- Major economies may be on the road to recovery, but large government borrowing risks fueling a financial crisis, World Bank chief economist Carmen Reinhart told Bloomberg TV on Thursday.
- The path of government fundraising and redemption of bonds is not sustainable and could lead to a debt crisis if they continue, the economist said.
- “It didn’t start as a financial crisis, but it escalates into a major economic crisis with very serious financial consequences,”; she said.
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If left untreated, the coronavirus pandemic could cause a global financial catastrophe and exacerbate terrible economic damage, World Bank chief economist Carmen Reinhart told Bloomberg TV on Thursday.
Even after the virus caused the biggest economic downturn in nearly a century, bankruptcies were somewhat halted by strong government stimulus and a weakening central bank. But the path to global quantitative easing is “not sustainable,” and many countries could face a debt crisis just as their economic recovery takes place, Reinhart said.
“It didn’t start as a financial crisis, but it escalates into a major economic crisis with very serious financial consequences,” she said.
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Central banks in both developed and emerging economies have resorted to unprecedented bond-buying programs to increase market liquidity and enable governments to pay for massive relief. The introduction of such procurement contributed to the first stage of economic recovery, but the weakness in the global public debt “became apparent,” the economist said.
“The longer the uncertainty, the longer the pandemic travels through the world economy, the greater the loss-making balance,” Reinhart added.
This is not the first time that governments have had to raise cash quickly and risk their balance sheets. A World Bank economist pointed to World War II, when “acute” financing needs pushed for record borrowing and prompted the use of untested monetary policy.
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The coronavirus pandemic represents a similar global crisis, Reinhart said. But government spending “is not a military expense that can be recovered quickly,” she said, and uncertainty about the trajectory of the virus suggests that spending needs will continue in the near future.
“The need to look for new sources of income to support social needs will, in my opinion, be very important to move forward,” she said, adding that the risk of a debt crisis is decreasing “in all regions, to varying degrees and in different regions.” “.
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