Aiyar presented a number of likely scenarios based on how quickly or slowly the coronavirus situation plays itself out:
1) No one has any idea how long it will take for the virus to play out. In the best case scenario, it would be over in three months — in which case there will definitely be a recession but after the recession we may see a reasonably fast recovery, Aiyar told ET Now.
2) On the other hand, if it takes six months then we are in very deep long-term trouble.
3) If it carries on for nine months, that would make it as long as the Spanish flu of 1918-19 which at that time infected 200 million people and took 50 million lives. At today’s population levels, several billion people will be infected, tens of millions of people will die, the economic damage will be extremely deep. The damage will be of a different nature than the one inflicted in 2008, which was a narrow financial crisis, he said.
4) If we have this continuing for a full one year, then the financial sector will also be affected, Aiyar said. There will be a very large number of bankruptcies. Debt will become a very serious matter for many banks because the corporate sector has been borrowing a lot, taking advantage of lower interest rates.
In the worst case scenario, if the coronavirus continues for 12 months, we will suddenly find that companies no longer have the cash to repay their loans. What could follow is another full-blooded financial problem like the one we had in 2008, says Aiyar.
There is a more worrying part: Aiyar said that government and central bank policies may not matter much this time.
According to him, this (the fall in economy) is not determined by policy. This will be determined by the disease — how long the disease continues, how fast it spreads, whether it is checked by the summer heat, and things like that. We have no way of knowing how much things things will matter, he said.