Debt is the other pandemic of concern

The International Monetary Fund (IMF) is concerned about the level of debt that the pandemic will leave in all economies, regardless of whether they are more or less developed or industrialised; on the other hand, the World Bank (WB) is concerned about the increase in the levels of poverty and inequality resulting from the impact of the health emergency on the micro and macro-economy. 

Various WB estimates anticipate that the pandemic unleashed in March last year would have led to an increase in the number of new poor people to between 119 and 124 million globally. 

The Washington-based agency headed by David Malpass argues that the challenges in human capital, poverty levels, employment deficits and product demand will be much more acute not only during the pandemic but also in the new post-pandemic reality. 

The damage caused by the coronavirus crisis is not yet fully visible on the surface, the stumbling blocks have not yet surfaced, because international lending agencies have unceremoniously released credit and financing to almost all countries that have approached them in search of imminent oxygen to avoid becoming insolvent.

The International Development Association (IDA) accepts that it has redoubled its efforts by financing 74 countries with 82 billion dollars, mainly African, Latin American and Caribbean economies. 

Without aid to Latin America and the Caribbean, the number of new poor in the region would have risen by 20 to 30 million and has so far been contained.

The IMF, also based in Washington and headed by Kristalina Georgieva, focuses its analysis on the growing levels of indebtedness that will remain as a result of the loans, aid funds, emergency leverage and unconscionable loans that all organisations have released to prevent the world from collapsing with production chains interrupted by the confinements decreed in several countries. 

If before the pandemic several industrialised and other developing countries already had their levels of internal indebtedness on a red light, the post-pandemic world will have unprecedented levels of indebtedness for which an effective way out will have to be created. 

The IMF foresees a new cycle of external debt pressures on GDP and domestic debt, but also deficit levels that will eventually undermine domestic savings capacity.

The result would be a world suffocated by its inability to pay either what it owes outwardly or what it spends inwardly; 80 countries have knocked on the doors of the organisation requesting urgent financing, according to the creditor body itself.

Even Iran, which had been decades without asking for a loan, has been forced to urgently request 5 billion dollars, and Venezuela has tried several times without success in the face of the refusal to grant money to Nicolás Maduro's regime, which is now willing to exchange oil for vaccines in the face of a lack of liquidity. 

The strategy is the same as always, the same old recipe when an economy is shaken and bankruptcy must be avoided: loans, subsidies, aid, bailouts including reform programmes and, in many cases, tax hikes.

The microeconomy suffers, but so does the macroeconomy. The SARS-CoV-2 pandemic has created the perfect storm, putting governments and health authorities in a life-or-death dilemma. 

The IMF has $50 billion available through its emergency financial facilities for low-income and emerging market countries stricken by the coronavirus.

Also available is the Flexible Credit Line (FCL) created in March 2009 as a crisis prevention mechanism, disbursements "are not phased or conditional on meeting policy targets" as in the IMF's long-standing programmes.

Poverty and debt are both spectres of the same evil: an economic crisis that this time has been provoked by a different shock than on other occasions and that has nothing to do with an oil, debt, inflation, currency, capital flight, banking or stock market crisis, nor has it been a financial crisis in general. 

What is currently being discussed are the mechanisms for exiting the economic crisis and how to confront the new distortions in the area of debt levels, poverty levels, unemployment levels and levels of precariousness.

The first thing, Georgieva points out, is to stem the capital flight resulting from distrust and uncertainty over the time horizon of the pandemic. As of December last year, $83 billion had flowed out of emerging markets, a historic amount of capital. 

This is also a way of sapping liquidity in economies traditionally hit by the slightest hint that something is wrong; and it becomes a vicious circle that always ends with more borrowing.

Georgieva has been putting on the table the need for payment moratoriums for severely over-indebted countries to deal with the coronavirus emergency. 

With global debt levels set to exceed 100 per cent of world GDP, the IMF managing director believes it is necessary to develop restructuring packages, moratoriums, write-offs and even write-downs and more flexible payments so that countries can emerge from the current economic crisis more relieved. 

Last year, the G-20 agreed to suspend debt repayments to developing countries for six months. In June 2021, the deadline will expire and it does not seem that the 43 beneficiary countries are in a better position to pay, even though their repayments of 5.7 billion dollars have been frozen for the time being.

The IMF has made this its main flag of concern for its spring meeting; it wants to find a mechanism among the ministers present from all over the world to avoid repeating the mistakes of the past in the management of indebtedness that end up becoming heavy anchors that are impossible to shake off. 

In the opinion of Adolfo Barajas and Fabio Natalucci, analysts at the creditor organisation, the question is how to prevent the new recovery from being "jeopardised" and, at the same time, an excessive accumulation of leverage from occurring.

"Leverage, the capacity to borrow, is a double-edged sword. It can stimulate economic growth because it allows companies to invest in machinery to expand the scale of production or individuals to buy houses and cars or invest in education. During an economic downturn, it can play a particularly important role in building a bridge to recovery," argue Barajas and Natalucci. 

In their analysis 'Confronting the dangers of rising leverage', the two experts point out that leverage can be measured as "the ratio of the debt stock to GDP" and this provides a picture of the conditions in which an economy is able to service its debt.
"In the period 2010 to 2019, global leverage rose from 138% to 152% and corporate leverage reached an all-time high of 91% of GDP. Loose financial conditions in the aftermath of the 2008-2009 global financial crisis were a key determinant of the rise in leverage," they explain.

How much has this ratio worsened? Barajas and Natalucci argue that a lot: "In both advanced economies and emerging markets, indebtedness increased further as a result of the support policies deployed in response to the pandemic shock; in addition, the contraction in output in many countries contributed to the rise in the debt-to-GDP ratio and corporate leverage increased by 11 percentage points of GDP up to the third quarter of 2020.

In the European Union (EU) there is also growing pressure for the European Central Bank (ECB) to forgive or end up paying off the debts contracted by several countries in the European club, such as Spain, Italy, Greece, France, Poland, Portugal and others.
In eight months of last year, the ECB lent 710 billion dollars because of the pandemic, and many economists and advisors to the European Council are advising against demanding repayment of these loans, arguing that so many debts contracted imminently will end up weighing on GDP in the medium term.