The World Bank’s senior economist said in an interview Thursday that the coronavirus pandemic “is turning into a major economic crisis” and questioned the wisdom of central banks strengthening their influence in the bond market.
“It didn’t start as a financial crisis, but it is turning into a major economic crisis, with very serious financial consequences,” World Bank chief economist Carmen Reinhart told Bloomberg. “There is a long way to go.”
She said that “the longer the uncertainty, the more the pandemic progresses in the global economy, the greater the damage to the balance sheet.”
“It’s a war,” she said of central banks trying to keep yields low by buying bonds. “During wars, governments finance their war spending as best they can and right now the needs are dire.
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Reinhart was best known – before joining the World Bank in June – for her book “This Time Is Different: Eight Centuries of Financial Folly” co-written with a former Harvard colleague during the 2008 crisis.
The World Bank has called for a one-year extension of debt relief for the world’s poorest countries amid the pandemic, and richer countries have agreed to extend it for at least six months.
Almost 60% of the debt of the poorest countries this year is owed to China, according to Bloomberg.
She said about half of the poorest countries are in or about to be in debt distress.
She added that the “vulnerabilities” of low-income countries and emerging markets are much greater than those of advanced economies, and while emerging markets have turned out to be the “bright spot” of the 2008 crisis, “this does not certainly not happening here. It is truly a global crisis. ”
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Reinhart said she called it the “quieter crisis” because banks have given extensions to businesses and households in repaying loans. “When the dust settles, some of these loans will not be repaid.” She said it would likely have big consequences on bank balance sheets.
China’s share of global GDP is set to increase during the crisis, but not in the same way as when it increased to double digits during the 2008 crisis, she said.
She said China is participating in debt relief, but “less than fully – full participation is something we should be aiming for but have yet to see. ”
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She added that the scenario “we are in is not sustainable”.