Updated: May 21, 2020
Angelina Kali International fashion model, Journalist, TV Reporter and Social Media Influencer instagram.com/angelina_kali
As a response to the economic damage done by the containment measures to limit the spread of Covid-19, governments throughout the world have enacted massive stimulus packages to safeguard jobs and to hinder a complete economic collapse. The US has so far approved rescue packages in excess of $4.5 trillion. Yes, it is trillion with a capital “T”. That equates to around 20% of the US Gross Domestic Product (GDP). The UK has so far announced about £65 billion in aid packages that will likely exceed £100 billion in 2020 or between 3-5% of GDP. Similar sizeable measures have been enacted by many western nations.
This is completely understandable as the current situation is akin to a wartime situation. Already millions have been made unemployed and without fiscal stimulus support, there is a real risk of total collapse of the global economy with forecasted unemployment rising to well into the hundreds of millions globally. In the US so far, already over 22 million have registered for unemployment benefits in 3 weeks and that’s just at the beginning of lockdowns in the US whilst the death toll keeps mounting. Everyone is clamouring for support from the unemployed, the gig-economy, small businesses and even massive corporations such as international airlines. Even with these stimulus packages, the International Monetary Fund (IMF) have forecasted that the Covid-19 pandemic will have a $4 trillion hit on the global economy.
There is one thing that most people seem to overlook and that is the mounting national debts. Nobody seems to question how governments suddenly can afford these massive fiscal spending sprees. Prior to the Covid-19 pandemic, most governments had until recently been tightening their budgets through austerity measures to get their budgets and national debts under control. No longer. US debt is set to exceed 100% of GDP. Italy already had a debt to GDP ratio of around 135% even before the pandemic and it is set to shoot upwards in light of the fiscal stimulus packages needed to stave off a complete meltdown of the Italian economy. At some point in time, all this debt has to be repaid or at least serviced in order to prevent bankruptcy. Or governments can keep printing more money either physically or through quantative easing (QE). Many already warn of the debt levels and some even go as far as calling western currencies as “fiat” currencies based on the notion of Ponzi schemes. That is that governments need to borrow more money to pay their existing debtors and this just gets repeated over and over again. But at some point, confidence will evaporate and investors will demand higher and higher interest rates to buy the debt until it becomes unattainable. There are several recent cases of this with Venezuela and Zimbabwe being prime examples with million percent inflation.
When Greece needed a bailout from the IMF and the ECB, its debt was around 127% of GDP. The fiscal tightening that were imposed by its lenders has led to mass unemployment of around 26% and a contraction of its GDP by 25%. The fallout of the Greek debt crisis was contained due to its relatively small size of its debt at Euro 320 billion as well as fairly solid finances of the Eurozone
countries. However, all this has changed due to the costs of the lockdowns. There is no real appetite by the moral fiscally prudent northern European countries to keep bailing out the less fiscally prudent southern European countries.
With the wealthier countries having had to balloon their own national debts, they are in a much weaker position to come to the aid of vulnerable economies such as Italy or Spain which have been amongst the hardest affected by the Covid-19 pandemic. Pre-lockdown national debt of Italy stood at around 138% of GDP, which is even much higher than the levels when Greece couldn’t repay its creditors. Who knows what the debt levels will be after the stimulus packages but it will certainly exceed 150% of GDP. What makes Italy so worrisome is the nominal amount of its debt pile currently totalling 2.44 trillion. Whilst Italy has sought a Covid-19 Eurobond whereby these bonds would be guaranteed by all 27 European Union member states, the Netherlands have at least for now halted those efforts. Without ECB guarantees, there is mounting concerns of how Italy will be able to manage its debt repayments, especially considering that its budget deficit for 2020 was already forecast to be around 5% before the Covid-19 pandemic. The risk of an Italian default has risen exponentially. The impact of this event would be catastrophic for the Eurozone in particular and the global financial system in general. If Spain joined Italy in defaulting on its 1.5 trillion debt, it is difficult to see how the global financial system could limit the financial fallout of such an event. But with debt to GDP at close to 100% before Covid-19, this will rise sharply in the coming months due to the necessary fiscal stimulus packages to stave off an economic meltdown in Spain. And we haven’t even considered Greece’s situation yet with a debt to GDP ratio of nearly 180%.
The fiscal stimulus packages will limit the economic damage of the Covid-19 pandemic in the short term. But there might be an even greater long term cost. The rising national debts will have to be maintained through increased portion of budgets being used to manage the debt mountains which leaves less for other government spending. There will have to be fiscal tightening so austerity will return with a bang. But the real problem is if inflation takes hold which will lead to rising interest rates. This is a real possibility due to the massive money printing programmes since the 2008 financial crisis which will continue for the foreseeable future. That will exacerbate the problem with maintaining not only national debts but also the massive personal debts. We may have averted a global economic meltdown for now, but the future is now even more uncertain. Unfortunately there is no such thing as a free lunch! Someone always have to pay.