion since January) a
lot of people could fall into genuine poverty. This is worrying to a lot of governments since

2. their credibility and legitimacy depends on economic growth (China is a prime example).
The situation is particularly stark in economies with a large percentage of unorganised
sector workers who have neither job security nor savings to deal with this abrupt shock, but
it applies as well to workers in the ‘gig’ economy in the OECD nations. The shock waves are
likely to ripple across nations as remittances from the lucrative Middle East for many South
Asian, Vietnamese and Pilipino families will feel the hit.
This is the main reason why, for example, the main thrust of the committed expenditure
amongst the Emerging Markets (Thailand, Philippines and Vietnam mainly but also Japan
and the Czech Republic) has been in the form of direct cash payments whereas the bulk of
the outlay in the OECD nations (barring Japan, of course) has been into job retention
schemes. Both of these are targeted at either preventing firms from laying off workers until
they require them again or providing cash handouts in the case of the EM countries where
tracking employment is much more difficult. European countries are offering to fund
between 75-90% of the salaries of workers to companies with the specific intention of
incentivising them to retain staffing levels.
The size of commitment to the schemes are skewed by the US commitment which now
stands at just shy of USD 3 trillion- just under 15% of annual GDP, which, coming from the
world’s largest economy is both commendable and problematic for differing reasons. But
since the US spending on job retention, unemployment insurance and direct payments
stands at just under 50% of the total commitments it is the most likely to succeed in its
short term effect of preventing a cataclysmic collapse of the largely service based economy.

3. Source: UBS
As it stands, weekly unemployment claims show a rise in unemployment of 26 million over
the last 5 weeks of data- wiping out all the job growth since the dark days of 2009 in just
over 1 month.
The commitment to healthcare has- surprisingly, been very low, given the that the whole
purpose of the social distancing and quarantine norms has been to reduce the impact of a
sudden outbreak on healthcare facilities globally. The US has just announced a $75 billion
commitment to spending on hospitals but that’s after 900,00 Americans have contracted
the coronavirus and 50,000 have died of it. South Korea and Taiwan- both of whom have
had great success in controlling the infection spread rate of the coronavirus, have both
committed about 30% of their total outlay to healthcare (especially early detection through

4. large-scale testing) but Hungary and Bolivia are also notable for their commitment to
healthcare spending.
The elephant in the room is then the commitment to financial markets and corporates. This
is also the most contentious. Tax relief/ soft loans/ government bailouts and other
expenditures like bank guarantees are welcomed if they are directed towards the small
sector of entrepreneurs who may not be eligible for the salary replacement or job retention
schemes but severely criticised if they support multinational oil companies or airlines with
billionaire owners (particular flack is being drawn by Richard Branson of Virgin Atlantic who
is a tax exile but is looking for the British public to lend the company GBP 500 million). The
US just announced a supplementary USD 250 billion for small businesses after the previous
allocation of USD 350 billion ran out in 3 weeks- taken up mainly by listed firms.
The argument for lending to the largest firms in a country is that they need to continue to
exist as production units with the least amount of disruption that a bankruptcy would cause,
the loans are to be repaid and are meant to be short-term in nature. The Americans did this
successfully in the aftermath of the financial crisis when they rescued the car industry
giants. The belief that it would have caused enormous secondary damage to the economy
with multiple suppliers going under and their suppliers, along with the jobs involved, pushed
the Obama administration to lend (along with the Canadians) USD 80 billion. This was
largely repaid (the US Treasury lost USD 11.2 billion from its investment in General Motors
but was fully repaid by Chrysler ahead of time) and consensus opinion is that it saved a
cascade of failures in US manufacturing.
The desire to cause the least amount of disruption and return as smoothly as possible to a
post-lockdown world is the reasoning to lend to large corporations. Apart from the job
guarantee underwriting the various governments are approaching debt refinancing as the
most effective way of preventing the asset markets seizing up. This topic has been covered
in an earlier article, but it should be noted that the build-up of debt can freeze economic
activity because of the sensitivity of banking channels to defaults- a situation which
governments are eager to avoid. So, the expansion of refinance availability through repo
windows has been extended to include ‘fallen angels’- bonds which prior to the pandemic
lockdowns were of investment grade but have now become ‘junk’ bonds.
The last category- more a sub-category, is the expansion of government deficit lines. It is
one thing if companies get further indebted as their bond or equity prices are settled in the
market, but the increasing deficit spending by governments can have one of two possible
outcomes: inflation or austerity. At this point, governments are probably gambling on the
former not being an issue given that it has remained stubbornly low globally for years. The
EU just announced a EUR 480 billion stimulus package which devolves responsibility on the
nature of expenditure but allows member states to draw up to 2% of their GDP through the
European Stability Mechanism (established in 2011 after the sovereign debt crisis) to
finance their ‘direct and indirect’ costs related to the crisis.
What has been problematical is the agreement to a pooled ‘Coronabond’ which would aim
to raise money from the public. This was negated by the Netherlands which feared the fiscal
profligacy of the southern nations undermining their prudence. This is something that will

5. come back into focus once the pandemic is tamed. The deficit numbers are going to look
awful. The US budget deficit last year was a near-record USD 984 billion. This year it will be
closer to USD 4 trillion- which is 19% of GDP. And the US is not alone even if it is
exceptional. Even Singapore has committed to 10% of its GDP to crisis measures but they
have the cushion of strategic investments made through Temasek Holdings for decades to
draw upon if necessary.
The main consequences of these measures can either be higher taxation going forward-
something that seems inevitable across the globe, and/ or higher borrowing rates. Whilst
signal benchmark rates (overnight rates mainly) may remain low, the far end may spike to
reflect greater risk and spreads may widen for the same reason. We are essentially
borrowing from our own future when we commit huge funds to solving today’s problems.
This is the simplest analogy which reflects the on-ground reality. Whilst production/
productivity has fallen, we are continuing to ensure a standard of living as before (or as
close as possible). This is the only way governments can ensure voluntary compliance
against a threat of this nature. And this agreement between governments and their people
has costs. And this cost is drawing down from future income streams by going to the banker
of last resort- the government printing presses.