The world is trying to recover after the initial shock of the Covid-19 pandemic, but the task is huge. The virus has shaken to the core not just our confidence, but our entire way of life.

Gone are the overcrowded commutes towards busy offices. Gone are the long queues in front of various restaurants, fast food outlets and cafés during the busy mid-day lunch break. Gone are the brunches, lunches, dinners or boozy parties in restaurants, pubs and night clubs.

Gone are the trips to the gym, swimming pool, bowling, ice rinks. Gone are the holidays in hotels, at home or abroad.

This litany of closed businesses translates in millions of jobs lost across the world. And if some of them will come back, many of them will not. It will take a lot of time for the economies in different countries to restructure and adapt to the new reality.

There are signs that this is happening already. Farmers are offering home deliveries to make up for lost business due to the closing down of markets and restaurants, fitness trainers offer lessons online rather than in gyms, office workers hold meetings on Zoom, pubs sell takeaway Sunday roast, to give just a few examples.

However, while encouraging, these initiatives are not enough to cushion the global economy from a deep recession if, after the initial lockdown is relaxed, things don’t go back to “normal” quickly. And it looks like they won’t.

All the measures that need to be put in place – more working from home for office workers, social distancing in pubs and restaurants, restrictions on travel (to the point where Warren Buffett said he won’t buy any airline stocks) – are just as many nails in the economy’s coffin.

Drowning in debt

Although on the surface we entered the crisis in rude health, that was just the effect of the drug administered a decade ago to take us out of the 2007-2009 financial crisis: debt. And, if before the Covid-19 pandemic we were up to our eyeballs in debt, now we’re drowning.

A recent paper by the Bank for International Settlements (BIS) takes stock of the debt owed by businesses. Among its findings:

• Statements from 2019 suggest that 50% of firms do not have sufficient cash to cover total debt servicing costs over the coming year.
• Operating expenses result in many firms running operating losses, placing an additional burden on cash buffers. It is estimated that following a 10% drop in revenues, operating expenses only fall by 6% on average.
• Simulations suggest that if revenues fall by 25% in 2020, then closing the entire funding gap with debt would raise firm leverage by around 10 percentage points.

Source: BIS

The BIS paper considered a scenario in which revenues decline by 25% this year compared with last year — something which, it said, “could happen in several sectors if lockdowns last for three months or if activity remains supressed over the year.”

The conclusion is more than worrying. If businesses can roll over all their maturing debt this year, around 40% in the median country would still be unable to cover their operating expenses and interest payments from their revenues and cash buffers. If they cannot roll over any maturing debt this year, that percentage jumps to 60%.

Sure, central banks have been trying to help. They’ve restarted their asset purchases, buying even junk debt in order to ensure that businesses can be kept afloat and they can keep people employed. Interest rates are anyway so low that they’re irrelevant.

But, looking at the UK only, more than 4 million people have been furloughed so far on 80% of pay. Of these, how many will, realistically, return to work? One in nine households — more than 1.2 million borrowers — have been granted three-month mortgage holidays, during which they will not pay interest and principal payments on their loans, to give them breathing room to find new income.

But what if that income is no longer enough to cover the payments? Yes, banks can lower the costs of mortgages, but what about those who will not find enough money to cover even these lower costs?

This is why the idea of a bailout for households is again gaining traction. At some point, we will all have to admit that borrowers cannot stretch any further, while lenders cannot “pretend and extend” forever. The road to debt forgiveness will be painful, but perhaps a better type of economy and society can emerge at the other end.