Coronavirus to leave a legacy of unprecedented global debt

[webfact]

Coronavirus to leave a legacy of unprecedented global debt

By Dhara Ranasinghe and Karin Strohecker

 

FILE PHOTO: Saudi riyal, yuan, Turkish lira, pound, U.S. dollar, euro and Jordanian dinar banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

 

LONDON (Reuters) - Enormous doses of stimulus spending are offering relief from coronavirus damage but their lifelong legacy of debt could seed future crises by hobbling economic growth and worsening poverty, especially in developing countries.

 

Central banks and governments worldwide have unleashed at least $15 trillion of stimulus via bond-buying and budget spending to cushion the blow of a global recession tipped to be the worst since the 1930s.

 

Graphic: Fiscal firepower

 

But the steps will pile even more debt on countries already struggling with the aftermath of the 2008-9 financial crisis -- total global debt has risen $87 trillion since 2007, and governments, with $70 trillion, accounted for the lion's share of that increase, the Institute of International Finance estimates (IIF).

 

This year alone may see the global debt-GDP ratio rise by 20 percentage points to 342%, the group said, based on 3% economic contraction and a doubling in government borrowing from 2019.

 

Taking on that kind of debt doesn't go unpunished: the most pain will be in highly indebted states, whether relatively wealthy ones such as Italy, or those such as Zambia which were already under strain before the virus hit and are now careering towards default.

 

But not even the richest will be spared. Rising debt could lose Germany and the United States their triple-A credit ratings, while governments will increasingly rely on central banks to keep borrowing costs in check or even directly finance spending for years to come.

 

"Historically, whenever countries step up debt levels, things change," said Mike Kelly, global head of multi-asset at PineBridge Investments. "This crisis...has taken us back to the slow-growth trap that we had just started to shake off in 2016-2019."

 

The challenge for policymakers in coming years will be to find a way to "grow into this massive debt-GDP structure we've found ourselves in almost overnight," he predicted.

 

For now, with the world economy staring at a 5-6% contraction this year, the additional borrowing and spending is a lifeline. The International Monetary Fund estimates public deficits as a percentage of national income will jump to almost 10% this year from just under 4% in 2019.

 

Even European powerhouse Germany is taking on new debt for the first time since 2013, while the U.S. Treasury's second quarter borrowing will amount to almost $3 trillion -- more than five times the previous record.

 

U.S. federal debt held by the public, a gauge tracked by the Congressional Budget Office, will rise to 100% of GDP this year - levels last seen in the 1940s - and approach 125% by 2030, Deutsch Bank calculates. It was 79% in the 2019 fiscal year.

 

Eventually though, debt can drag on economic growth if countries start to spend more and more of their annual income on paying creditors, a position developing countries have endured time and again.

 

Accelerating economic growth in those circumstances is like "trying to fly when we were already carrying a lot of debt and now we are adding more," OECD Secretary General Angel Gurría told an FT online conference this week.

 

QE NOT ALWAYS PANACEA

Low interest rates will allow some countries to live with higher debt. Japan's debt for instance exceeds 200% of GDP but it prints money to issue debt which the central bank then buys.

 

"The ability to control interest rates and keep rates low is a key parameter for keeping debt servicing costs low and we expect that to continue," said Eric Brard, head of fixed income at Amundi.

 

The trend will gather pace in the United States and Europe too, with central banks soaking up much of the excess debt.

 

But in some countries, average GDP growth has crawled along well below interest rates for years, meaning debt ratios were rising relentlessly even before coronavirus hit.

 

Italy, for instance, has not benefited from five years of low interest rates, noted Kevin Thozet, a member of the investment committee at Carmignac.

Graphic: 10-year goverment bond yields minus GDP growth -

 

"Italy's debt, at around 135% of GDP, is likely to rise to around 170% -- those levels are not sustainable so it either needs rapid growth or debt mutualistation," he said. Graphic: Italy's debt to GDP set to jump in face of coronavirus crisis -

 

 

He was referring to the idea of pooling European risk across all member states, something wealthier countries are resisting.

 

According to Pictet Asset Management, Greece had the worst debt sustainability at the end of 2019 among developed countries, followed by Italy, Japan, Belgium and Britain.

 

However, Italy and other southern European states have the might of the European Central Bank backstopping their borrowing, a luxury most developing countries lack.

 

Central banks in about a dozen emerging economies have started their own quantitative easing programmes. Yet without big domestic savings pools, most rely on foreign investors to cover balance of payment deficits and underpin currencies.

 

That, along with inflation risks, constrain how much money they can print to support growth. Bond buying programmes in Brazil or South Africa could see real interest rates at the back end of the yield curve push up sharply, said Manik Narain, head of EM strategy at UBS.

 

"How can South Africa service debt at 10%? This debt becomes unsustainable and creates a crisis - at best it will pull GDP growth down," he said.

The dynamics could put some developing economies on track for another devaluation and inflation cycle, said analysts.

 

"Worryingly some large developing economies – Turkey, Brazil, South Africa – are heading in this direction," said Andres Sanchez Balcazar, Head of Global Bonds at Pictet Asset Management.

 

Some countries such as Brazil and South Africa have for years grappled with annual growth below 2%, while interest rates were as high as 14.25% and 7% respectively.

 

BofA calculates public debt could hit 77.2% of GDP by year-end in Brazil and 64.9% in South Africa. A decade ago, they were around 61% and 35% respectively, IMF data showed.

 

Rising debt levels in turn raise borrowing costs for such issuers, noted Edith Siermann, head of fixed income solutions at NN Investment Partners.

 

"The long-term worry is - who is going to pay for this?" 

 

(Reporting by Dhara Ranasinghe and Karin Strohecker; Additional reporting by Sujata Rao; Graphics by Ritvik Carvalho; Editing by Sujata Rao and Toby Chopra)

 

-- © Copyright Reuters 2020-05-15

 

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[brokenbone]

imagine gretas surprise when she realize she and coming generations gets to foot the bill for the shut down

[nausea]

My guess is the triple lock in the UK will go for a start. Always a stupid idea IMHO; my pension rises by inflation, which is fine by me. The Tories are a bit stuck on this one, like the NHS in now a Sacred Cow, as to a lesser extent are already pared back public services in general, and raising taxes would go against their whole philosophy; be interesting to see how it pans out. In addition, a lot of countries are maxed out, what happens when the next Black Swan event comes along? The obvious solution is to cut back on military spending, a Catch 22 situation, cos that would take a consensus among the big powers to accept the status quo and not pursue their expansionist policies, and we all know, in desparate situations the weakest go to the wall. Anyway, Olivia and Noah may be a minority now, but eventually they're going to be the guys and gals making the decisions, they're not gonna be very happy with this mess they've inherited. Ha!

[Rimmer]

A conspiracy trol post has been removed

[PETERTHEEATER]

FILE PHOTO: Saudi riyal, yuan, Turkish lira, pound, U.S. dollar, euro and Jordanian dinar banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

 

Taken in January 2020. The image on the Saudi banknote is that of the late King Fahad who died in 2005. You can't beat old money!

[Baerboxer]

7 hours ago, brokenbone said:

imagine gretas surprise when she realize she and coming generations gets to foot the bill for the shut down

 

I read yesterday that CNN were trying to get her on their Covid 19 discussion panel. 

 

Her parents will be pleased - that will likely be a good earner.

[Chomper Higgot]

8 hours ago, brokenbone said:

imagine gretas surprise when she realize she and coming generations gets to foot the bill for the shut down

Triggered?

[brokenbone]

2 minutes ago, Baerboxer said:

 

I read yesterday that CNN were trying to get her on their Covid 19 discussion panel. 

 

Her parents will be pleased - that will likely be a good earner.

i saw it, medicine science politics is all coming together

in a facebook snake pit club

[brokenbone]

Just now, Chomper Higgot said:

Triggered?

i think she will be if she ever snap out of it

[natway09]

Wait until the UK freezes pensions for anyone not living there for 50% of the year.

NZ & OZ basically done it already

 

[Chomper Higgot]

4 minutes ago, natway09 said:

Wait until the UK freezes pensions for anyone not living there for 50% of the year.

NZ & OZ basically done it already

 

The UK already did this for their pensioners living in dozens of countries, including Thailand.

[Mick501]

11 hours ago, brokenbone said:

imagine gretas surprise when she realize she and coming generations gets to foot the bill for the shut down

How dare you make my  generation go to work.  How dare you!

[mr mr]

3 hours ago, Chomper Higgot said:

Triggered?

you're a grown man and you use that word ? hahahah 

[jack7106]

Credit agencies- a monumental misnomer if I’ve ever seen one????????‍♂️????????

They are self fulfilling propagators of financial misinformation ????????‍♂️????????

[thaibeachlovers]

22 hours ago, webfact said:

Coronavirus to leave a legacy of unprecedented global debt

Rubbish. The cause of unprecedented global debt is what governments did in reaction to Corona.

Had they had a referendum as whether to lockdown and save proportionately few lives, or carry on like in 1918 and not ruin multi millions of lives and leave a legacy of debt that will take generations to get out of I'm pretty sure most would have voted to carry on.

Of course we'll never know though, will we?

[UbonThani]

10 hours ago, mr mr said:

you're a grown man and you use that word ? hahahah 

15yos on youtube use it all the time

[UbonThani]

6 minutes ago, thaibeachlovers said:

Rubbish. The cause of unprecedented global debt is what governments did in reaction to Corona.

Had they had a referendum as whether to lockdown and save proportionately few lives, or carry on like in 1918 and not ruin multi millions of lives and leave a legacy of debt that will take generations to get out of I'm pretty sure most would have voted to carry on.

Of course we'll never know though, will we?

Exactly

The lockdown should have been 5% of the nation not 100%.

 

 

[thaibeachlovers]

22 hours ago, webfact said:

Central banks in about a dozen emerging economies have started their own quantitative easing programmes. Yet without big domestic savings pools, most rely on foreign investors to cover balance of payment deficits and underpin currencies.

Yet without big domestic savings pools,

LOL. That's caused by propaganda creating a generation that worships consumerism. Faced with saving or having an overseas holiday, savings gets the boot. Want to have a flash car one can't afford- get a loan or use credit.

The mantra coming out of government now is spend spend spend on things like cafes and restaurants- insanity. I'm sorry for those that own cafes etc, but it's not essential to have an overpriced cup of brown water, and it is essential to pay off debt and save something for the next time it all turns to poo.

[UbonThani]

2 minutes ago, thaibeachlovers said:

Yet without big domestic savings pools,

LOL. That's caused by propaganda creating a generation that worships consumerism. Faced with saving or having an overseas holiday, savings gets the boot. Want to have a flash car one can't afford- get a loan or use credit.

The mantra coming out of government now is spend spend spend on things like cafes and restaurants- insanity. I'm sorry for those that own cafes etc, but it's not essential to have an overpriced cup of brown water, and it is essential to pay off debt and save something for the next time it all turns to poo.

I buy $1 coffees 7/11 or drink at home. The $1 coffees taste like $5 ones. And $8 for croissant what a joke. All the trendies love cafes though.

[thaibeachlovers]

20 hours ago, nausea said:

The obvious solution is to cut back on military spending, a Catch 22 situation, cos that would take a consensus among the big powers to accept the status quo and not pursue their expansionist policies, and we all know, in desparate situations the weakest go to the wall.

If countries were to cut back on military spending that would be many thousands on the dole, and entire industries would collapse.

Some countries have such a low level of spending that it would be hard to cut more. The UK has gone from the most powerful country in the world to IMO insignificance militarily through spending cutbacks. Some countries might have to print big signs saying we surrender in the obvious language.

 

accept the status quo and not pursue their expansionist policies

You'd accept China's assurances on that?

[Kinnock]

Soooo .... shutting down businesses that pay taxes then using taxpayers money to pay people to sit at home and post their favourite albums on Facebook, increases national debt.

 

Who knew!

[baansgr]

20 hours ago, nausea said:

My guess is the triple lock in the UK will go for a start. Always a stupid idea IMHO; my pension rises by inflation, which is fine by me. The Tories are a bit stuck on this one, like the NHS in now a Sacred Cow, as to a lesser extent are already pared back public services in general, and raising taxes would go against their whole philosophy; be interesting to see how it pans out. In addition, a lot of countries are maxed out, what happens when the next Black Swan event comes along? The obvious solution is to cut back on military spending, a Catch 22 situation, cos that would take a consensus among the big powers to accept the status quo and not pursue their expansionist policies, and we all know, in desparate situations the weakest go to the wall. Anyway, Olivia and Noah may be a minority now, but eventually they're going to be the guys and gals making the decisions, they're not gonna be very happy with this mess they've inherited. Ha!

The UK should cease almost all foreign aid immediately...again pensioners are going to go without and workers continue working until they are older, just to subsidize, yoga lessons in Nepal or dance troupes in Venezuala...at the same time MPs getting ever increasing benefits for doing nowt.

[baansgr]

56 minutes ago, thaibeachlovers said:

Rubbish. The cause of unprecedented global debt is what governments did in reaction to Corona.

Had they had a referendum as whether to lockdown and save proportionately few lives, or carry on like in 1918 and not ruin multi millions of lives and leave a legacy of debt that will take generations to get out of I'm pretty sure most would have voted to carry on.

Of course we'll never know though, will we?

If they had a referendum...looking at the last one, we'd all be dead befor anything was agreed upon

[simple1]

13 hours ago, natway09 said:

Wait until the UK freezes pensions for anyone not living there for 50% of the year.

NZ & OZ basically done it already

 

I currently live in Oz, plus receive a small NZ pension, haven't seen anything about your claim - got a link?

[thaibeachlovers]

9 minutes ago, baansgr said:

If they had a referendum...looking at the last one, we'd all be dead befor anything was agreed upon

Are you serious?

Do you actually know what the fatality rate from Corona is? Do you know that most that catch it do not need to have hospital treatment? Do you know that most that die of it have underlying medical problems that they may have died of anyway?

[Heppinger]

1 hour ago, thaibeachlovers said:

Rubbish. The cause of unprecedented global debt is what governments did in reaction to Corona.

Had they had a referendum as whether to lockdown and save proportionately few lives, or carry on like in 1918 and not ruin multi millions of lives and leave a legacy of debt that will take generations to get out of I'm pretty sure most would have voted to carry on.

Of course we'll never know though, will we?

You may need to add the definition of "referendum" as most people will have never heard this term before.

[UbonThani]

92% of aussies surveyed thought ....

 

The general public are .....

https://theconversation.com/deeply-worrying-92-of-australians-dont-know-the-difference-between-viral-and-bacterial-infections-138619

Edited May 15, 2020 by UbonThani

[Heppinger]

1 hour ago, UbonThani said:

I buy $1 coffees 7/11 or drink at home. The $1 coffees taste like $5 ones. And $8 for croissant what a joke. All the trendies love cafes though.

Don't worry. Australia's half baked millennials are busy brainstorming more sustainable snacks in the form of grass hoppers and roaches.

[UbonThani]

1 minute ago, Heppinger said:

Don't worry. Australia's half baked millennials are busy brainstorming more sustainable snacks in the form of grass hoppers and roaches.

$26 vegan burgers

[Heppinger]

9 minutes ago, thaibeachlovers said:

Are you serious?

Do you actually know what the fatality rate from Corona is? Do you know that most that catch it do not need to have hospital treatment? Do you know that most that die of it have underlying medical problems that they may have died of anyway?

Not forgetting that some forms of the common cold are considered a coronavirus.