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Economies Risk Debt Crises After Stimulus Spending

The economic meltdown brought on by the coronavirus pandemic has governments deploying historically vast fiscal spending packages to support millions of their citizens and businesses. This spending is necessary to support economies — officials agree on that much. But the debt incurred over time could mean a deeper crisis and a doubled-down recession for some countries, according to recent reports.

Already in early January, before any country imposed coronavirus lockdowns, the World Bank warned of the risk of a fresh global debt crisis. It described the current wave of debt accumulation — which started in 2010 — as “the largest, fastest and most broad-based increase” in global borrowing since the 1970s.

Economies risk debt crises after stimulus spending

In the first half of 2019, global debt surged by $7.5 trillion, hitting a new record of more than $250 trillion, according to the Institute for International Finance. “With no sign of a slowdown, we expect the global debt load to exceed $255 trillion in 2019, largely driven by the U.S. and China,” the IIF wrote in late 2019 — before the year was over and well before anyone was talking about a global pandemic.

Now, the International Monetary Fund projects that the global economy this year will “very likely” suffer the worst financial crisis since the Great Depression, as governments around the world extend lockdowns and economic shutdowns to fight the spread of Covid-19. The Washington-based fund now expects the global economy to contract by 3% in 2020. In January, by contrast, it had forecast a global GDP expansion of 3.3% for this year.

Half the world has now asked the IMF for a bailout, the organization’s chief Kristalina Georgieva told CNBC on Wednesday, highlighting the severety of the economic crisis. Much of Southern Europe is still getting over years of austerity, Demarais added, and is weighed down by high debt, fiscal deficits and ageing populations. “A debt crisis in any of these countries would quickly spread to other developed countries and emerging markets, sending the global economy into another, possibly much deeper, economic crisis.”

A double recession? Economies risk debt crises after stimulus spending, CNBC, Apr 17

Source: FXPro

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