- Major economies may be on track for recovery, but oversized government borrowing risks fueling a financial crisis, World Bank chief economist Carmen Reinhart said on Bloomberg TV on Thursday.
- The route of government fundraising and bond buying is unsustainable and could trigger debt crises if they continue, the economist said.
- “It didn’t start as a financial crisis, but it is turning into a major economic crisis with very serious financial consequences,” she said.
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If not handled properly, the coronavirus pandemic could fuel a global financial catastrophe and exacerbate severe economic damage, World Bank chief economist Carmen Reinhart said on Bloomberg TV on Thursday.
Even after the virus caused the biggest economic recession in nearly a century, bankruptcies were somewhat averted by a massive government stimulus and central bank easing. But the path to global quantitative easing “is not sustainable,” and many countries could face a debt crisis even as their economic recovery materializes, Reinhart said.
“It didn’t start as a financial crisis, but it is turning into a major economic crisis with very serious financial consequences,” she said.
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Central banks in developed and emerging economies have turned to unprecedented bond buying programs to add liquidity to markets and ensure governments can pay for massive relief measures. The introduction of such purchases contributed to the first stage of economic recovery, but the weaknesses in the global public debt space “have become evident,” the economist said.
“The longer the uncertainty, the more the pandemic progresses in the global economy, the greater the damage to the balance sheet,” added Reinhart.
This is not the first time that governments have had to quickly raise liquidity and put their balance sheets at risk. The World Bank economist referred to World War II, when “urgent needs” for financing led to record borrowing and prompted the use of untested monetary policies.
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The coronavirus pandemic presents a similar global crisis, Reinhart said. But government spending “is not military spending that can be quickly reversed,” she said, and uncertainties over the trajectory of the virus suggest spending needs will persist for the foreseeable future.
“The need to seek new sources of income to meet social needs is going to be, I think, very urgent for the future,” she said, adding that the risk of a debt crisis extended “to all regions, to varying degrees, and across all income strata. ”
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