Coronavirus and the interplay of systemic, systematic risks, and Catch-22 on business and economy at large

Abstract

The corona virus induced economic crisis is different from economic downturns that most of us have seen during our lifetime. A virus has crippled ‘super humans’ and their Earth; Humanity is beseeching The Almighty to end this misery. This virus has sent seismic waves across the globe, halting economic activities, affecting financial markets after supply chains and businesses came to a screeching halt. The crisis of this nature is a magnum opus in itself but without a certain ending. This is the very reason why this crisis stands out amongst other economic crises since the Great Depression. Like other economic meltdowns, this did not have any preceding economic shocks or financial market jugglery. Oil shocks of the 1970s culminated into an economic crisis in the 80s. Asian financial crisis has its roots to the untenable peg to the US dollar. 2008 financial crisis, also called the Great Recession, was the result of the bursting of the asset price bubble. 1990s onwards the economic downturns did have an increasing contagion effect on global economy and financial markets, largely due to globalization. During these periods of crises, the talks on risks, its nature and type, and mitigation came to fore and discourse goes on until the end of the crisis, to begin again when the Next emerges. This article aims to explore the interplay of systemic, systematic risks and Catch-22 scenarios because of Covid-19 on business and economy at large. Simply put, systemic risk is an event that causes a collapse of a company, industry or even economy. Thus the definition is broad and encompasses micro business events like trading platform outage of a brokerage house during trading hours, or a failure of payment systems of banks or even a trading algo gone rouge. But generally, it means a risk caused by an event at a company level that is severe enough to bring about instability in the economic and financial systems. The most glaring example is 2008 Lehman Brothers bankruptcy that triggered market-wide collapse and put brakes on global economies. Systematic risk, popularly known as market risk, is an all-permeating risk that crops up from a variety of factors such as economy, interest rates, corporate wellbeing, geopolitical issues etc. and cannot be diversified away.