Financial bubbles, crisis and coronavirus

El Economista – The financial crisis caused by the Covid-19 can be compared with the last financial crisis in 2008 and with the crash of the Stock Exchange in 1987. However, it presents some differences with respect to the latter.

Unlike the other two crises mentioned, the recent crash in the New York Stock Exchange was much faster. The coronavirus only took 18 days to destroy 35% of the value of the Dow Jones index, while in 87 ‘this destruction was not achieved, and in 2008 it took 122 days to destroy 35% of the index and 213 days to brush the 50% drop. Although we have not yet reached that drop, the speed of the market collapse is higher, mainly because the speed of information circulation and Big Data allow markets to adjust expectations much faster than a few decades ago.

Despite this difference, there are similarities. As in other financial crises, a financial bubble was brewing in the stock markets, which, in this case, grew slowly but steadily thanks to the actions of central banks. Thus, the bubble grew so much that only with the first puncture did it burst and a generalized panic was unleashed, causing investors to divest themselves of their riskiest assets (stocks and bonds from emerging countries) and switch to hedge assets (government bonds). United States and Germany, for example).

What worries most, not only the markets but the entire population, is the uncertainty about how quickly the spread of the disease stabilizes. In this sense, it is not the same that productive activities are normalized in two months than at the end of the year, given that in the latter case we would be facing a global depression. What is expected as the most likely scenario is that there will be a global recession in the first quarter, as a consequence of the impact of the coronavirus in China (a fall of between 2.5% and 4% is estimated). In addition, the world is expected to experience a drop in economic activity in the second quarter, as a result of the impact of the virus in Europe and the US.

The case of China makes us think of an optimistic future, given that strict measures had a positive result in stopping infections. If the same effect begins to emerge in Europe, especially in Italy where the situation got out of control, investors’ spirits will change and the collapse of the financial markets, at least, will stop.


By Diego Piccardo Economist, Fundación Libertad y Progreso