Balance-Sheet Stress Worsens Bailout Dilemma

In reacting to overwhelming evidence of a devastating blow to corporate earnings, policy makers and investors now have to come to grips with another consequential theme connected to that: the severity and duration of balance-sheet stress and the potential to relieve it. It’s a theme that will partially determine the severity of the global recession and the amount of pain felt by society as unemployment shoots up to previously unthinkable levels and incomes plummet. It will also differentiate among sectors and companies in a way that will significantly affect investment performance.

As it makes it way through the global economy, the coronavirus has decimated corporate income statements. Signs are everywhere, starting with drastic downward revisions in earnings, with many companies understandably suspending forward guidance entirely. The next rounds include corporate downsizing that will drive unemployment quickly to alarming levels, above even the highs reached after the financial crisis.