otal public and private global debt rose by a record $24 trillion in 2020, according to the Institute of International Finance. Driven by the COVID-19 pandemic and accompanying recession, international debt rose to $281 trillion and the debt-to-GDP ratio is at 355%.
From Angola to Zambia, many nations are already struggling under the weight of their existing debts and struggling not to default on loans. In the pandemic economy, they’ve had to compete for financial relief from international organizations like the IMF and World Bank. The trajectory risks stalling years of economic growth and has already forced countries to cut spending at a time when domestic markets need stimulus and healthcare needs vaccine funds. Economists say that the IMF, World Bank, and US have not done enough to prevent a crisis, particularly as the US spent far less on international aid in much of 2020 than in previous years.
In recent months, all three changed tactics. The World Bank committed $2 billion to vaccine financing for 40 developing nations by the end of April. Previously-short on liquid funds, the IMF is currently set to issue $650 billion in reserve money known as Special Drawing Rights (SDRs) to nations in need. US Treasury Secretary Janet Yellen is on board, citing the importance of a global recovery. Economists believe the moves will offer many countries a much-needed cushion to repay debts and allow them to offer relief to their citizens, though some will still face unnecessary borrowing pressures due to the yearlong delay in aid.
It’s time to change how we think about debt
Much like the interest payments of Argentina and Ethiopia, international debt reform is overdue.
After the IMF and World Bank announced updated terms for the G20 Debt Service Suspension Initiative (DSSI), which allows nations to delay debt payments during the financial crisis, IMF Managing Director Kristalina Georgieva noted, “...the DSSI is not the solution to unsustainable debt.” In response, the UN Secretary-General on April 9th stated it was time to “rethink the principles underpinning today’s debt architecture.”
The pandemic has also revealed new realities about debt. Economists have long assumed that debt approaching or surpassing GDP risks a major financial crisis. However, the US is on track to pass this mark by the end of 2021, and to date nothing has changed. In fact, even as conventional wisdom warned increased debt would increase interest rates, the opposite has happened. Interest rates have been low globally since the 2008 financial crisis, and fell again in 2020. The US Congressional Budget Office in 2021 claimed that there is now no set debt-to-GDP ratio at which a financial crisis becomes likely or imminent.
Some economists still worry of a tipping point at which the US debt becomes a crisis, but there’s no consensus on if or when this happens. Olivier Blanchard, Former Chief Economist of the IMF, suggested that the public debt may not have fiscal cost, and that it’s likely the US can decrease its debt-to-GDP ratio without ever having to raise taxes.
Instead, many national and international professionals have re-examined their views on debt following the Great Recession of 2008, during which failure to provide enough stimulus delayed the US and global economic recovery by over four years, the Economic Policy Institute reports. During the pandemic recession, such findings have led many governments to invest in more generous stimulus and risk too much aid rather than too little, even at the cost of driving up debt.
Oxford Economics suggests that this approach will pay off. In their World Economics Report, they note no evidence for sustained inflation and expect the last decade’s low rates to continue. Strong US stimulus and falling COVID cases suggest a healthy worldwide recovery. While oil and some goods may experience short-term inflation, there is no expectation of long-term effects, and Central Banks should face little pressure to increase bond rates.
Mounting evidence suggests that the IMF and World Bank must continue and increase their more generous approach to lending and debt forgiveness. International debt reform has long been delayed, but COVID-19 has transformed reform into a moral imperative. Not being approved for loans or later defaulting on them risks not only years of global economic growth, but also avoidable infections and deaths. As our global debts come due, we must remember that economies are a measure not only of money, but of human wellbeing. Innovative new policy approaches such as debt forgiveness and loan generosity to the struggling world are on track to be rewarded with strong economic growth.
“Green recovery programs” present another promising possible solution. In the coming months, the World Bank and IMF are meeting with debtor countries and seeking buy-ins from the world’s wealthiest nations to negotiate green recovery programs which offer new forms of debt relief and forgiveness in exchange for sustainable infrastructure and green development to battle climate change. Studies suggest that borrowing costs have already increased due to climate change and are projected to rise farther by 2030. At a pivotal moment amid two crises of humanity’s health and future, new debt initiatives are necessary not only for the short-term pandemic recovery, but for a long-term sustainable future.
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What 2020 Revealed About International Debt
Photo by Milind Kaduskar via Unsplash.
April 19, 2021
Rapidly rising global public and private debt are changing how economists think about the impact of debt loads on national economies.
T
otal public and private global debt rose by a record $24 trillion in 2020, according to the Institute of International Finance. Driven by the COVID-19 pandemic and accompanying recession, international debt rose to $281 trillion and the debt-to-GDP ratio is at 355%.
From Angola to Zambia, many nations are already struggling under the weight of their existing debts and struggling not to default on loans. In the pandemic economy, they’ve had to compete for financial relief from international organizations like the IMF and World Bank. The trajectory risks stalling years of economic growth and has already forced countries to cut spending at a time when domestic markets need stimulus and healthcare needs vaccine funds. Economists say that the IMF, World Bank, and US have not done enough to prevent a crisis, particularly as the US spent far less on international aid in much of 2020 than in previous years.
In recent months, all three changed tactics. The World Bank committed $2 billion to vaccine financing for 40 developing nations by the end of April. Previously-short on liquid funds, the IMF is currently set to issue $650 billion in reserve money known as Special Drawing Rights (SDRs) to nations in need. US Treasury Secretary Janet Yellen is on board, citing the importance of a global recovery. Economists believe the moves will offer many countries a much-needed cushion to repay debts and allow them to offer relief to their citizens, though some will still face unnecessary borrowing pressures due to the yearlong delay in aid.
It’s time to change how we think about debt
Much like the interest payments of Argentina and Ethiopia, international debt reform is overdue.
After the IMF and World Bank announced updated terms for the G20 Debt Service Suspension Initiative (DSSI), which allows nations to delay debt payments during the financial crisis, IMF Managing Director Kristalina Georgieva noted, “...the DSSI is not the solution to unsustainable debt.” In response, the UN Secretary-General on April 9th stated it was time to “rethink the principles underpinning today’s debt architecture.”
The pandemic has also revealed new realities about debt. Economists have long assumed that debt approaching or surpassing GDP risks a major financial crisis. However, the US is on track to pass this mark by the end of 2021, and to date nothing has changed. In fact, even as conventional wisdom warned increased debt would increase interest rates, the opposite has happened. Interest rates have been low globally since the 2008 financial crisis, and fell again in 2020. The US Congressional Budget Office in 2021 claimed that there is now no set debt-to-GDP ratio at which a financial crisis becomes likely or imminent.
Some economists still worry of a tipping point at which the US debt becomes a crisis, but there’s no consensus on if or when this happens. Olivier Blanchard, Former Chief Economist of the IMF, suggested that the public debt may not have fiscal cost, and that it’s likely the US can decrease its debt-to-GDP ratio without ever having to raise taxes.
Instead, many national and international professionals have re-examined their views on debt following the Great Recession of 2008, during which failure to provide enough stimulus delayed the US and global economic recovery by over four years, the Economic Policy Institute reports. During the pandemic recession, such findings have led many governments to invest in more generous stimulus and risk too much aid rather than too little, even at the cost of driving up debt.
Oxford Economics suggests that this approach will pay off. In their World Economics Report, they note no evidence for sustained inflation and expect the last decade’s low rates to continue. Strong US stimulus and falling COVID cases suggest a healthy worldwide recovery. While oil and some goods may experience short-term inflation, there is no expectation of long-term effects, and Central Banks should face little pressure to increase bond rates.
Mounting evidence suggests that the IMF and World Bank must continue and increase their more generous approach to lending and debt forgiveness. International debt reform has long been delayed, but COVID-19 has transformed reform into a moral imperative. Not being approved for loans or later defaulting on them risks not only years of global economic growth, but also avoidable infections and deaths. As our global debts come due, we must remember that economies are a measure not only of money, but of human wellbeing. Innovative new policy approaches such as debt forgiveness and loan generosity to the struggling world are on track to be rewarded with strong economic growth.
“Green recovery programs” present another promising possible solution. In the coming months, the World Bank and IMF are meeting with debtor countries and seeking buy-ins from the world’s wealthiest nations to negotiate green recovery programs which offer new forms of debt relief and forgiveness in exchange for sustainable infrastructure and green development to battle climate change. Studies suggest that borrowing costs have already increased due to climate change and are projected to rise farther by 2030. At a pivotal moment amid two crises of humanity’s health and future, new debt initiatives are necessary not only for the short-term pandemic recovery, but for a long-term sustainable future.
