The Debt Pandemic

• Life after the coronavirus is going to be extremely challenging for governments, businesses and
households and will create some dilemmas for central banks as they try to grapple with the balance
between unsustainable levels of debt, the ambition of economic growth and the risk of financial
bubbles that could ignite another financial crisis while the world remains vulnerable.

• Once the pandemic established itself outside China, debt levels began soaring. They continue to
soar. Ahead of the pandemic global debt was more than $US250 trillion, or more than 320 percent
of global GDP. In advanced economies, according to the International Monetary Fund, public debt
is forecasted to grow by nearly 19 percent this year to reach about 130 percent of global GDP.

• India’s public debt ratio, which remarkably remained stable at around 70 percent of the GDP since
1991, is projected to jump by 17 percentage points to nearly 90 percent because of an increase in
public spending due to COVID-19 (according to IMF).

• The IMF, the World Bank, and other multilaterals acted quickly to provide much-needed funding
amid the pandemic as government revenues collapsed alongside economic activity, while private
capital flows came to a sudden stop. In addition to new loans from multilaterals, Group of Twenty
(G20) creditors granted a debt moratorium to the world’s poorest countries.

• Although many emerging market governments have succeeded in borrowing more in local
currencies, businesses have continued to accumulate foreign currency debt. Under severe duress,
it’s likely that emerging market governments would yield to pressure to bail out their corporate
national champions, just as the United States and Europe have done.

• There is brewing in the background, a growing need for debt restructurings in numbers not seen
since the debt crisis of the 1980s. Official creditors should be prepared to act as needed.

• Governments and multilateral lenders can ensure more transparency on debt data and debt contracts
to make sure new funding ends up benefiting the citizens of debtor countries affected by the
pandemic rather than lining the pockets of creditors.

• Realistic growth forecasts are critical to avoid underestimating a country’s near-term financing
needs and overestimating its capacity to service its debt commitments. Legal steps in jurisdictions
that govern international bonds (importantly but not exclusively New York and London) or where
payments are processed can contribute to more orderly restructuring by promoting a more level
playing field between sovereign debtors and creditors.

References:https://www.smh.com.au/business/the-economy/post-pandemic-world-a-frightening-
mix-of-financial-bubbles-and-massive-debt-20200716-p55clj.html

https://www.imf.org/external/pubs/ft/fandd/2020/09/debt-pandemic-reinhart-rogoff-bulow-
trebesch.htm