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Even finances can "catch a virus"

UGLY TRUTH: Panic on the stock market and cities on shutdown! Coronavirus can cost the world billions

David Budai
27.Feb 2020
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3 minutes
Koronavirus mučí svět financí

Coronavirus, which has already begun to spread wide and far across Europe, will soon become an issue not just for medical workers, but also for economists and financial experts. There is a real danger of global shocks on the stock exchange, increase in bankruptcies and state budget crisis in many countries. The measures that should prevent the spread of the virus are actually paralyzing international trade. And the worst is yet to come.

Koronavirus se šíří po světě.
Koronavirus může otřást burzou na Wall Strett.
Koronavirus může otřást burzou na Wall Strett.

When we look at China today, where the outbreak is the most extensive and tens of thousands of people have already fallen ill, it clearly shows how coronavirus can cripple the economy. Just a little example: car sales have dropped by an incredible 92 percent, electricity consumption has halved due to factory shutdowns, and emissions to air, for instance, have decreased by 25%.

This is due to the fact that many places have been quarantined, people aren't leaving their homes, they've stopped traveling and shopping. And it's not just China anymore, but also the technologically advanced South Korea or Italy. If similar quarantines spread to other countries (as this week's development suggests), it could cause financial problems for a great number of business companies, because nobody will be buying their products.

On the threshold of a global crisis

But business companies usually have loans, and they won't be able to keep paying them off, which means problems for banks. Tourism, hotels or restaurants and travel agencies will also suffer, since people will travel less. World stock markets are usually quick to react to situations like this, stocks of various companies will thus go down. And all of that can trigger a major global crisis that will deprive millions of people of their jobs, plunge countries into economic recession, and business companies, financial securities, or banks will begin to collapse.

It doesn't take much to trigger a spiral, ending with a major economic crisis that will cause a decline in the standard of living of people worldwide. This scenario is definitely not unrealistic. Economists around the world are openly talking about this, and the US stock market, for instance is already experiencing huge stock drops. The biggest in the last four years. Finance ministers and central bank leaders are already meeting to discuss the effects of coronavirus on the economy.

The worst thing? Paralysis!

In the Czech Republic alone, it is estimated that coronavirus will cause financial losses of at least five billion crowns and deepen the state budget deficit. But these are estimates based on the current scenario, in which the contagion hasn't arrived in the Czech Republic yet. But what will it look like if thousands of people get infected? It can easily happen that multiple Czech towns will be affected by quarantine. People won't able to go to work, production will come to a halt, and nobody will be buying the goods anyway. Consequently, companies won't make the payroll, people won't be able to pay off their mortgages, and it will also trigger inflation, making everything more expensive. Commercial supply will be crippled and everything will come to a standstill.

And coming to a standstill is the worst thing that can happen to the current economy. It could take several weeks or months for doctors to get the coronavirus under control, which means years of recovery. If it really goes that far, it will affect the lives of all Czech people.

Panic is the greatest danger for the markets

However, the worst part is that all of this can still have less impact than fear and panic. The world of today is faster and more interconnected, so financial markets are responding much faster than 100 years ago, when the Spanish flu killed millions of people. Back in those days, even such an enormous tragedy couldn't shatter the world economy. Today, though, the smallest sign of fear is enough for people to start acting emotionally. One sick person on the famous Wall Street can be a greater disaster than thousands of sick elsewhere in the world.

If people start to panic and behave irrationally, they might begin to sell their stocks without thinking, triggering an avalanche and causing the stock market’s downward spiral to accelerate. And that can damage everyone - even outside the financial markets and stock markets. For global finance, this could be completely destructive.

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