Global debt is now US$87 trillion higher than at the start of the Financial Crisis in 2008. Image: iStock

Battered by the Covid-19 tsunami, the world now faces a debt wave that could swamp economies and wreak global havoc.

Already the International Monetary Fund has warned of a “crisis like no other.” In its latest report, the IMF has forecasted that global GDP will plunge by 4.9% in 2020, wiping out a staggering US$12 trillion in the next two years.

The specter of a deep recession also looms large, dwarfing the fallout from the worldwide Financial Crisis between 2008 and 2009. Moreover, a third wave, this time of debt, is likely to submerge nations that have propped up their economies with massive injections of cash.

“The effects of the pandemic will be felt beyond economic losses; sovereign debt crises are likely,” Agathe Demarais, the global forecasting director at The Economist Intelligence Unit, said on Thursday (June 25).

“Governments in many developed countries have concluded that increasing public expenses, and therefore public debt levels, is preferable to the widespread destruction of productive capacity during the epidemic. As a result, public debt levels will increase sharply this year,” she added in an email note from the EIU.

Borrowing has already surged in the past 12 months. A study by the Institute of International Finance revealed that global debt across all sectors jumped by more than $10 trillion in 2019 to $255 trillion, or “322% of GDP.”

To underline the magnitude of the situation, worldwide liabilities are now 40 percentage points, or $87 trillion, higher than at the start of the Financial Crisis.

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“[Indeed, this is] a sobering realization as governments worldwide gear up to fight the pandemic. With the Covid-19 fiscal response in full swing, the global debt burden is set to rise dramatically in 2020,” the Washington-based group of financial institutions said in April.

“Gross government debt issuance soared to a record high of over $2.1 trillion last month [March], more than double the 2017-19 average of $0.9 trillion,” it added.

Stagnating growth will only add to the misery. The IMF has predicted that China, where the outbreak emerged in Wuhan last December, will be the only economy to grow this year by a modest 1%. 

GDP in the United States could shrink by 8%, while the eurozone faces a 10% drop.

Breaking the numbers down, Italy and Spain could suffer 12.8% contractions, France 12.5% and Germany 7.8%. The United Kingdom’s GDP is also projected to shrivel by 10.2%, while Japan’s economy could contract by 5.8%.

“Some developed countries will, in the medium term, find themselves on the brink of a debt crisis,” Demarais, of the EIU, said.

“This is compounded by the fact that many of the European countries that are among the worst affected by the epidemic, such as Italy and Spain, already had weak fiscal positions before the coronavirus outbreak. A debt crisis in any of these countries could quickly spread across the globe, sending the global economy into another crisis,” she added.

Amid this toxic atmosphere, influential American economist Stephen Roach has highlighted the plight of the US dollar, pointing out that “the aggressive fiscal response to the Covid-19 shock” would not be “without major consequences.”

He has even predicted that the greenback could fall at “warp speed” or 35% against other currencies in the next three years.

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Roach, a faculty member at Yale University and the former chairman of Morgan Stanley Asia, painted a picture of stark realities when it came to the world’s reserve currency. 

They included a lockdown-induced recession as the coronavirus pandemic continues to ravage the US economy, high unemployment data and ongoing trade friction with major partners such as China.

“To the extent that the inflation response lags and the Federal Reserve maintains its extraordinarily accommodative monetary-policy stance, the bulk of the concession should occur through the currency rather than interest rates. Hence, I foresee a 35% drop in the broad dollar index over the next 2-3 years,” Roach, a senior fellow at Yale University’s Jackson Institute for Global Affairs, said.

“Shocking as that sounds, such a seemingly outsize drop in the dollar is not without historical precedent. The dollar’s real effective exchange rate fell by 33% between 1970 and 1978, by 33% from 1985 to 1988, and by 28% over the 2002-11 interval,” he wrote in a commentary for Project Syndicate.

“Covid-19 may have spread from China, but the Covid currency shock looks like it will be made in America,” Roach added.

So far, more than 9.5 million people have been infected worldwide with the death toll spiraling past 485,000. A debt epidemic and an anemic dollar would certainly push the global economy back into intensive care.

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