WB/Carmen Reinhart:  A financial crisis could emerge from the coronavirus’s lingering fallout

Vaccine distribution is expected to bring an end to the coronavirus pandemic, but households and companies will still face severe debt pressures, Carmen Reinhart, chief economist at the World Bank, said Tuesday.

The pandemic is on the cusp of its one-year anniversary, and its fallout is expected to linger until well after cases tumble. What started as a health crisis is now morphing into “your classic balance sheet problems,” Reinhard said. Those strains threaten to keep the global economy from staging a full bounce-back in the near-term.

“Don’t confuse rebound with recovery,” Reinhart said on Bloomberg TV. “A rebound this year still leaves per-capita income below where it was before the crisis. Calling it a recovery is misleading.”

 

Yet Reinhart, who wrote a book on the 2008 financial crisis with famed economist Kenneth Rogoff, doesn’t expect the current downturn to come with a sudden-shock “Lehman moment.” A coronavirus-fueled financial crisis would likely emerge as a less dramatic event and more as a slow crawl, the economist said.

The length of the pandemic is also among Reinhart’s biggest concerns. The US continues to grapple with soaring daily case counts and its most lethal wave of the virus yet. Prolonged lockdowns have already cut into job growth and consumer spending, and the long-term impacts on individuals are becoming increasingly dire, Reinhart said.

“I am very concerned that the longer this goes on, the more strain on balance sheets of individuals, households, of firms, of countries. It’s a cumulative toll,” she added.

Relief from governments and central banks provided some relief amid the broad economic downturn. Trillions of dollars in fiscal stimulus bolstered household income and interest rates are expected to stay at record lows until employment and inflation reach pre-pandemic levels.

Apart from the fiscal and monetary aid, debt-deferment programs provided a crucial bridge for struggling homes and companies, Reinhart said. Yet their expiration presents a new risk for the still-ailing global economy and its mounting debt pile.

 

 

“Financial institutions across the globe in varying degrees have also agreed to grace periods. Periods in which businesses and households don’t repay their debts. What happens when those programs come to an end?” the economist said.

 

 

Speaking to BloombergHT,  a Turkish private financial broadcaster not affiliated with Bloomberg, Coface Turkey CEO predicted global and Turkish insolvency cases to rise by 35% and  25% respectively.

 

The turn-around in corporate profitability in Developing Nations is a function of GDP growth, which the World Bank expects to remain low ex-China.  The only way the huge increase in EM FX debt burdens can be repaid, is  a very long period of weak dollar and low rates. Low rates are probably here to stay, because arguments about the return of rising inflation doesn’t find much support among economists. Yet, the Dollar Index has already surprised forecasters this year, with Morgan Stanley already rescinding its weak dollar call.

 

EM at large, but most regions of the global economy face another danger:  Covid-19 is mutating by the day, and in ways not observed among coronaviruses of the past.  Some of the mutant strains could be resistant to new vaccines, which would extend the curfews and lockdowns. Secondly, vaccination across the world is going at snail’s pace, with 35 mn doses administered as of 13 January.

 

There seems to be a serious discord between EM asset valuations and the path of the world economy.  Better listen to Dr Reinhart.

 

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.