Coronavirus fallout can morph into a global financial crisis, the World Bank's chief economist says

Samuel de Roman/Getty ImagesKing Juan Carlos delivers ‘Premio de Economia Rey Juan Carlos’ (King Juan Carlos Economy Award) to the economist Carmen Reinhart at Banco de Espana headquarters on December 11, 2018 in Madrid, Spain.
  • Major economies may be well on their way to recovery, but outsized government borrowing runs the risk of fuelling a financial crisis, World Bank Chief Economist Carmen Reinhart said Thursday.
  • The path of governments’ fundraising and bond-buying is “not sustainable” and could spark debt crises should they continue, the economist warned.
  • “This did not start as a financial crisis but it is morphing into a major economic crisis, with very serious financial consequences,” she said on Bloomberg TV.
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If not handled correctly, the coronavirus pandemic can fuel a global financial disaster and exacerbate already dire economic damage, World Bank Chief Economist Carmen Reinhart said Thursday.

Even after the virus drove the biggest economic slump in nearly a century, bankruptcies have been somewhat staved off by massive government stimulus and central bank easing. Yet the current path of global quantitative easing is “not a sustainable one,” and many countries could face a debt crisis just as their economic recoveries materialise, Reinhart said.

“This did not start as a financial crisis but it is morphing into a major economic crisis, with very serious financial consequences,” she said in an interview on Bloomberg TV.

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Central banks in developed and emerging economies alike have turned to unprecedented bond-buying programs to add liquidity to markets and ensure governments can pay for massive relief measures. The introduction of such purchases helped drive the first stage of economic recovery, but frailties in the global public debt space “have become manifest,” the economist said.

“The longer the uncertainty, the longer the pandemic works its way through the global economy, the bigger the balance sheet damage,” Reinhart added.

To be sure, this isn’t the first time governments have had to rapidly raise cash and place their balance sheets at risk. The World Bank economist pointed to World War II, when “dire needs” for funding pushed record borrowing and prompted the use of previously untested monetary policies.

The coronavirus pandemic presents a similar global crisis, Reinhart said. Yet governments’ expenditures “are not military expenditures that can be quickly reversed,” and uncertainties around the virus’ trajectory suggest spending needs will persist for the foreseeable future.

“The need to look for new revenue sources to support social needs is going to need a very pressing one moving ahead,” she said, adding that the risk of a debt crisis “really cuts across all regions, in varying degrees, and across all income strata.”

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