Simmons: how to limit economic damage
The recession in Bermuda caused by the Covid-19 pandemic will be deeper than the economic downturn that followed the 2008 financial crisis, an economist said.
“This recession will be deep, dwarfing the one resulting from the financial crisis, but it need not be as long,” said Craig Simmons, a senior economics lecturer at Bermuda College.
He added: “A recession is imminent, but the Government's focus shouldn't be on the economy. If anything, we should be trying to enter the recession as quickly as possible by shutting down hotels and restaurants, retail [with the exception of grocery stores and pharmacies], and construction.
“The central objective should be social isolation to limit the spread of the virus.”
Mr Simmons said the emphasis of fiscal policy “should be on providing temporary social insurance (cash payments) to people working in the shutdown sectors”.
“A policy of social insurance can help protect people from the economic difficulties of staying at home whilst reducing the spread of the virus. In this sense social insurance has what economists call a positive externality well beyond its economic cost.”
The Government yesterday announced that laid-off workers would be eligible for unemployment benefits of up to $500 per week over a 12-week period.
For all the workers in the closed-down hospitality, construction and retail sectors $500-a-week payments would amount to $60 million over three months, which he said is “the time it might take for life to begin to return to normal”.
Mr Simmons added that the island's small and medium-sized businesses will require help to manage cashflow challenges.
“Unlike financial support for individuals, one size will not fit all,” Mr Simmons said. “SME assistance could be based on payroll. An SME with annual payroll of $1 million would receive more assistance than one with a $200,000 payroll.
“Further, business in general will need assurances that banks, landlords and creditors will act in the compassionate way. Businesses will need a temporary postponement of debt payments from lenders and creditors. In this environment, bankruptcy and foreclosure will likely lead to large lender and creditor losses and undermine business confidence.
“All of this debt forbearance will ultimately put banks at greater risk. We know that at least one bank is operating below the capital requirements set by the regulator, the Bermuda Monetary Authority.
“So, banks will also need forbearance from BMA because when a bank's balance sheet is weak, its ability to keep ATMs full and debit card payments running smoothly is compromised. By relaxing capital requirements, a bank can write down the value of its loans without having to raise new capital.”
Mr Simmons said the Government “must act as the lender of last resort”, adding: “The Government has to be willing to underwrite all of the cash handouts to workers and businesses and be willing to guarantee some of the outstanding loans which today stand at over $3 billion.
“We want to keep businesses in a position to rebound from this crisis. Further, we want shutdown businesses to quickly rebound once the health threat reaches an acceptable level. We can think of this rebounding process as a part of the recovery phase, which at this point is an unknowable distance away.
“During the recovery, the Government could offer payroll tax holidays to employers along with ‘jawboning' bankers, creditors and landlords to extend debt forgiveness.”
Mr Simmons said the Covid-19 pandemic is a “black swan event”.
He added: “In the minds of most people, it is a highly unlikely, highly impactful event, although after the fact, many will claim to have seen it coming.
“Many will have heard the adage, ‘it is tough to make predictions, especially about the future'. This is especially true of economists because the global economy and, indeed, our very small economy have too many moving parts.
“If we could accept that economic and political prediction is fraught with uncertainty, then maybe we could avoid perilous decisions that expose vulnerabilities to grey swans — consequential events that are somewhat predictable such as difficulties arising from large personal and public debt.”