Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

The Covid-19 debt deluge

Jayati Ghosh 19th March 2020

The Covid-19 crisis may have set the stage for a debt meltdown long in the making, starting in the Asian economies on the front lines.

debt
Jayati Ghosh

Pandemics like Covid-19, alarming and destructive as they are, can serve a useful purpose if they remind everyone of the critical importance of public health. When a contagious disease strikes, even a society’s most protected elites must worry about the health of neglected populations. Those who have advocated privatisation and cost-cutting measures that deny health care to the most vulnerable now know that they did so at their own peril. A society’s overall health depends on the health of its poorest people.

More immediately, though, the Covid-19 crisis could have many severe economic effects, possibly pushing the global economy into recession. Supply chains are being disrupted, factories are being closed, entire regions are being locked down and a growing number of workers are struggling to secure their livelihoods. These developments will all lead to mounting economic losses. A world economy already suffering from insufficient demand—owing to rising wealth and income inequality—is now vulnerable to a massive supply-side shock.

Another potential consequence of the pandemic is less recognised but potentially more important: increased financial fragility, implying the potential for a debt crisis and even a broader financial collapse. After Covid-19 is contained and policies are implemented to ease the situation, supply chains will be restored and people will return to work with the hopes of recovering at least some of their lost incomes. But that real economic recovery could be derailed by unresolved financial and debt crises.

Financial fragility

Today’s financial fragility far predates the Covid-19 ‘black swan’. Given the massive accumulation of debt in both developed and developing countries since the 2008 financial crisis, it has long been clear that even a minor event—some ‘known unknown’—could have far-reaching destabilising effects. Yet, until recently, rising asset prices—owing to a long period of extraordinarily loose monetary policies in advanced economies—disguised mounting debt levels. As the recent scare in global equity markets indicates, asset bubbles cannot last forever. By contrast, in the absence of active public pressure or state intervention to facilitate their resolution, debts do not deflate on their own.


Become part of our Community of Thought Leaders


Get fresh perspectives delivered straight to your inbox. Sign up for our newsletter to receive thought-provoking opinion articles and expert analysis on the most pressing political, economic and social issues of our time. Join our community of engaged readers and be a part of the conversation.

Sign up here

A recent analysis by the United Nations Conference on Trade and Development shows how sustained debts could pose a larger problem for the global economy and financial system. In 2018, total debt (private, public, domestic and external) across developing countries was equal to almost twice their combined gross domestic product—the highest it has ever been. Particularly concerning is the build-up of private debt by non-financial corporations, which now amounts to nearly three-quarters of total debt in developing countries (a much higher ratio than in advanced economies). According to UNCTAD, inherently volatile ‘foreign shadow financial institutions’ have played a major role in fuelling this accumulation, such that around one-third of private non-financial corporate debt in developing countries (with the exception of China) is denominated in foreign currency and held by external creditors.

Worse, more sovereign-debt repayments on short-maturity international bonds will soon be due. And foreign-exchange reserves, which have declined in many emerging markets and developing economies as a result of recent capital outflows, will be less robust in the face of further outflows as bond markets become more fraught.

Severe shock

These financial conditions, which would be worrying in the best of times, could spell disaster in the event of even a relatively mild economic shock. But now we are in the midst of a severe shock. Consider Asia’s emerging economies, which are deeply integrated financially and economically with China—the epicentre of Covid-19—and thus highly vulnerable. Dramatic decreases in exports, disruptions to the sourcing of raw materials and intermediate goods, and rapid declines in travel and tourism are already having severe employment effects across Asia’s economies. And now these adverse outcomes are being compounded by financial concerns over the region’s already high debt levels.

After all, Asian financial markets were vulnerable even before the current shock, owing to falling margins, higher risks, and an excessive dependence on banks and shadow banking (a problem that has already been exposed in India). Worse, a significant share of stressed debt in the region is held by energy, industrial and utility companies, all of which are directly affected by recent output and oil-price declines. With equity markets swooning, capital buffers have been further diminished.

These problems cannot be contained by policies adopted in any one country. More than ever, the global community needs leadership to address the immediate effects of the coronavirus pandemic and its economic fallout. In addition to co-ordinated fiscal spending across countries, we urgently need to tackle the debt crisis that will soon unfold. It is time to start thinking about debt resolution and restructuring.

Debt resolution

As the Turkish economist Sabri Öncü has suggested, we can start by taking our cue from the London debt agreement of 1953, which dramatically altered economic conditions for Germany, at that time a major debtor. The agreement between Germany and 20 external creditors wrote off 46 per cent of the country’s prewar debt and 52 per cent of its postwar debt, while the remaining debt was converted into long-term, low-interest loans with a five-year grace period before repayment. Most significantly, Germany had to repay its debt only if it ran a trade surplus and all repayments were limited to 3 per cent of annual export earnings. This encouraged Germany’s creditors to be vested in its export success, creating the conditions for the subsequent boom.

This is the type of forward-thinking, co-ordinated debt-resolution strategy that is essential in today’s interconnected world. If we are collectively to survive not just the normal depredations of global markets but also the existential threats posed by pandemics and climate change, there is no alternative.

Republication forbidden. Copyright Project Syndicate 2020 The Covid-19 debt deluge


Support Progressive Ideas: Become a Social Europe Member!


Support independent publishing and progressive ideas by becoming a Social Europe member for less than 5 Euro per month. You can help us create more high-quality articles, podcasts and videos that challenge conventional thinking and foster a more informed and democratic society. Join us in our mission - your support makes all the difference!

Become a Social Europe Member

Pics 4
Jayati Ghosh

Jayati Ghosh is professor of economics at the University of Massachusetts Amherst. She is co-chair of the Independent Commission for the Reform of International Corporate Taxation and a member of the UN secretary-general’s High-Level Advisory Board on Effective Multilateralism and the World Health Organization's Council on the Economics of Health for All.

You are here: Home / Economy / The Covid-19 debt deluge

Most Popular Posts

Russia,information war Russia is winning the information warAiste Merfeldaite
Nanterre,police Nanterre and the suburbs: the lid comes offJoseph Downing
Russia,nuclear Russia’s dangerous nuclear consensusAna Palacio
Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter
retirement,Finland,ageing,pension,reform Late retirement: possible for many, not for allKati Kuitto

Most Recent Posts

Vienna,social housing Vienna social-housing model—celebrated but misusedGabu Heindl
social democracy,nation-state Social democracy versus the nativist rightJan Zielonka
chemical,European Union Which comes first—Big Toxics’ profits or health?Vicky Cann
Russia,journalists,Ukraine,target Ukraine: journalists in Russia’s sightsKelly Bjorkland and Simon Smith
European Union,enlargement,Balkans EU enlargement—back to the futureEmilija Tudzarovska

Other Social Europe Publications

strategic autonomy Strategic autonomy
Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship

Eurofound advertisement

Eurofound Talks: housing

In this episode of the Eurofound Talks podcast, Mary McCaughey speaks with Eurofound’s senior research manager, Hans Dubois, about the issues that feed into housing insecurity in Europe and the actions that need to be taken to address them. Together, they analyse findings from Eurofound’s recent Unaffordable and inadequate housing in Europe report, which presents data from Eurofound’s Living, working and COVID-19 e-survey, European Union Statistics on Income and Living Conditions and input from the Network of Eurofound Correspondents on various indicators of housing security and living conditions.


LISTEN HERE

Foundation for European Progressive Studies Advertisement

The summer issue of the Progressive Post magazine by FEPS is out!

The Special Coverage of this new edition is dedicated to the importance of biodiversity, not only as a good in itself but also for the very existence of humankind. We need a paradigm change in the mostly utilitarian relation humans have with nature.

In this issue, we also look at the hazards of unregulated artificial intelligence, explore the shortcomings of the EU's approach to migration and asylum management, and analyse the social downside of the EU's current ethnically-focused Roma policy.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

WSI European Collective Bargaining Report 2022 / 2023

With real wages falling by 4 per cent in 2022, workers in the European Union suffered an unprecedented loss in purchasing power. The reason for this was the rapid increase in consumer prices, behind which nominal wage growth fell significantly. Meanwhile, inflation is no longer driven by energy import prices, but by domestic factors. The increased profit margins of companies are a major reason for persistent inflation. In this difficult environment, trade unions are faced with the challenge of securing real wages—and companies have the responsibility of making their contribution to returning to the path of political stability by reducing excess profits.


DOWNLOAD HERE

ETUI advertisement

The future of remote work

The 12 chapters collected in this volume provide a multidisciplinary perspective on the impact and the future trajectories of remote work, from the nexus between the location from where work is performed and how it is performed to how remote locations may affect the way work is managed and organised, as well as the applicability of existing legislation. Additional questions concern remote work’s environmental and social impact and the rapidly changing nature of the relationship between work and life.


AVAILABLE HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube