Post-Pandemic Economy. The Risk of Surge in Defaults

The massive growth in government spending has resulted in a sharp increase in global debt. Trying to maintain the economy ruined by the coronavirus pandemic, the central banks made an unprecedented cut in interest rates in 2020. As a result, the global debt soared to a record increasing by $19.5 trillion against $3.3 trillion in 2018 and $10.8 trillion in 2019.

The national debt has never been so high since the Second World War, according to the experts from the Institute of International Financial (IIF) uniting over 400 banks and credit organizations around the world. At a rough estimate, the historical record hit $277 trillion.

No more loans?

Almost half of the increased debt burden fell on the advanced economies. The USA, Great Britain, Eurozone, Japan and South Korea are among the leaders. The total debt of the developing countries in the third quarter was 250% of GDP, 305% in China and 432% in developed countries.

“It is completely unclear how the global economy will reduce such an enormous debt in the future without significant destructive economic effects,” reported the IIF. Due to the pandemic, the refinancing risk has sharply increased – many countries and companies are no longer able to attract new loans to pay off the previous ones. It is unclear who can provide them since the IMF and the World Bank have spent large funds on the anti-crisis programs.

Lebanon, China, Malaysia and Turkey raise experts’ fears due to the highest growth of non-financial debts there. Even at record low rates, the decrease in government revenues has made loans much more burdensome.

The biggest debt belongs to...

Jerome Powell, the Federal Reserve (FRS) Chairman, described the financial situation in the following way: “Huge borrowings by the governments and corporations during the pandemic served as a bridge across the economic chasm of lockdowns, plunging consumer spending, idled cruise ships, vacant hotels, and millions of lost jobs. It allowed companies to pay the employees they didn’t fire and maintain assets in working condition.”

Meanwhile, the United States is the economy that has accumulated the biggest debt, which is dangerous for the world economy – 335% of GDP, or $80 trillion (28 of which makes the government loans). It is estimated that by 2028, the Americans will have spent a fifth of the state budget only paying off the interest.

According to the Treasury Department of the USA, the government spending rose 47% to a record $6.5 trillion as the government launched an ambitious program to counteract the effects of the pandemic and recession.

Surge in defaults?

The IMF warned that almost 40% of the corporate debt in major economies could be considered at risk in another global downturn. In the USA in particular, the figures will be worse than those during the financial crisis in 2008, states Goldman Sachs, the leading global investment banking company.

“We are sitting on top of the bomb, but we don’t know what will trigger it,” says Emre Tiftik, a debt specialist at the Institute of International Finance. Once the crisis subsides and the central banks start increasing the rates, the world will be hit with another wave of defaults, possibly the most devastating of all.

Source: RIA Novosti


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