INTHEBLACK October 2021 - Magazine - Page 36
F E AT U R E
// D E B T A N D E C O N O M I C F U T U R E
WILL THERE BE A DEBT RECKONING?
A growing concern, among some at least, is
that the global debt mountain may be difficult
to conquer.
Will current and future generations still
be paying the price of the huge government
COVID-19 stimulus packages for years to come,
long after the pandemic is brought under control?
It is evident that, to varying degrees, all
countries will likely be grappling with higher
debt levels for years, which could ultimately have
long-term economic and social consequences.
Developed nations have much stronger
economic capacity and more policy levers
available to reduce their debt levels. These could
include new tax measures.
On the other hand, the after-effects for
poorer nations that have needed to ramp up
their borrowings to deal with the COVID-19
crisis will be longer lasting and potentially
harder to fix.
The IMF has made about US$250 billion
(A$339 billion) available to its member
countries, which is a quarter of its US$1 trillion
(A$1.4 trillion) lending capacity.
In addition, the World Bank has made up
to US$160 billion (A$217 billion) in financing
available to developing countries with limited
financial resources to respond to COVID-19.
The World Bank has also committed more
than US$26 billion (A$35 billion) as part of
the G-20 economies Debt Service Suspension
Initiative, which has allowed the world’s
poorest countries to suspend the repayment
of official bilateral credit.
The IMF says that, in emerging and frontier
market economies, countries with market access
should take advantage of favourable financing
conditions to improve the composition of their
debt structure.
“Countries with limited market access will
likely need additional assistance from the
international community. Other countries
facing significant difficulties with debt burdens
could benefit from deeper restructuring.”
With interest rates at historical lows, the cost
of servicing debt has fallen sharply and is likely
to remain manageable for many countries over
the medium term.
As the pace of economic recovery quickens,
however, central banks may need to resort to
lifting interest rates as a means of keeping
inflation levels under control.
In fact, expectations of rate rises in developed
economies over the next two to three years
are increasing, although governments will be
36 ITB October 2021
Above: Dr Steven Hail,
University of Adelaide
THE BIGGER
PICTURE
DESPITE RECORD-HIGH LEVELS OF
GLOBAL DEBT, FACTORS SUCH AS
CORPORATE DEBT AND THE RATIO
OF HOUSEHOLD DEBT TO GDP NEED
TO BE CONSIDERED WHEN
PAINTING A PICTURE OF A
COUNTRY’S ECONOMIC FUTURE.
Dr Steven Hail, lecturer in the
School of Economics at the
University of Adelaide, is not
concerned with long-lasting
effects from COVID-19-related
borrowings and says the big debt
picture is quite complicated.
“You have to get down into the
nitty gritty to really make sense
of what’s going on,” Hail says.
“Overall, it’s complicated, and
it’s a mistake to add household
debt and business debt and
government debt, and, when you
look at government debt, not to
distinguish between currency
issuing governments like Australia
and governments that don’t
borrow in their own currency.”
Hail says government debt in
Australia is not an issue, corporate
debt is relatively low, and the ratio
of household debt to GDP has
declined as a consequence of
higher savings rates.
“You can add everybody
together, and you can say,
globally, financial liabilities have
gone up. But one person’s
financial liability is somebody
else’s financial asset.”
treading very carefully with rates to avoid a
new wave of corporate and individual loan
defaults.
RISING DEFAULT RISKS
Credit rating agency S&P Global Ratings
notes that, while the continuing recovery of
the global economy will likely prevent a debt
crisis in the short term, higher global leverage
does translate to an elevated default risk.
“Naturally, the shape of the post-pandemic
recovery will factor into how much and
how quickly corporates, governments and
households can trim debt, if at all,” says senior
research fellow Terence Chan CPA.
Chan says defaults may hit levels not seen
since 2009, following the global financial
crisis (GFC).
“Our baseline expectation is for the US
trailing 12-month speculative-grade corporate
default rate to rise to 7 per cent by year-end,
from 6.6 per cent in December 2020. For
Europe, the equivalent expectation is
6.5 per cent, from 5.3 per cent.