Countries are piling on record amounts of debt amid COVID-19. Here’s what that means

(Viacheslav Bublyk, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: John Letzing, Digital Editor, Strategic Intelligence, World Economic Forum

  • Public debt levels and deficits have hit records during the pandemic.
  • Many experts argue it’s a sound means to fund the recovery.
  • Such borrowing has been further enabled and encouraged since the financial crisis due to central bank efforts.

As public debt in the US recently hit a peak not reached since World War II, a funny thing happened: the public didn’t really seem to mind.

The debt load in the US has only continued to rise, far exceeding the size of the country’s economy as measures are enacted to cushion the impact of COVID-19. The US is not alone – governments around the world have been borrowing heavily as they seek to counter the pandemic. While this doesn’t necessarily come as a surprise, the relatively subdued reaction among conservative experts might.

The pandemic seems to be further reshaping how many people think about sizable public debt. Those who may have once been spooked by the concept seem to be okay with it now, if the money’s put to good use and the interest due remains relatively low.

So, even as countries like the UK register record debt, some like South Africa have to enact public-sector wage freezes that risk unrest, and the public debt-to-GDP ratio is expected to hit 140% in developed economies, many experts have a general recommendation: keep borrowing

Not so long ago, it was received wisdom that a country’s public debt load should stay well shy of the size of its economy. In the US, public debt amounted to about 60% of GDP on the eve of the global financial crisis slightly more than a decade ago, and the European Union’s founding treaty actually spelled out a public debt cap of 60% of GDP. But like other things that may have once been taken for granted, the pandemic has at least temporarily scrapped that EU guideline – as policy-makers scramble to prop up economies.

In some ways, the growing willingness to ramp up borrowing is a result of a trick honed since the financial crisis. Just as they did then, central banks have simply printed the money required to buy up massive amounts of government debt and inject liquidity into economies. Need to expand your deficit to fund COVID-19 relief? Just “print the damn money,” as one economist put it.

Image: World Economic Forum

Long before COVID-19, many experts were criticizing the single-minded obsession with curbing public debt as “foolish,” while noting that debt raised to defeat the Nazis in World War II – presumably a justified expense during a crisis – had yet to be paid off.

Still, rising debt levels risk scaremongering about potential bankruptcy and ruin. And, the circular approach of having a central bank pump out money for public spending triggers warnings about resulting inflation. Germany after World War I, where hyperinflation got so bad waiters had to call out new menu prices every half hour, is a frequently-cited example. Yet, inflation fears seem mostly muted.

Governments have been borrowing from a broad range of investors, including pension funds, but central banks have been some of their most reliable backers – the US Federal Reserve has been buying $80 billion in Treasury securities per month.

Of course, record public debt levels are expected to create financial challenges in many parts of the world. Developing countries, for example, may be unable to tap the same resources as their wealthier peers – and they’ll likely soon be on the hook for billions of dollars in debt payments.

Image: The World Economic Forum

For more context, here are links to further reading from the World Economic Forum’s Strategic Intelligence platform:

  • South Korea recently unveiled a plan to legally limit public debt amid criticism from conservatives. But according to this report, there are also concerns about not spending enough to fight the pandemic, and questions about how urgently-needed such a cap really is. (The Diplomat)
  • This economics professor believes the UK government may be making a big mistake by letting its pandemic response be overly influenced by concerns about what a resulting deficit will mean for the future. (LSE)
  • A global debt crisis is not imminent, according to this analysis. While market watchers have good reason to sound the alarm about rising leverage worldwide, it should flatten out around 2023 – though that’s contingent on factors like a widely-available COVID-19 vaccine by mid-2021. (Project Syndicate)
  • When the European Central Bank committed to a €1.35 trillion asset purchase program to cushion the blow of COVID-19 earlier this year, it brought to the surface a deep-seated disagreement in its governing council. This analysis examines the political conflicts always liable to break out at the ECB, and what drives them. (LSE)
  • The pandemic has triggered concern about debt unsustainability in many countries. But the issue of sovereign debt transparency has been a thorny one – this analysis proposes the establishment of an open-access, real-time debt transparency platform powered by distributed ledger technology. (CEPS)
  • Low-income nations were due to send at least $40 billion to lending banks and bondholders this year, and plans to pause these interest payments – let alone cancel any of the principal – are now patchy, according to this report. (The New Humanitarian)
  • Economists might be untroubled by heavy government borrowing when the US economy is in peril, but according to this report, Republican lawmakers have grown skittish at the enormous costs of battling the pandemic. (Christian Science Monitor)

On the Strategic Intelligence platform, you can find feeds of expert analysis related to COVID-19, Financial and Monetary Systems and hundreds of additional topics. You’ll need to register to view.

Image: World Economic Forum

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

2018 Golden Pen of Freedom Awarded to Maria Ressa of the Philippines

This is how the world can get routine vaccinations back on track

Mobile Technology Saving Lives: Changing healthcare systems with simple technological solutions

These four countries are the happiest in the European Union

‘Power is not given, power is taken’, UN chief tells women activists, urging push-back against status quo

Where do Americans stand on immigration? They’re not as divided as you might think

FROM THE FIELD: One teen’s journey from refugee camp to US school principal

UN’s Guterres condemns ongoing airstrikes on Syria’s hospitals, medical workers

Mental health in times of a pandemic: what can each individual do to lessen the burden?

Parliament backs a modernised EU electoral law

A Sting Exclusive: “Paris is indeed our best bet for a secure climate future”, EU Commissioner for Environment Karmenu Vella cries out from Brussels

Making the most of our ‘extra time’ – for ourselves and society

This is the state of the world’s health, in numbers

Privatisation and public health: a question of Human Rights

Germany: A grand coalition may trouble employers and bankers

Sustainable investment is on the rise – here’s how to connect the dots

State aid: Commission approves €6 billion German measure to recapitalise Lufthansa

NASA has released new photos of the Apollo 11 moon landing

The European Parliament wants to stay in one place

Coronavirus could trigger a hunger pandemic – unless urgent action is taken

Where are the world’s nuclear weapons?

The world must pull together to stem the urgent crisis in our ocean

The COP24 Agreement: Yes, it happened at last

Afghanistan: UN ‘unequivocally condemns’ attack in Kabul

From Sweden to India, School climate strikes have gone global

The world has made spectacular progress in every measure of well-being. So why does almost no one know about it?

‘Leaders who sanction hate speech’ encourage citizens to do likewise, UN communications chief tells Holocaust remembrance event

‘Education transforms lives’ says UN chief on first-ever International Day

Lessons from dealing with the collapse of Lehman Brothers

Towards a seamless internal EU market for industrial goods

State aid: Commission approves €133 million Portuguese liquidity support to SATA airline; opens investigation into other public support measures

Do doctors need to know their patients’ sexual orientation and gender identity?

EU Parliament and Council: Close to agreement on the bank resolution mechanism

The unique frequency of felling the gab on women’s rights by medical students

Taking care in times of social isolation goes beyond washing hands or wearing masks

Venezuelans brave torrential border river, face exploitation, abuse – UN urges greater protection

China dazzles the world with her Silk Road plan to connect, Asia, Europe and Africa

Phone lines open between Ethiopia and Eritrea, and people are calling strangers

3 trends that will transform the energy industry

UN chief ‘deeply saddened’ by Ethiopia plane crash which killed 157, including at least 21 UN workers

Why are so few women buying into Bitcoin?

Germany may prove right rejecting Commission’s bank resolution scheme

UN calls for action to tackle ‘ubiquitous but invisible’ global road safety crisis

Future-proofing the European banking market – removing the obstacles to exit

GSMA Announces First Keynote Speakers for 2019 “MWC Los Angeles, in Partnership with CTIA”

UN launches drive to highlight environmental cost of staying fashionable

The EU Commission vies to screen Chinese investment in Europe

These 11 EU states already meet their 2020 renewable energy targets

In Marrakech, UN chief urges world leaders to ‘breathe life’ into historic global migration pact

UN expert ‘shocked’ by Egyptian reprisals against human rights defenders she met

Decent working conditions for the young health workforce: what are the challenges and can we find solutions?

LGBTQ+: The invisible poor on our healthcare

Commission announces actions to make Europe’s raw materials supply more secure and sustainable

These Asian economies invested in their people – and it paid off

How AI can inspire doctors to be more inventive

Russia won’t let Ukraine drift westwards in one piece

Latin America and Caribbean region deadliest for journalists in 2019

MWC 2016 LIVE: Ford trumpets new in-vehicle system, “fundamentally rethinks” transportation

These countries create most of the world’s CO2 emissions

National parks give a $6 trillion boost to mental health worldwide

More Stings?


Speak your Mind Here

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s