Debt rise during a pandemic poses a threat to investors and developed countries

Deficits & Debts: Crash Course Economics #9

Debt rise during a pandemic poses a threat to investors and developed countries

As the director of the Institute of International Finance (IIF) said on Friday, risks for investors, as well as for developed countries, are increasing due to rising debt during the coronavirus pandemic..

The coronavirus crisis pushed global debt levels to a new high of more than $ 272 trillion in the third quarter, the institute said a day earlier. The published report says that in the coming months, global debt will break new records and will reach $ 277 trillion by the end of the year..

Governments around the world have had to spend heavily on fiscal stimulus measures to support consumers and businesses as economies are plagued by the pandemic.

Sonya Gibbs, IIF’s managing director for global policy initiatives, told CNBC on Friday that one of the main areas of concern relates to developed markets, which are simultaneously grappling with slow growth and surging debt.

«In mature markets, debt has only continued to rise. No government mows hay while the sun is shining. In other words, when growth was strong, governments did not cut their debt levels. So they go higher and higher», – she said in an interview with CNBC.

During the pandemic, governments in these developed markets face a double whammy, experiencing weak growth while increasing debt by another 50 percentage points, Gibbs said..

Gibbs added: «In the long term, the risk associated with mature markets is a kind of stagflation – weak growth in which rates remain low indefinitely. This is a big problem».

Debt rise during a pandemic poses a threat to investors and developed countries

Gibbs also pointed to the growing danger for investors who choose to invest in government bonds for the sake of traditional stability..

This week, China sold its first negative yield government bonds following the UK, which also did so for the first time this year in May. This happened because the rates became even lower during the pandemic. Public debt in Europe and Japan has long been offered at zero or negative yields as central banks around the world continue to cut rates.

«This is one of the biggest risks associated with consistently high and growing debt. We see debt with negative yields even in China. There is a situation where huge distortions are created», – noted Gibbs.

A negative yield bond means that the Chinese government is actually being paid for the loan. Bond yields move inversely with prices. Those who buy bonds with negative yields are essentially betting that rates will remain low and prices will rise. However, if rates start to rise even slightly, it will begin to undermine the capital gains that bondholders have..

Debt rise during a pandemic poses a threat to investors and developed countries

Gibbs pointed to the risks for investors holding such debt: «Investors who might want to stay in government bonds for safety reasons fall into increasingly risky investment categories simply because how can you make a profit when your benchmark has negative returns??».

«This has been a problem in Europe for years, in Japan, and now China is being added. This is a really serious market distortion.», – summed up Gibbs.

Debt rise during a pandemic poses a threat to investors and developed countries

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