Coronavirus bailouts: governments and central banks can’t keep throwing money at the problem
- The largesse keeping the world from a depression is also saddling governments with growing debt and limiting the space for stimulus in case of a second Covid-19 wave
- The focus must also be on getting the pandemic under control and everyone back to work
A comfort in these dark days of pandemic and recession has been the presence of governments and central banks with apparently bottomless purses.
We used to believe that governments had two revenue sources: taxes plus borrowings. And that central banks did not simply go on printing money. By some strange alchemy, however, debt concerns have become a thing of the past.
Governments can continue handing out trillions of dollars in aid to businesses and households while central banks prop up an increasingly shaky-looking financial system.
The figures are almost unbelievable. As IMF chief economist Rita Gopinath said, “We are now projecting deeper recession in 2020 and a slower recovery in 2021. Global growth is projected to decline by 4.9 per cent in 2020 [vs 3 per cent forecast in April] followed by partial recovery … in 2021.”
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The country forecasts are most dismaying. The US economy is projected to shrink by a dramatic 8 per cent this year and Britain’s by 10 per cent, while Japan’s contracts by nearly 6 per cent, Germany’s shrinking by 7.8 per cent and France’s by 12.5 per cent.
Even next year’s partial recovery might not materialise in the event of a second wave. The picture looks grim too, in Asian and other emerging economies (not least India, whose economy is projected to shrink by 4.5 per cent).
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But back to the question of how long official financial support can keep coming. As Harvard economist (and former S&P Global chief) Paul Sheard wrote: “The blowout in fiscal deficits around the world triggered by the Covid-19 pandemic is leading many to ask: how are we going to pay for all this?”
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He added that “the size of the budget deficit should be driven by how far from full employment the economy is and how much inflationary or deflationary pressure there is, not by concerns about how much debt a government is accumulating”.
Such arguments tend to be arcane yet are so important that economists need to explain them more clearly. Finance ministers do not appear to have fully bought into them (supposing they fully understand them). Fiscal caution is still widely regarded as a virtue.
Indonesian finance minister Sri Mulyani Indrawati, for example, said at a recent Bloomberg investment event in Hong Kong that her government will do all it can to keep borrowing in check, and warned against slipping into the “habit of undisciplined fiscal and monetary stimulus”.
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Cheah Cheng Hye, co-chairman of Value Partners Group, suggested at the same event that such behaviour could only “result in tears”. Moody’s Investors Services has said that economic slowdown will raise advanced economies’ debt burdens sharply and could result in credit rating downgrades.
With interest rates at rock bottom, leading economies can afford to finance the current debt burden but it can only get bigger. And emerging economies are running out of policy space for further fiscal stimulus, said the Institute of International Finance.
The moral for policymakers seems to be, do not rely too much on kindly uncles from finance ministries and central banks. Focus on getting the pandemic under control and then get everyone back to work, and economies back on a sustainable recovery track.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs