Build a bridge to recovery

A bridge rather than a bailout is what is needed to help aid recovery and support the world economy. According to Franklin Templeton’s CIO of Fixed Income Sonal Desai, this is what current fiscal stimulus is trying to achieve, but it is a fine balance.

To address the crisis in demand, governments are responding. The UK central government has committed (for a limited time) to pay 80% of the wage bill of private sector workers in virus affected areas

The strategy is to try and influence the behaviour of workers not during the health crisis, which is more difficult, but after. “If workers know they  will have a job at the end, it impacts their behaviour during this period.”

For example, if people are used to going to restaurants once a week and they stop going for three weeks during the current period, if they know they have a job they are more likely to go out to the restaurant when growth rates pick up.

This is also needed for SME’sand large corporates such as flight companies and multi-national hotel chain.

“They don’t need a traditional bail out, they need a bridge, to get from this side to the other side. I do hope that if you have an appropriately designed fiscal policy together with monetary policy, you can hope to have growth rates pick up in a much speedier fashion.”

Regarding the correct level of fiscal stimulus in the US, Desai said 5-10% of GDP or around US$2 trillion would be very good.

“It’s not a replacement – but it is a bridge.”

Unlike the GFC which took “months and in some cases years to undo because it was complicated problems”, Desai said she hopes to see something more straightforward.

“Large corporates  such as United Airlines or the Marriott hotels, these are not a business model which is dysfunctional but which is under enormous stress right now. Their problem is they need a bridge loan so they don’t have to do layoffs and can continue to service their  debt. It is a much simpler problem than unwinding leverage debt.”

Another upside is the health of the US banks, who currently have approximately $1.6 trillion in security reserves.

“A quick package, so we could see cash flowing to individuals and companies could stem the crisis, so we can stop it before it becomes self-perpetuating.”

While Desai admits to being optimistic about a recovery, she says the length of the shutdowns becomes critical to the recovery.

“Whether it’s a matter of weeks or months becomes critical. You cannot close economies for months. A large part of China did shut down for about six weeks.”

She said while it is clear Q1 is going to be bad in the US and growth rates slow until April, by the second to third month of Q2,  we should start seeing some recovery.