American Consequences - August 2020

The Debt Jubilee Is Going Global

never entered your mind. Like money owed by the government of Argentina – which, last month, defaulted for the ninth time in the past century – or any number of other developing economies around the world. According to the Institute of International Finance, a finance industry association, total global debt – money borrowed by companies, households, and governments – has risen by $87 trillion since the start of the 2008 to 2009 global economic crisis... to around $258 trillion as of the end of March. Total debt from emerging markets has more than doubled since 2010 to $73 trillion today. That means global debt stands at 331% of total economic output. That’s up nearly 50 percentage points since the last big economic crisis. And since forecasts of how much economic output is going to fall in 2020 are all over the map, in reality, this percentage is probably larger. One of the ironies of a potential debt jubilee in emerging markets is that even now, some of the world’s most rickety economies are still piling up on debt, due in part to the Fed pumping liquidity into the global economy. From April 1 through mid-July, emerging- market governments raised an incredible $90 billion by selling bonds to global investors. And in a lot of ways, the debt situation for the U.S., the eurozone, and Japan is an

anthill compared to the Mount Everest-sized challenge facing countries that don’t enjoy the luxury of being a reserve currency. The Fed can easily create new money, whether to bail out small businesses hit by the coronavirus, pay holders of U.S. Treasurys, or to buy “junk bond” exchange-traded funds (“ETFs”). But if developing economies from Ecuador to Zimbabwe start printing their local currencies to buy ventilators, pay bus drivers, or meet a bond payment... they’ll spark massive inflation. That will cause far more damage to their economies than the destruction they’re trying to head off. Total debt from emerging markets has more than doubled since 2010 to $73 trillion today. The biggest emerging markets include China, India, and Russia. The grand total includes around $3.2 trillion owed by the dozens of “frontier markets,” which are economies that haven’t reached “emerging” status yet. In recent years, as yields on bonds in developed countries have collapsed to zero and into negative-return territory, investors have tripped over each other to lend to markets where they can earn interest of around 9% (Zambia’s 2015 international bond issuance) or 7% (Tajikistan’s in 2017). Before the coronavirus-inspired crash in global asset prices earlier this year, bonds issued by Mexico and Brazil yielded around 6.5%. When the global economy is growing, those look like good bets. But the risk-reward setup has all changed now.

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August 2020

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