AThe second stage of the crisis has broken out in the financial markets. In the first stage, announcements by central banks and governments to support the economy and the stock exchanges were generally received positively, but described as too halfhearted. In the second stage, such announcements are evidence of helplessness or panic. The American central bank had this experience at the beginning of the week after surprisingly lowering its key interest rate again and also announcing that it would buy larger amounts of bonds.
In an immediate reaction, Donald Trump described these announcements as good news for the stock exchanges. But investors saw it differently: everywhere, share prices fell again very clearly. In Germany, the Dax temporarily fell by more than 10 percent on Monday. Stock trading on the New York Stock Exchange had to be interrupted just a few seconds after it opened. Later, courses recovered somewhat.
In this second stage of the crisis, many investors tend to generally sell investments and park their money in bank accounts, even when there is no interest there. At the beginning of the week, gold was also sold, which, contrary to legend, is of poor quality, and for the first time also bonds with very good credit ratings, including German government bonds. The price losses are sometimes severe, but there is no real panic on the financial markets, unlike after the fall of Lehman Brothers in autumn 2008. The first financial firms are advising to slowly buy shares again. Many investors will not yet dare to do that.
A good plan
Any stabilization of the economy and the financial markets presupposes a successful fight against the virus. Until then, the goal of politics is to keep banks and companies alive by providing liquidity. This is a good plan, but unlike in the financial crisis around ten years ago, joint action by the leading countries is sorely missed. This applies to transatlantic cooperation, but also to the cooperation between Europeans. Even if it may be necessary for medical reasons to make borders less permeable than before, and even if health policy is largely the responsibility of nation states, there are no signals for joint action.
That also depends on Trump, whose attempt to gain sole access to a vaccine under development through the German pharmaceutical company Curevac shows that the American is only interested in himself. But so far the Europeans have not managed to appear closed. The answer cannot be to just hand out money. If the crisis continues, speculation will begin to emerge on the financial markets as to whether all highly indebted European countries will be able to face the virus and rising bond yields in a recession at the same time.
The high levels of government bonds in the books of many European banks are one reason why bank share prices are currently falling so sharply. It would be fatal to trust that the European Central Bank could pull the chestnuts out of the fire again.