It is clear that, from 2000 to 2010, the growth differential between developed and emerging economies widened significantly, reaching around 5.5% between 2007 and 2010. Hence, the Great Recession did not affect significantly this growth differential, and prospects for the near term also indicate that growth in emerging economies will outpace growth in developed economies, but at a rate (4%–4.5%) not that different from the average between 2003 and 2005. A simple observation of the data therefore suggests that growth differentials are more important in driving capital inflows than interest rate differentials. The latter have remained quite stable for several years, and the main stylized fact of the past decade and a half has been a significant shrinkage of short term interest rates in emerging economies. A more suggestive interpretation of these broad medium-term trends is that high growth in emerging economies attracted capital inflows. Prudent macroeconomic management in emerging economies (especially compared to previous decades), allowed an improvement in external and fiscal solvency, alongside appreciation pressures. These factors helped implement lower interest rates. This different macroeconomic backdrop has also implied that today current account balances in emerging economies do not display the significant deficits observed in the run-up to crises during the 1980s or 1990s (Figure 4). The lack of a significant widening of the current account deficits should also indicate that current concerns about (net) capital flows into emerging economies could be premature, although for specific economies they could be posing more immediate policy challenges.
In the first phase, the crisis generated a significant decline in firms’ revenues relative to fixed costs (such as supplies, rentals, labour costs) that led to an increase in firms’ liquidity needs on top of those derived from the amortisation of pre-existing debt. In turn, this raised the risk that some of these corporates would not be able to meet their payment obligations (liquidity risk) together with a non-negligible probability of negative spillovers to other companies. The decisive and forceful action of economic policies has helped mitigate this risk to a great extent, so that a large proportion of these firms with liquidity needs were able to cover them. Key measures included, for example, furlough schemes that help to alleviate fix costs, and also public guarantees for business financing that have allowed for the liquidity needs to be financed. However, as the crisis unfolds, concern is shifting from liquidity risk to the deterioration of the solvency position of firms, associated with the combination of higher levels of debt as a result of the crisis with still low profitability expectations for the coming quarters, especially in sectors most impacted by the crisis and irrespective of whether these firms are viable in the long term. And this situation leads to the following two related concerns. First, it is obvious that it increases the probability of defaults which could lead to viable firms going out of business, thus making the costs of the crisis deeper and protracted.