COVID-19 Recess: Worse Than 2008 Global Financial Crisis

Today’s turbulent economy recalls how they behaved in the nerve of the financial crisis 12 years ago

5 min readNov 26, 2020

The outbreak of COVID-19 put the global economic plunge as affected by the collapse of demand, supply & market instability. A total restriction caused by the Great Lockdown roughly cut 50% of economic growth in the emerging economy. IMF had considered that global growth projected at -4,4% in June 2020 and expected recovery rise in the third quarter with 5,2 percent in 2021. Pandemic had also cost 2,3% GDP reduction in the first year according to indicators of macroeconomic’ supply & demand circulation.

At the same time, the simultaneous damage has destabilized cross-border supply chains implying the global contractions for the 10 to 20% GDP loss in the second quarter range. The total loss of GDP scenario can be proxied by the latest forecasts and pre-COVID 19 outlooks. By far, the cost of this damage is higher than the previous epidemic and recess during the Global Financial Crisis 2008–09 while OECD countries had lost 3% GDP per year.

Unlike the 2008 global financial crisis, the immediate impact of collapsing world markets is going through inevitable fatalities. It comprises the negative-sum-game scenario in the fiscal domain, government incompetencies of disastrous reign, and millions of deprivations. Then, what else makes Covid-19 recess a more damaging crisis than 2008?

Gauging supply & demand side

Nothing like 2008, today’s world recession has made governments and markets face limited access to determine trade-offs. Not because of neither banking and settlement systems that had hit rock bottom, but today’s recession includes fundamental health crisis and massive mortality. It has ruined the momentum of global economic growth and also shown governments and central banks’ helpless attitude as incapable of repress financial volatility. According to the Federal Reserve, this sequence has led to the inevitable rise of corporate debt caused by several high-yield debts.

COVID-19 also persistently depress the aggregate of supply & demand. Since it has damaged the whole capitalism economic structure and human security aspects, the pandemic’s too stretching the fractures in the rate return of capital and catapult the negative impact in both supply and demand.

On supply aspects, companies will feed up with the circulation of self-consuming expenses to bear the operational burden with negative earnings growth and cash balances. With this undeniable debt risen, corporates themselves have to deal with the self-feeding cycle and disrupting the supply chain.

Later on, demand aspects are calculated based on the time reduction of the labor force that will be affecting purchasing power. It can also materialize by combining an estimated loss of employee workdays with expected productivity per worker. By this array, the demand will decrease as be especially severe among industries whose products required customers to congregate.

Subsequently, the company’s net debt is roughly equal for triple B rated bonds to its earnings. The company’s unable to trade high-yield bonds could affect the primary market for bond issuances while constrained and refinanced maturing debt. Investors unwilling to sell their high-yield bonds as if seeking other assets to offload and causing disruptive motive in one market to another. Ultimately, both companies and investors will be facing spillovers and credit downgrades.

Companies Response

While the government and the central bank had no chance to pull the equilibrium string to happen, the company manage to hover their solution into micro-threatening moves. In the self-help scenario, many companies have elevated their extreme debt to hinder liquidity stress. Liquidity stress has altered debt rating goes down, as it has put off inflorescences in credit spreads and unhealthy trading conditions. The impact is nothing than the inevitable default in public wellbeing and financial stability.

The risks could sustainably hurt the primary market. In this long-lasting aversion, the stock price increases that heighten credit risk and engulfing liquidity in debt markets. The company will be bragging into debtholders status and jump into the pitfall of the debt trap. The longer company holds this negative growth, the higher threats of default, and the inability of Free Cash Flows (FCF). In the end, the post-Covid situation will conduce FCF to goes down and the debt risen in values.

Authorities Response

Sudden shut-downs of economic activity cost trillions of dollars to soften turbulence. It fetches the Advanced Economies (AEs) 8.3% of GDP–6.6 percentage points (pp) higher than in the aftermath of the GFC in 2008. The government progressively narrows the deficits through fiscal stimulation and policy interest. By reacting to temporary panic on the domestic market, the government had allocated several fiscal programs by setting up special wards to boost health security and care capacity.

Both budgetary or non-budgetary, the government sacrificed the negative impacts in state financial balance to channeled its Fiscal Stimuli to subsidized workers, incite household consumption, and domestic companies. It had also triggered by government regulation by tax/credit relaxation determinants to EMEs and SMEs with such strong policy response. This though financing conditions reflected in the increase of CDS (Credit Deafault Swap) spreads, that has negatively and significantly correlated with the size of the fiscal packages.

Follows by the monetary side, the government will complement its fiscal package by cut policy rates. The affected sectors can take advantage of this lower policy interest in financing the costs of the sovereign. With policy rates close to zero, this unconventional monetary policy will let the central bank to form quantitative easing (QE) and have the possibility of increasing fiscal space by reducing interest rates along the yield curve. The QE form will affect zombie companies to mold in the functioning market.


COVID-19 outbreak situations have already dismantled the problems in the current capitalism financial system while neglecting the morality aspect of the economy. The current economic system is killing. Debt as a primary solution only occurring disruptive solution rather than systematic resolution. Thus, regulatory authorities should adopt non-micro-financing policies to alleviate the gravity of the impact of Covid-19.

By following the high-frequency indicators to reduce the downside and robustness of subsequent economic restart in 2021, authorities should capture the severity of the current harmful free-market capitalism system.
The government should start defining the new destination of the global economy at the forefront in a stricter manner and prevent a harmful crisis on civil society sovereignty.


  1. Arslan, Y, M Drehmann and B Hofmann. 2020. Central bank bond purchases in emerging market economies, BIS Bulletin no 20.
  2. Drehmann, M, M Farag, N Tarashev and K Tsatsaronis. 2020. Buffering Covid-19 lossesthe role of prudential policy, BIS Bulletin no 9.
  3. Hördahl, P and I Shim. 2020. EME bond portfolio flows and long-term interest rates during the Covid-19 pandemic, BIS Bulletin, no 18.
  4. IMF. 2020a. Tracking the $9 trillion global fiscal support to fight Covid-9, IMF Blog, 20 May.
  5. IMF. 2020b. Fiscal monitor, April.
  6. IMF.2020c. World Economic Outlook, October.
  7. Kohlscheen, E, B Mojon and D Rees. 2020. The macroeconomic spillover effects of the pandemic on the global economy, BIS Bulletin, no 4, April.
  8. McKibbin, W and R Fernando. 2020. The global macroeconomic impacts of Covid-19: seven scenarios, CAMA Working Paper, no. 19/2020.
  9. Meirison, M. 2018. Riba and Justification in Practice in Scholars’ Views. Transformatif, 2(1), 348.
  10. OECD. 2020, Evaluating the initial impact of Covid containment measures on activity, 27 March