As businesses deal with the prospect of a sudden stop in their cash flows, the most exposed are a relatively new generation of companies that already struggle to pay their loans. This class includes the “zombies”— companies that earn too little even to make interest payments on their debt, and survive only by issuing new debt.
The dystopian reality of deserted airports, empty trains and thinly occupied restaurants is already badly hurting economic activity. The longer the pandemic lasts, the greater the risk that the sharp downturn morphs into a financial crisis with zombie companies starting a chain of defaults just like subprime mortgages did in 2008.
Over the last century, recessions have almost always been started by a sustained period of higher interest rates. Never a virus: The damage such contagions inflicted on the world economy typically lasted no more than three months. Now this once-in-a-century pandemic is hitting a world economy saddled with record levels of debt.