Photograph: James Veysey/REX/Shutterstock
Allianz’s chief economist, Mohamed El-Erian, fears that companies who can’t access loans, or issue debt, will face solvency problems soon.
Speaking on CNBC, El-Erian explained here are two groups of companies right now.
One has access to the debt market, and “they are taking on a ton of debt... building a ton of cash”. That will help them through the Covid-19 crisis, but such a debt pile will hurt their credit worthiness in future.
Those on the other side have an immediate problem - no access to loans or debt issuance.
“For them, a liquidity problem will become a solvency issue,” says El-Erian.
This means a reversible shock will become a permanent capital impairment shock
The markets are still working through this issue, he adds, but the upshot is “lower valuations from here”.
An article by theguardian.com