Coronavirus to leave a legacy of unprecedented global debt

Who is going to pay for this?
Image: Waldo Swiegers/Bloomberg

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.

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.

“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.

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?”

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Who is going to pay for it ?
The poor sods that still have fiat money in the banks ,
the people that have life insurance with a saving component,
the people that have a retirement annuity ,
the people that have a pension saving plan,
the people that have property,
in short , all the people that did consume less that they earned.
Those people do not fit into the new , brave ANC Commie world.

Therein is precisely who will pay :
The prudent Planner will be Forced to subsidise the Financially irresponsible : Krugerrand or Bitcoin time !!

ANC? Isn’t this a global phenomenon?

Who is going to pay for this? That is a very ambiguous question. Rest assured the debt will never be repaid. Under the current fiat monetary regime, debt can only increase with time. Debt compounds with compound growth. It is irredeemable and is the basis for the money supply. The money to repay the debt simply does not exist. Any new money is borrowed into existence further compounding the debt. If all money in existence was used to retire debt, there would still be debt but no money.

All countries with a debt/GDP ratio above 80 or a budget deficit above 8 will default, simply because there is no way for them to repay the debt. This implies that all leading nations and many emerging nations will default. The only debate is about the shape of the default. By which method will they default?

Zimbabwe, Venezuela, Argentina and Brazil are currently defaulting in an unsophisticated way, by simply dishonouring loan agreements by non-payment. This is option one. Then they follow the crude mechanism of money-printing to fund government expenditure, mainly to bribe the military and the police force who in turn, have to guard the printing press and the palace of the socialist autocratic leader. These countries default through hyperinflation.

Depending on which faction fills the majority of seats in Luthuli House, this might be South Africa’s destiny as well. Hyperinflation is a nasty beast because supply chains fall apart, leading to a severe shortage of medicine and necessities. This scenario implies that 15 million to 20 million locals will die of AIDS, TB and Diabetes within 12 months after the supply chains fell apart. This proves the craziness and irresponsibility of the risk/reward ratio of implementing lockdown measures.

Leading nations will not stop the payment of interest and principal on their bonds. They will default in a sophisticated manner. They will pay down the debt with a new stealth tax that steals purchasing power from their citizens. This mechanism is called “financial repression”. Interest rates will be artificially low while inflation is allowed to be higher. They will wipe the debt-slate clear with the cloth of inflation. This mechanism is not visible and therefore it will be politically acceptable. This mechanism was very successful at bringing down the debt levels after WW2. This mechanism cannot be used by countries with external foreign currency debt though. Those countries have no option but to go for option one.

Everybody will pay for the high levels of government debt. The price will differ between countries. Some will pay with their lives, and others will pay with their standard of living.

Very well said. None of this debt is repayable and any reset will cost lives and standards of living.

Who is going to pay for this?

The same people who paid last time and the times before that. The average citizen. They pay through the taxes and pensions and in extremes through Govt grabbing savings. They pay through the debt depenancy created and bailing out of entities that should not exist and obviously pay by having their money weakened by globalist hedge funds profiting off the volatility.

It’s a very good time to reset the world’s financial system and go to a non usury type if exchange economy.

Every citizen will pay through the transparent way of income taxes and the concealed form of currency debasement. A proactive citizen will hedge themselves against this economic reality in advance while the reactive citizen wil get all their assets wiped out.

Now you have touched on the essence of the “investment game”. The recipe that firstly offers protection against debasement, and secondly enables the investor to benefit from it, is the “holy grail”.

…with global debt that high approaching 100 tril

I wouldn’t be surprised considering currency of the large economies are basically digital, that a “wink wink, nudge nudge” agreement between global banks and politicians will be “no way this can be repaid …lets just continue”

Ultimately this does make the 99% of the global population poorer and ultimately serfdom emerges again as it did 500+ years ago

BTC will be beyond the affordability of most as it become scarcer to buy by virtue of value

Considering that SA’s debt forecast is set to be nearly double that of a decade ago, it seems that apart from Brazil being an EM & among the BRICS group of countries. Their economic deterioration hardly matches those felt throughout the African continent.

End of comments.

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