Question

Do you think the ongoing Covid-19 can trigger a financial crisis? If yes, explain the mechanism with which it will spread. If no, explain why. (100 words)

Answer 1

Yes, this will cause a financial crisis and it will spread from the banks. Most of the business in the US takes loans for expansion and investing. Due to strict lockdowns and lack of any business activity in the market the demand is low and there is very less economic activity in the US. The business will be unable to pay back the loan installments. People who are now unemployed may be having similar loans and installments to pay who will also default on their loans.

This willl increase the bad debts in the US market and lead to a fall in the value of goods that are kept as a mortagage, this can lead to a fall in the banks that are overleveraged. A slowdown in the US will leads to other financials institutions also falling because of US exposure to the international market.