As the focus around issues of Covid-19 moves to the long and winding road to economic & financial recovery, it is worth taking a look at some of the myths and folklore which might be encountered along the way.

Big, Big Myths

Myth 1 The World is experiencing a health crisis, not a financial, crisis.

Financial and economic slowdown, more accurately paralysis, has happened because Governments have determined that the health crisis will in part be mitigated by putting economies to sleep.

The 2008 crisis is not a model for addressing financial and economic recovery. The banking sector is in a far better position than it was a decade ago. In simple terms companies and individuals have, and will have, a liquidity problem. The absolute priority for governments will be to find a way to direct funds towards those who need it.

Some Governments in the EU, particularly in the East, currently have little, if any, wriggle room for significant intervention. The cupboard is bare at many Government Treasuries, as a result of their reckless and misdirected public spending in recent years. They are going to have to to borrow. Fortunately, money is largely cheap as interest rates are low. Banks, (although, maybe not in the Eurozone) have plenty of money to lend, but not every country has access to cheap money.

The capacity of countries to cope depends not merely on fiscal health, but on the quality of their healthcare systems. Major differences are evident within the European region. It is the need to protect health services, which have suffered from underinvestment over the last decade, from being overwhelmed, that has lead most countries in the region to put in place strict lockdowns early. Far quicker, in many cases, than countries in Western Europe.

Myth 2 This health crisis will bring an end to globalisation, a virtue championed in both liberal and protectionist circles since the beginning of the Covid-19.

Labour shortages exist in Europe. It is unlikely that companies are about to bring back production from Asia to Europe. Admittedly as a result of rising unemployment through lay-offs, bankruptcies and longer downturn in consumer demand, Governments may intervene to domesticate supply chains. The current crisis will encourage growth in digitalisation in the EU region but certainly, supply chains will have to acquire more diversity in their models and links.

Myth 3 Any rise in growth will mean that economic stagnation is over and recovery is on the way.

The worst has passed, so does this mean that economic and financial recovery rapidly begin? If we measure the extent of ‘crisis’ only by the recorded figures for real gross domestic product (GDP) – the value of the production of goods and services, after allowing for price rises – then it does appear that the economy has turned the corner.

Normally, the underlying reasons for the rise in GDP are more complicated than they appear. Recovery is often kicked-off in a process through what used to be called an ‘inventory cycle’. Stocks of materials and parts, after being reduced as production declines and expectations remain pessimistic, reach a point where they start to run out. In the shops even the depressed sales start to deplete the shelves. A relatively modest restocking can stimulate output. Stock accumulation alone does no more than restore output towards its former level. Annual rates of growth of less than 1 per cent, as we have had for the past six months, are scarcely better than stagnation.

Myth 4 The beginnings of a recovery mean it will be self-sustaining and improve.

The lack of growth constrain even the weak growth associated with an inventory cycle, but there are great uncertainties in the wider world economy. Governments talk about growth coming from the private sector, but investment by businesses remains depressed. Announcements of major projects, for example have to move from the drawing board to construction (never an straightforward path, particularly in the UK).

Myth 5 Financial and economic recovery will result from successfully addressing the health crisis

Although Governments would like to present the story book in that way, they have the ability to fire the starting guns to economic and financial recovery at almost anytime. It depends how many lives they are prepared to sacrifice by giving economic and financial recovery a higher priority that health recovery. How many deaths are tolerable? The likely answer is that more deaths will be tolerated if institutional and individual economic and financial problems increase.

Little, Big Myths

Turning to some of the more practical myths of operating businesses during profound economic and financial recovery:

Customers demand lower prices during a recession. When customers stop buying, the first reaction is to drop prices to stimulate spending. Where price is the chief incentive, buying behaviour changes. Customers wait for even deeper cuts.

Businesses have to follow competitor price-moves during a recession to stay competitive. Competitors use price wars to protect market share but soon find that doing so at the expense of profit is unsustainable. Rarely does volume make up for the loss in revenue.

“Customers are privileged to do business with us because we are very good at what we do.” As the British motor manufacturers of the 1960’s discovered, companies portraying that attitude find customers don’t stick around long.

Customer-retention initiatives are a cost that won’t pay back. Companies which treat customer retention as a cost will under-allocate resources to protect their greatest asset. Their efforts fail to improve retention or increase sales and, therefore, support dwindles with inevitable results.

Big, Little Myths

Finally, at a very practical level, defaults, bad debts and attempts at recovery of assets will become critical for economic and financial survival of individuals and businesses.

Financial recovery of assets, misunderstandings and misconceptions by both creditors and debtors on recovery of outstanding debts are illuminating. Some of the myths below provide a flavour but are by no means exhaustive:.

Creditors must accept any offer of repayment made. Most creditors will have heard a debtor offer minimal regular periodic repayments on the basis that if taken me to Court, the Court will order an even lower regular periodic repayment. In reality, Court proceedings will require a debtor to file paperwork advising of their financial circumstances. The creditor may file a response with information suggesting that the debt can be repaid quicker. The Court will make an appropriate final judgment.

Misleading information regarding the right of entry a bailiff is presented by the media. Generally, when enforcing a normal civil warrant, a bailiff cannot force entry into a home, although a bailiff may gain peaceful entry, for example, through an unlocked door or a side garage. However, where a bailiff has previously visited the premises and obtained a signed Controlled Goods Agreement, they can then force entry. If there are outbuildings, sheds or garages which are separate from the residential building, entry can also be forced. A bailiff may be able to obtain an order of the Court granting leave to force entry, for example if there is good evidence of a debtor hiding valuable assets in a property.

A person is only liable to pay his “share” of a jointly and severally liable debt. Joint and several means that all parties are liable for the whole debt until it is paid. What arrangements the debtors have for settling their affairs between themselves is not a concern for the creditor.

Bailiff cannot remove a vehicle if it is needed for work. The High Court Enforcement Officer or Bailiff is not allowed to take control of or remove “tools of trade” – items that are needed by the debtor to do their job or run their business. A vehicle could be a tool of trade only if it is exclusively used for business purposes. If the vehicle is also used for example for the school run, the weekly shop or any non-business related activity then it can be removed. It might also be the case that the vehicle is excessive for the business needs. The self-employed will have difficulty in making a business case for a luxury vehicle Bailiffs can take the expensive vehicle for sale at auction and replace it with a cheaper, more business suitable alternative.

A debtor cannot avoid the debt by entering bankruptcy. From a creditor’s perspective, when a debtor enters bankruptcy the debt appears to then be “written off” as there is nothing more the creditor can do. For the debtor, bankruptcy is not an easy option. The debtor’s means and circumstances will be reviewed and assets liquidated. Debtors can be subject to an Income Payment Order. Such an Order requires them to pay their disposable income to the trustee in bankruptcy for the next three years. Whilst the formal bankruptcy normally lasts 12 months, the damage to the debtor’s credit record will make obtaining credit or a mortgage extremely difficult for years to come.

A debt is wiped out after six years under the provisions of the Limitation Act. A creditor who is owed money under simple contract and has failed to take formal legal action within six years from the cause of action, will be statutorily barred from issuing an action on that debt. A debt which is statute barred still exists, and can be paid by the debtor. A creditor with such a debt should consider when the “cause of action” arose i.e. the date that the debt became formally due. If a debtor has “acknowledged” the debt at any time since the initial default date, the six year period may have restarted allowing a Court action to be taken. If there has been no acknowledgement of the debt, a creditor can still apply to the Court to extend the limitation, though the Court would require very good reasons to do this. It should also be noted that a Creditor is usually only allowed to claim up to 6 years interest

Bob McDowall