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Banks should stock up on cash for worst-case scenario

Consider the following scenario for a moment:

As the great spring migration of wild fowl from Africa to Europe gets under way, it becomes clear from widespread clusters of migrant bird deaths that avian flu in the form of the H5N1 virus is now endemic in wild populations.

Despite supposed safeguards, infections among European poultry flocks increase. Mass culls are ordered in Spain, France, Germany and Poland.

A Belgian farm worker becomes the first verified case of human H5N1 infection in the European Union. The patient later dies.

Other isolated cases of human infection begin to appear along water fowl migratory routes. After a French veterinary surgeon is confirmed to have contracted the virus, members of his family begin showing flu-like symptoms, despite having no contact with either wild or domestic birds.

French officials immediately quarantine the family but pupils at the children's school also develop symptoms. Cases begin occurring in the wider population, including Paris. Doctors suspect that H5N1 may have mutated and that it is now spreading directly between humans.

A Hong Kong man who returned recently from France gets sick. Health officials attempt to track down everyone he has contacted since his return but clusters of flu-like symptoms develop rapidly across Hong Kong.

The World Health Organisation identifies a new variant of H5N1. Flu outbreaks occur in London, New York, Dakar and several other cities.

In line with its Preparedness Plan published last month, the Hong Kong government closes local schools, begins destroying abandoned pets and puts the city's crematoria on notice for 24-hour operation.

It may seem a morbid speculation but business people are increasingly advised that they should now be preparing for just such an eventuality. Earlier this month, the Hong Kong Monetary Authority warned that some local banks had not yet identified which services they should continue to provide during a pandemic - operating cash machines, running payments systems and maintaining access to safe deposit boxes, for example - or how to provide them, given expected high absentee rates.

Yesterday, the International Monetary Fund added to the gloom, warning that the global financial system could be vulnerable during an outbreak. A flight to quality by investors would hammer asset prices and widen credit spreads, threatening the balance sheets of financial institutions.

As a relatively small open economy which is heavily reliant on international services such as finance and shipping as well as tourism, Hong Kong will be especially hard hit in a pandemic. Last year, the Asian Development Bank estimated that a relatively benign influenza outbreak with a mortality rate 20 times less severe than the 1918 Spanish Flu pandemic could knock up to $270 billion dollars off Hong Kong's economy, equivalent to a 17.5 per cent economic contraction.

As investment halts, consumption slows and trade all but ceases, Hong Kong's inflexible currency board system could pose special difficulties. Sudden capital flight could squeeze local money supply and push interest rates higher just when small businesses most need access to cheap credit to tide them and their employees, through the crisis.

If Hong Kong is to be properly prepared, the government, along with the HKMA and the banks, needs to ensure there will be sufficient financial liquidity available to keep basic functions of the economy ticking on. This should include stockpiling banknotes to meet expected high demand. It should also include plans for the provision of cheap credit to businesses, perhaps through a government guarantee scheme.

The fiscal costs will be high, but Hong Kong has ample reserves. Failure to prepare in advance to help out businesses that need it could lead to widespread bankruptcies, massive economic disruption and high unemployment levels that persist long after the outbreak is over.

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