Poorer business prospects dampened the banks’ and financial markets’ willingness to make funding available. Immediately after the outbreak of the pandemic, financial market stress rose abruptly. Stock indices collapsed all over the world; in the bond markets, risk premia rose. At the start of the pandemic, a liquidity crunch was looming in the corporate sector.
This could have led to a wave of insolvencies, an increase in unemployment, and significant credit defaults. Even firms that had a sustainable business model before the crisis were affected. Government measures averted such a liquidity crunch and prevented a spillover to the financial system.