'This is war': Covid may lead to global financial bloodshed
The World Bank had called for a year-long extension of debt relief for the world's poorest countries amid the pandemic.
The coronavirus pandemic is "morphing into a major economic crisis", World Bank chief economist Carmen Reinhart said, and warned of an impending global financial calamity.
Questioning the wisdom of central banks increasing their sway over the bond market, she said the "longer the uncertainty, the longer the pandemic works its way through the global economy, the bigger the balance sheet damage".
Reinhart said the current global meltdown did not start as a financial crisis but it is morphing into a major economic crisis, with very serious financial consequences. "There's a long road ahead," she said in an interview with Bloomberg.
On central banks trying to keep yields low by buying bonds, she said: "This is a war. During wars governments finance their war expenditures however they can and right now there are dire needs. The scenario we are in is not a sustainable one."
Reinhart's scary view for the world economy is in line with the dire forecast made by International Monetary Fund chief economist Gita Gopinath a few days ago. "This is the worst crisis since the Great Depression, and it will take significant innovation on the policy front, at both the national and international levels to recover from this calamity," she said.
The IMF has projected the global growth in 2020 would be -4.4 per cent, an upward revision of 0.8 per cent compared to its June update. Noting that the current crisis is far from over, Gopinath said employment remains well below pre-pandemic levels and the labour market has become more polarised with low-income workers, youth and women being harder hit.
"The poor are getting poorer with close to 90 million people expected to fall into extreme deprivation this year. The ascent out of this calamity is likely to be long, uneven and highly uncertain. It is essential that fiscal and monetary policy support are not prematurely withdrawn, as best possible," said Gopinath.
In 2021 growth is projected to rebound to 5.2 per cent, -0.2 per cent below its June projection, according to the IMF.
The World Bank had called for a year-long extension of debt relief for the world's poorest countries amid the pandemic, and the richest countries agreed to extend it at least six months.
In an earlier forecast, Reinhart had warned that the global economic recovery from the crisis originated by the pandemic might take as much as five years, and warned that for the first time in 20 years, global poverty rates will rise following the crisis.
Reinhart said in a remote intervention during a conference held in Madrid that the pandemic-caused recession would last longer in some countries than in others and will exacerbate inequalities as the poorest will be harder hit by the crisis in rich countries and the poorest countries will be harder hit than richer countries.
Nearly 60 per cent of debt due from poorer nations this year is owed to China. She said about half of poorer countries are either in or approaching "debt distress". The vulnerabilities for lower-income countries and emerging markets are much greater than for advanced economies, and while emerging markets turned out to be the "bright spot" of the 2008 crisis, "that is certainly not happening here. This is truly a global crisis". - email@example.com
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