The world is vulnerable to a financial crisis if the coronavirus epidemic drags on because it is already so deep in debt, the United Nation’s trade body warned in a report on Monday.
An enduring health emergency will likely trigger margin calls, tighten borrowing conditions, and increase the risk of a stampede to sell assets not hit in the first round of market turmoil, the UN Conference on Trade and Development said.
“This raises the prospect of a credit crunch in a period of high indebtedness,” despite very low interest rates, the report says.
Hopes of a recovery will hinge on sustained and coordinated liquidity injections by central banks, more active fiscal policies, and renewed efforts to bolster trade.
“Central banks should do whatever it takes in the face of the COVID-19, including directing credit for production and employment,” UNCTAD said.
The world has been on a borrowing binge since the 2008 meltdown, when central banks pumped vast sums into cash-strapped markets and banks to shore up the system. At the start of 2020, total debt stocks exceeded more than $250 trillion, about three times global gross domestic product, according to the Institute of International Finance.
Developing countries most at risk
Developing countries are particularly vulnerable to a credit crunch, as many are already struggling with the highest debt levels on record.
“For many developing countries that are facing debt distress already, I think we’re going to have to look at more radical solutions,” Richard Kozul-Wright, who oversees globalization and development strategies at UNCTAD, said in an interview Monday with CNNMoney’s Kasmira Jefford. “The need for a moratorium on debt servicing in some countries will also be necessary.”
Economists have warned for years that such massive debt is a risk for the global economy. Record-low interest rates in countries around the globe have made it easier and cheaper for corporates, individuals, and governments to borrow.
Last week, the U.S. Federal Reserve, which cut rates three times last year, slashed them by half a percentage point in response to the economic threat from COVID-19.
The European Central Bank meets this week, and markets are pricing in a much smaller cut, given that rates are already in negative territory. There is also speculation that the ECB is preparing measures to provide liquidity to businesses hit by the outbreak.