Averting the dangers of a global debt crisis

With countries getting deeper into debt, the day of reckoning doesn’t seem far away amid the looming global debt crisis. Global debt broke past records to touch an unsustainable 320% of GDP and how we got here isn’t hard to fathom. The world went into the pandemic with record high debt that more than tripled since the 2008 financial crisis.

Out of nowhere, we’ve found ourselves in the worst economic recession in 90 years and with the global economy projected to contract 4.4% in 2020, there’s fat chance that countries can grow their way out of debt. A full-fledged debt crisis would devastate the global economy and dwarf the fallouts of the 2008 financial crisis. Thus, the IMF last month urged countries to act now and avert the dangers of a debt crisis. 

In the past 60 years, the world has seen four debt waves, of which the first three ended with crises leaving several countries in financial ruin. Surprisingly, nations avoided a systemic debt crisis in 2010 thanks to ultra-cheap interest rates and a massive monetary push, but this didn’t solve the problem altogether. By 2018, another debt wave began building and global debt reached an all-time high of 230% of GDP. When the pandemic struck, 

public debt rose further due to higher spending and lower revenue. Global central banks’ easy monetary policies once again bought time. But it could be a matter of time before the crisis unfolds. India isn’t spending into trouble and is also resorting to expenditure cuts. Yet, public debt is likely to touch a staggering 90% of GDP next fiscal. We’ve avoided corporate and retail debt defaults thanks to government bailouts, but much depends on job creation and incomes from hereon.

Those with unsustainable debt will still need support and the often used low-interest-rate tool may not come to the rescue. As the IMF noted, policymakers must avoid outright defaults by restructuring debt. For, the longer the problem is postponed, the worse it gets, just like how sorrows won’t become joys by postponement.