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Analysis .. The world is approaching the fourth wave of debt

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Analysis .. The world is approaching the fourth wave of debt

 

Analysis .. The world is approaching the fourth wave of debt

 February 09, 2020 03:07 PM

Mubasher - Ahmed Shawky : Amidst the World Bank warning of a massive wave of debt escalating all over the world, it is not clear who will be affected the most.

But if the countries most vulnerable to the brunt of the debt wave, from the UK to India, do not act soon, they may face severe economic damage, according to Kyushik Paseo, a former World Bank economist, through an analysis published by Project Syndicate.

Over the past decade, the global economy has seen a steady accumulation of debt, now reaching 230 percent of global GDP, with the fact that the last three debt waves have caused a major economic recession around the world.

The catastrophic past of debt

The first debt wave was in the early 1980s, after 10 years of low borrowing costs that enabled governments to expand their balance sheets considerably, interest rates began to rise, making debt service increasingly unsustainable.

Mexico was the first victim, as the US government and the International Monetary Fund were informed in 1982 that they could no longer pay their debts.

This had a domino effect, as 16 Latin American countries and 11 least developed countries outside the region eventually rescheduled their debt.

In the 1990s, interest rates were again low, raising global debt again.

The crash came in 1997, when the fast-growing but financially vulnerable East Asian economies - including Indonesia, Malaysia, South Korea and Thailand - experienced a sharp slowdown in growth and their currency rates plunged, thus extending effects to all parts of the world.

But emerging economies are not alone vulnerable to such meltdowns, as demonstrated by the 2008 US mortgage crisis.

By the time everyone discovered what the mortgage crisis meant, American investment bank Lehman Brothers had collapsed, causing the worst crises and recessions since the Great Depression.

The fourth wave of debt

The World Bank recently warned that the fourth debt wave may exceed in its first three waves, as emerging economies whose debt-to-GDP ratio reached a record low of 170 percent are particularly vulnerable.

As in previous cases, the debt crisis increases due to lower interest rates, while anxiety will start as soon as interest starts to rise.

The reality is that the mechanisms of such crises are not well understood, but research conducted by "Stephen Morris" and "Mortar Song Shin" in 1998 about the mysterious origins of currency crises, and how they are transmitted to other economies, shows that a "financial tsunami" can make the situation go beyond a source the crisis.

How the source of the financial crisis could fade has been illustrated in the delightful short story "Ranam Kurtva" by the famous Indian writer, Shibram Chakraborti.

In this story, the desperate Chipram asks an old school friend, Harsha, to lend him 500 rupees ($ 7) on Wednesday with a promise to pay the deposit the following Saturday.

But Chibram is wasting money, so when he comes on Saturday, he has no choice but to ask another school friend, Jopar, for a loan of 500 rupees, to pay it back next Wednesday.

Chipram uses the money to pay off his debts to Harsha, but when he comes on Wednesday he has no way to pay off Jopar’s debt, so he reminds Harsha that he paid off his debts on time and therefore borrowed from him again.

This becomes customary as Shibram repeatedly borrows from a friend to pay off his debts to the other, and Shibram then clashes with Harsha and Jobar one day.

After a moment of anxiety, Chipram proposes an idea that every Wednesday Harsha should give “Jopar” 500 rupees, and every Saturday the latter must give the same amount to the first.

Shepram assures his former friends at school that this will save him a lot of time and change nothing for them, and he will disappear in the crowds of the city "Kolkata" in India.

The UK and India are a model of the crisis

So who are the potential "Harsha" and "Jobar" in today's debt spree? According to the World Bank, they could be any country with domestic vulnerabilities, a large fiscal balance sheet, and a heavily indebted population.

There are many countries that fit this description and run the risk of becoming the channel that carries the fourth debt wave of the global economy.

Among the advanced economies, the UK is a clear candidate, and in 2019 Britain barely avoided recession, recording the weakest pace of growth in any period not seen since the 1945 recession.

Britain's conservatives have also promised big increases in commercial investment, and this is unlikely, but instead it will be a debt wave.

Among emerging economies, India is particularly vulnerable, as in the 1980s the Indian economy was somewhat protected, and consequently the debt wave had little impact at that time.

At the time of the East Asia crisis in 1997, India had just begun to open up and thus experienced some slowdown in growth.

By the time of the debt wave in 2008, the country had become globally integrated and severely affected, but its economy was strong and growing at almost 10 percent annually, and recovered within a year.

But India’s economy today faces one of the deepest crises of the past 30 years, with growth slowing sharply and unemployment at the highest level in 45 years, almost no export growth over the past six years, and per capita consumption in the agricultural sector over the past five years.

Add to this a highly polarized political environment, and therefore it is no wonder that investor confidence is rapidly declining.

It is not too late for countries to build "walls" to protect against the debt tsunami, while while India's political problems will take time to resolve, the new budget may be an opportunity to take precautionary action.

The fiscal deficit must be controlled in the medium term, but the government will be prudent in adopting an expansionary fiscal policy now, with funds directed to support infrastructure and investment, and if managed properly, could boost demand without increasing inflationary pressures and strengthening the economy in order to cope with the debt wave.

https://www.mubasher.info/news/3586473/تحليل-العالم-يقترب-من-الموجة-الرابعة-للديون/

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