How will countries pay off their debt after COVID-19? | Counting the Cost

How will countries pay off their debt after COVID-19? | Counting the Cost

Jan Randolph, director of sovereign risk at IHS Markit, explains how countries may pay off debts in the coming years.

Take-away: 

  • Governments will lose tax revenues; deficits widen, debt levels as a ratio of the public debt to GDP are at record-level highs. 
  • How will governments deal with this? Can governments continue borrowing from their central banks? It depends on a few factors: If a government can borrow long-term at low-interest rates, that makes it easier for them to service debts. But it is not a free lunch, and it will need to be paid back. 
  • Will investors continue to buy up these new debts? This depends on the confidence they have of each government, whether investors see each government as responsible. 
  • Most economists agree that now is the time for governments to support the economy so that there is income later to service the debt eventually.
  • After the second world war, when the US had similar debt-level ratios, debts were paid back in the 50s, 60s and 70s. Also, in the 60s and 70s, the US had a lot of inflation, and that helped ease the debt levels down. BUT, investors now will be put off investing if governments are seen to be stoking inflation. 
  • Can we be printing money and be okay with that? It depends on who you ask. If you ask a German monetarist, they will disagree. Because in the 1930s, this practice decimated their savings, which eventually lead to the second world war. Printing money would create problems if it leads to inflation. 

 

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Tags:   Covid-19 Coronavirus Jan Randolph
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