Huge spending stimulus packages are helping to reduce the damage caused by the COVID-19 pandemic to the world economy, but the legacy “legacy” of debt may create future crises.
Central banks and governments around the world have allocated at least US $ 15,000 billion to stimulus packages, through purchasing bonds and increasing budget spending, to overcome the global economic recession, arguably the worst since the 1930s.
However, those actions will accumulate more debt to countries, which are struggling with the consequences of the 2008-2009 financial crisis.
The International Finance Institute (IIF) estimates that global debt has increased by $ 87,000 billion since 2007, and governments with $ 70,000 billion make up a large portion of that increase.
Along with IIF, by 2020, the global debt to GDP ratio will increase by 20 percentage points, to 342%, based on an estimate that 3% of the size of the economy is shrinking and double the amount of government loans from 2019.
Over-stimulated debt will destroy the economies, the most vulnerable are the countries with the highest levels of debt, regardless of whether they are wealthy countries like Italy or poor countries like Zambia, an inherent country. have been under stress since the SARS-CoV-2 virus caused the COVID-19 outbreak and are now on the verge of default.
But even the richest nations will not escape from being affected. Increasing debt could cause Germany and the US to lose their AAA gold rating, while governments will increasingly rely on central banks to control borrowing costs or even directly finance them. for spending for years to come.
Mike Kelly, the leader of PineBridge Investment Group, said: “Historically, whenever countries raised debt levels, everything would change. This crisis will make the world fall into the trap of low growth, where we just escaped in the years 2016-2019.
Germany’s European power is forecast to bear a new debt for the first time since 2013, while the US Treasury’s Q2 / 2020 loan will amount to nearly $ 3,000 billion – more than five times more than the previous century. previous record.
Deutsche Bank calculates, the US federal debt held by the public, a measure tracked by Congressional Budget Office, will increase to 100% of GDP this year – the most recently recorded in the 1940 – and approaching 125% of GDP by 2030. In fiscal 2019, this figure is 79% of GDP.
Finally, debt can affect economic growth, if countries begin to spend more of their annual income on creditors, a situation that developing countries must endure again and again.
Quantitative easing is not a panacea
Low base rates will allow some countries to maintain high levels of debt. Japan’s debt now exceeds 200% of GDP, but it printed more money to issue debt and the central bank then bought them back.
Eric Brard, a leader at Amundi, sees the ability to control basic interest rates and keep them at a low rate as a key solution to keeping debt payment costs low. This trend is being observed in the US and Europe, with central banks accounting for the majority of the additional debt.
But in some countries, average GDP growth has been below interest rates for years, which means that debt ratios have been rising steadily, even before the pandemic hit. Kevin Thozet, a member of the investment committee at Carmignac Company, analyzed Italy as a prime example. The country has not benefited from low interest rates for five years.
He said Italy’s debt is about 135% of GDP and is likely to increase to approximately 170% of GDP – a threshold that is unsustainable if it needs rapid growth or debt conversion. Mr. Thozet suggested combining the risks of all European member states. However, this is an idea that rich countries are opposing.
According to the Pictet Asset Management Fund, Greece had the worst sustainable debt at the end of 2019, among the developed countries, followed by Italy, Japan, Belgium and the United Kingdom.
However, Italy and some other Southern European countries may be sponsored by the European Central Bank (ECB), a luxury that most developing countries lack.
Central banks in a range of emerging economies have begun implementing their own quantitative easing programs.
But, these countries have no domestic accumulation, mostly relying on foreign investors to offset the balance of payments deficit and consolidate the currencies.
That, coupled with the risk of inflation, limits the amount of money they can print to support growth. Analysts say that momentum could lead some developing economies into another cycle of devaluation and inflation.
“The worry is that some fast-growing economies – Turkey, Brazil, South Africa – are going in this direction,” said Andres Sanchez Balcazar, manager of the Pictet Asset Management Fund.
Some countries like Brazil and South Africa have for years struggled with annual growth of less than 2%, while high interest rates were 14.25% and 7% respectively.
Brazil’s public debt by the end of this year may increase to 77.2% of GDP and in South Africa to 64.9% of GDP. Data from the International Monetary Fund (IMF) shows that, a decade ago, they were about 61% of GDP and 35% of GDP respectively.
Increasing debt levels, in turn, increases the borrowing costs of issuers. And the worry in the long run is who will pay those debts.