- Large economies may be well on their way to recovery, but excessive government borrowing risks creating a financial crisis, the World Bank’s chief economist, Carmen Reinhart, told Bloomberg TV on Thursday.
- The road to government fundraising and bond buying is unsustainable and could trigger debt crises if they continue, the economist said.
- “This did not start as a financial crisis, but it turns into a major economic crisis with very serious economic consequences,”
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If not handled properly, the coronavirus pandemic could lead to a global financial disaster and exacerbate severe economic damage, World Bank chief economist Carmen Reinhart said Thursday on Bloomberg TV.
Even after the virus drove the biggest economic downturn in nearly a century, bankruptcies have been somewhat averted by massive government stimulus and relief by the central bank. But the path to global quantitative easing “is not sustainable” and many countries may face a debt crisis, as will their economic recovery, Reinhart said.
“This did not start as a financial crisis, but it turns into a major economic crisis with very serious economic consequences,” she said.
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Central banks in both developed and emerging economies have turned to unprecedented bond buying programs to inject liquidity into the markets and ensure that governments can pay for massive relief measures. The introduction of such purchases helped drive the first phase of economic recovery, but weaknesses in the global public debt space “have become apparent,” the economist said.
“The longer the uncertainty, the longer the pandemic functions through the global economy, the greater the balance,” Reinhart added.
This is not the first time governments have had to quickly raise money and jeopardize their balance sheets. The World Bank economist pointed to World War II when “serious need” for funding pushed record lending and prompted the use of untested monetary policy.
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The coronavirus pandemic poses a similar global crisis, Reinhart said. But government spending “is not military spending that can be quickly reversed,” she said, and uncertainty surrounding the virus’ trajectory suggests that spending needs will continue for the foreseeable future.
“The need to look for new sources of income to support social needs will be, I think, a very urgent move forward,” she said, adding that the risk of a debt crisis reduces “across all regions, in different degrees and across all income strata. “
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