Resilience has become the watchword for governments across the world. Mostly it is being applied to healthcare systems and manufacturing supply chains that risk being overwhelmed by Covid-19. But a new approach towards corporate finance is also called for: a preference for debt over equity has left economies more fragile than they should have been going into this crisis.
The capability for debt to produce instability has been comprehensively demonstrated twice in little over a decade. The 2008 financial crisis, at its root, was caused by excess debt. The destructive power of the financial innovations that prompted the moment of crisis itself were amplified by the leverage of the banks. A long decade of meagre growth followed on the heels of the crisis, partly as banks and governments attempted to repair their finances.
While the present crisis is not caused by debt, the side effects of lockdown are made worse thanks to businesses’ stretched balance sheets. Companies that used cheap borrowing to lever up and juice their profits are now struggling to meet interest rate payments during an enforced shutdown. Borrowing that in good times kept costs low can become a millstone in bad times.