Even at the depths of the 2008 financial crisis, Cirque du Soleil’s acrobats kept twirling. While other companies tightened their belts or went under, the Canadian circus expanded its roster of flamboyant shows. But the coronavirus crisis proved a vault too far.
Last month, Cirque du Soleil was forced to cancel all shows and lay off 95 per cent of its employees. Two weeks ago, it missed a payment on its $900m of debts — sourced from the riskier leveraged loan market — and became the latest corporate victim of the virus. “The situation has been sudden and has put a very difficult strain on the company that we are actively working to manage,” Cirque du Soleil said.
The Canadian entertainment company is not alone. What started as a health crisis has morphed into an economic crisis of staggering proportions. Morgan Stanley predicts this year will see the deepest global recession since the Great Depression. Despite the recent market recovery, some investors and analysts still fear that a financial crisis could compound the economic damage.
“Today’s crisis is primarily a health crisis, but the size of it has led to an economic crisis, and that could in turn become a financial crisis,” says Tobias Adrian, head of the IMF’s markets department.
If that happens, it is likely to be a very different kind of financial crisis than a dozen years ago. The banking sector today largely looks healthy, after efforts to ensure that the bailouts of 2008 could never happen again. Measures varied from country to country, but all banks have been hit with stricter capital requirements, while the “proprietary” trading that banks conducted with their own money has mostly been killed off.
However, fragilities in the financial system remain — but elsewhere, and in a different form. Former officials, analysts and investors warn that risks appear to have migrated from the banks into a sprawling, multi-faceted investment industry which has grown tremendously over the past decade, partly by stepping into the void left by banks.
As vice-president of the European Central Bank at the peak of the eurozone crisis, Vítor Constâncio watched many of the region’s banks teeter on the edge. Now he believes that this shift shows how the overhaul that came out of 2008 was a job half done.
“Risks have grown enormously over the past decade,” he says. “We need to rethink the regulation of the non-bank part of the financial system, because they could amplify what could become a full-blown financial crisis.”
Financial crises are not mere economic downturns, or even synonymous with plummeting markets. The early 1980s saw a painful global recession caused by the US Federal Reserve’s aggressive interest rate rises, but outside of parts of the developing world that borrow heavily in dollars, it was not a financial crisis. Nor was the global stock market losing nearly half its value in the early 2000s, when the dotcom bubble burst.