This article of Prof. Ivo Pezzuto was published on the ICTF Magazine, September 2020 issue.

1. ICTF World 26 www.ictfworld.org
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 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
Resilience or great
reset?
By Ivo Pezzuto
WORLD ECONOMY
Source: ecdc.europa.eu. (European Centre for Disease Prevention and Control)
Figure 1: Geographic Distribution of the 14-Day Cumulative
Number of Reported Covid-19 Cases per 100,000
Population, Worldwide, as of July 31, 2020

2. ICTF World 27 www.ictfworld.org
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.
International institutions and
multilateral organizations have
lately revised their economic
outlook for the year 2020,
forecasting a tough recession
for most countries worldwide,
but they have also predicted a
likely quick recovery (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 concerns of a
rockier recovery (IMF, 2020).
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Source: (Cox, 2020) CNBC Economy
Figure 2: US Economic Booms and Busts

3. ICTF World 28 www.ictfworld.orgICTF World 28 www.ictfworld.org
The International Monetary Fund
(IMF) predicts, for the year 2020,
a very sharp slump in the global
economy real global GDP, which
is expected to fall at -4.9%.
The unique magnitude of this
shock is confirmed by a marked
difference between the current
recession and the one following
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 difference
with the GFC of 2008 and great
concern regarding the current
sharp recession is represented
by the global average cumulative
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 beginning 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 mature economies, total debt
at the end of 2019 was $180
tn or 383% of these countries’
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.
After the GFC of 2008, emerging
markets have boosted debt-driven
growth strategies, in particular in
the private nonfinancial sector.
Much of this debt has been
denominated in ‘hard foreign
currencies’ such as US dollar and
euro (Figure 4) (Jones, 2020).
China’s debt in 2019 was
approaching 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 potentially
risky asset bubbles, on the onset
of the Covid-19 pandemic crisis,
household debt, government debt,
and corporate debt surged again
(Jones, 2020). These figures alone
give a clue to the magnitude of this
unprecedented shock to the global
trade, economy, and financial
markets and provide a clear
warning sign about a potential
gloomy scenario for the poorer
and more fragile emerging and
developing economies, the ones
more likely to be hit by a looming
sovereign-debt crisis. The most
vulnerable economies are likely
to be those with a high external
debt; high non-performing loans
as a share of GDP, and limited
foreign exchange reserves. These
WORLD ECONOMY
Source: IIF, BIS, IMF
Figure 3: Global Debt
Source: Srivastava, 2020
Figure 4: Emerging Markets’ FX Debt

4. ICTF World 29 www.ictfworld.org
countries might require substantial
debt relief or to restructure or roll
over their debts. In April 2020,
analysts of the World Bank have
predicted 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,
however, has caused millions
to lose their jobs or rely on
government 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 communities from
the health and humanitarian
crises since the unveiling of the
virus outbreak. Yet, it is hard to
determine today if their rescue
plans will be sufficient to weather
the looming “perfect storm” on
these economies. On a positive
note, it is worth mentioning
that since the beginning of the
Covid-19 pandemic crisis (March
2020), emerging and developing
economies’ liquidity crunch issues
and deep market sell-offs have
been alleviated by the massive
financial intervention of the US Fed,
which, as mentioned by former
Fed economist Nathan Sheets,
“has vigorously embraced its role
as a global lender of last resort.”
The Federal Reserve has warned
that the potential shock may
impact international financial
markets, such as international
shortage of dollars, and therefore
has decided to provide emergency
swap liquidity lines with some
central banks and temporary
repurchase agreement facilities to
international monetary authorities
(and not only in the emerging
and developing markets). By
stabilizing overseas markets, the
Fed’s actions helped avert higher
disruptions to overseas economies
and world markets; to assure
proper functioning of the monetary
markets, and to avoid that traders
would sell treasurys and different
dollar-denominated 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, Sweden, Denmark,
Norway and New Zealand and
also permanent standing swap
line arrangements with key
central banks such as the ECB,
the Bank of Japan, the Bank of
England and the Bank of Canada
(Politi and Smith, 2020).
Role of central banks
Central banks have also
undertaken exceptional measures
to support domestic economic
recovery and financial stability
offering all-time low interest rates,
purchasing massive quantities
of government debt, mortgage-
backed securities, corporate
WORLD ECONOMY

5. ICTF World 30 www.ictfworld.org
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 unconventional measures
to rescue their economies
such as introducing negative
rates, yield curve controls, or
buying equities, relying on debt
monetization, helicopter money,
digital currencies (i.e. recession
insurance bonds and Fed-backed
digital currency), 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 immediate economic
fallout and to sustain employment
and consumer spending. In fact,
a number of governments have
provided exceptional fiscal stimuli
such as government-backed credit
facilities and loan guarantees,
moratorium on debt repayments,
temporary nationalizations of firms,
subsidies for bank recapitalizations,
government guarantees on
bank risk, unemployment
insurance benefits, and even
forgiveable 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 survival of
the EU project, to help weaker
European economies recover from
a very deep recession and a severe
health crisis, and to help them
close the persistent economic
gap vis-à-vis more developed and
competitive European countries.
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
issuing a sort of “EU-bond” (debt
mutualization) on the market to
finance the EU recovery fund and
to offer to weaker economies
worst hit by the Covid-19 crisis,
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 Recovery
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 “fullyfledged 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).
The announcement of the EU
Recovery 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 rating
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”
conditionalities (ESM is eurozone’s
bailout fund) and the SURE fund (a
European instrument for temporary
support to mitigate unemployment
risks in an emergency). However,
...it is possible to
envision a more
optimistic and
promising outlook
with a safe
reopening and a
gradual return...
WORLD ECONOMY
Source: Imbert, Fitzgerald, 2020
Figure 5: Stock Market’s Wild 2020 Ride (S&P 500)

6. ICTF World 31 www.ictfworld.org
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in exchange for access to the EU
Recovery Fund, the European
countries 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 Recovery Fund since
the EU treaties require that the
agreement must be ratified by
national parliaments of the EU
member 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 access to funding for
small companies, although 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 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 represent one of
the biggest potential downward
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
expectations people have in a
soon-to-come discovery of a safe,
effective and accessible vaccine
against the coronavirus. There
is, in fact, promising progress
on vaccine research and testing
from Pfizer, BioNTech, Moderna,
AstraZeneca, CureVac, Johnson
& Johnson, Sanofi, Jenner
Institute of Oxford University,
CanSino Biologics, Roche and
Regeneron Pharmaceuticals,
Novavax, Gamaleya National
Center of Epidemiology and
Microbiology, IRBM-Advent,
and others which raise positive
expectations. The results of the
vaccine’s testing seem so far to
WORLD ECONOMY

7. ICTF World 32 www.ictfworld.org
be very encouraging in providing
strong antibody production
with tolerable side effects. Yet,
currently, there is no assurance
from experts that the vaccine’s
protections will build permanent
immunity to the virus (Imbert and
Fitzgerald, 2020; Feuer W, 2020;
Jee, 2020; and Patel, 2020).
As lockdown measures begin
to relax 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 effective therapy
or vaccine is not yet available, the
reopenings are intended to take
place safely while maintaining
social distancing, and masking and
handwashing, but some people
relaxed these infection prevention
efforts; in fact, cellphone data
are showing decreased social
distancing. Of course, mass testing
and contact tracing may mitigate
the impact of a potential second
wave, but such measures are not
easily enforceable in all countries.
Empirical evidence seems to
indicate that the first wave of the
epidemic resulted in a level of
immunity well below herd immunity
levels. According to the experts
of the Johns Hopkins University,
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 virus 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 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 sustainable for long without
a robust economic recovery,
a strong corporate earnings
season, pre-Covid-19 consumer
confidence and spending levels,
robust disposable incomes, and
low rates of unemployment. A
speedy rebound from the Covid-19
crisis in Q3 and Q4 of 2020 as
WORLD ECONOMY
Note: *Companies with a turnover exceeding EUR50 mn.
Source: Euler Hermes, Allianz Research.
Figure 6: Number of Major Insolvencies* by Quarter
and Size of Turnover (in EUR Million)
Note: *Companies with a turnover exceeding EUR50 mn.
Source: Euler Hermes, Allianz Research
Figure 7: Number of Major Insolvencies* in H1 2020
by Sector and Size of Turnover (in EUR Million)

8. ICTF World 33 www.ictfworld.org
well as in the following quarters of
2021 will be essential to avoid a
potential correction in the equities
market. Governments are doing
all they can in tandem with central
banks, health authorities, IMF,
and biotech firms researching
and testing Covid-19 vaccines,
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 (Figure 5).
The prolonged and sharp
economic fallout following the
Covid-19 pandemic crisis will
probably have a lasting impact for
years which will affect job creation,
firm’s insolvencies, and countries’
and corporate debt hangovers.
Regarding the risks of over-
indebtedness, 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 restructuring 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
insolvencies and companies filing
for Chapter 11 bankruptcy due
to the prolonged lockdown and
subdued consumer demand,
disrupted supply chains, and global
economic slowdown and a sharp
contraction of global trade. Notable
companies 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). According
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, representing an
increase by +70 cases compared
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 providers 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
declaring bankruptcy for a few
months. However, as time goes
by and new potential waves
of viral shedding increase, the
WORLD ECONOMY

9. ICTF World 34 www.ictfworld.org
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 increase
their layoffs due to overcapacity
and a sharp contraction in
revenues, liquidity, and earnings.
Continued ultra-expansionary
monetary policies of central
banks, temporary 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 complicate
the picture in a worst-case
scenario since after the GFC of
2008 there has been a spike
of nonfinancial corporate 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 Refinancing
Operations, (TLTRO) loans and/
or including bonds that have lost
their investment-grade status,
in its asset purchase programs.
If the scenario eventually further
deteriorates and a protracted crisis
materializes with the Eurozone NPL
ratio rising to around 20%, then
the creation of a European bad
bank might be the solution (Ozyurt
and Utermöhl, 2020). A TARPstyle
bad debt fund would issue bonds
that commercial banks would buy
in exchange 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 institutions such as
the European Stability 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
structural 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).
WORLD ECONOMY
Source: US Global Investors, 2020
Figure 8: US Corporate Debt at an All-Time High
in the Decade Since the Financial Crisis
Source: US Global Investors, 2020
Figure 9: US Nonfinancial Corporate Debt Rated
BBB Has Exploded in Recent Years

10. ICTF World 35 www.ictfworld.org
What next?
According to NYU Professor,
Edward Altman, and creator of the
Z-score, a stressed credit cycle
with a deep recession 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
interest rates into financial markets,
much of which has been used by
corporations to boost billions of
debt-driven buybacks of equities
to push asset prices higher. Based
on his well-known models for
predicting corporate insolvencies,
he has warned US credit investors
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 already
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. According
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 crisis 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 return
to economic growth driven by
environment-friendly investments,
improving consumer confidence
and discovery of effective Covid-19
vaccines or treatments. 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.
Ivo Pezzuto
Professor of Global Economics
and Competitiveness, Disruptive
Innovation and Entrepreneurship,
International School of Management,
Paris, France
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