NEW YORK–Financial assistance to vulnerable households and businesses will mitigate the economic and employment shock but will not prevent a severe downturn, according to a new report from Moody’s.
The report said support to large companies will limit credit deterioration for certain issuers, but Moody’s added, “While the federal aid package will provide some relief to households, businesses, states and local governments, Moody's Investors Service expects credit conditions will likely remain difficult for many public and private debt issuers over the coming months.”
"Combined with other fiscal, monetary and regulatory actions taken to date, the coronavirus rescue package will help contain the damage to the US economy and facilitate a recovery once the virus is contained," said Moody's Vice President Rebecca Karnovitz in a statement. "However, given the depth, breadth and nature of the shock, these measures will not be sufficient to prevent a recession or a sharp rise in unemployment."
‘Irreversible Credit Deterioration’
According to Moody’s, creditworthy borrowers in nationally important sectors as well as large employers will likely benefit most from the CARES Act's provisions for large companies. “However, these measures are unlikely to prevent irreversible credit deterioration and, in many cases, outright default for smaller, weaker companies with speculative-grade ratings,” the analysis suggests. “For financial institutions and structured finance transactions, the CARES Act will mitigate a rapid deterioration in asset quality to the extent that support measures help households and businesses meet their financial obligations. Provisions that allow borrowers to defer payments on certain types of debt may also support asset performance in the short term but create longer-term risks for creditors.”
What’s Crucial
The Moody’s analysis goes on to argue the effectiveness of government support will crucially depend on how quickly the aid is disbursed and whether it is sufficient to prevent a major hit to vulnerable households and to businesses' financial stability.
“Low- and middle-income households, as well as SMEs, tend to have little financial cushion and are particularly vulnerable to even a temporary loss in income,” noted Moody’s. “Even with the stimulus measures included in the CARES Act, many businesses will likely struggle to survive with little or no revenue for an extended period.”