13 May 2020   Leave a comment

The economic consequences of the COVID-19 pandemic have been severe. In the rich countries, the lockdowns associated with attempts to contain the contagion have led to mass unemployment and sharp drops in economic growth. The effects of these slowdowns are not equally felt in all classes domestically and all nations internationally. The IMF Blog makes this prediction:

“The COVID-19 crisis is now widely seen as the greatest economic calamity since the Great Depression. In January, the IMF expected global income to grow 3 percent; it is now forecast to fall 3 percent, much worse than during the Great Recession of 2008-09. Behind this dire statistic is an even grimmer possibility: if past pandemics are any guide, the toll on poorer and vulnerable segments of society will be several times worse. Indeed, a recent poll of top economists found that the vast majority felt the COVID-19 pandemic will worsen inequality, in part through its disproportionate impact on low-skilled workers.”

Poorer countries will be hit especially hard, largely because they are already burdened with heavy debts that will only have to be refinanced leading to an even heavier burden in the future. The Brookings Institution points out:

“Emerging markets and developing countries have about $11 trillion in external debt and about $3.9 trillion in debt service due in 2020. Of this, about $3.5 trillion is for principal repayments. Around $1 trillion is debt service due on medium- and long-term (MLT) debt, while the remainder is short-term debt, much of which is normal trade finance.

External Debt of Poorer Countries

Many poor countries spend far more on repaying their debts to external lenders than they currently spend on health care in their own countries. These countries face the prospect of a massive default on their debts, and at the recent G20 meeting, the rich countries decided that a moratorium on debt repayments was far preferable to a default.

A moratorium on payment that does not also include a cessation of interest accruals does these countries no good. True, they will not have to make payments but all that money saved will likely be used to address the health costs of the pandemic. And when the payments resume, the actual amounts to be repayed will be larger. So a number of analysts are arguing for a “debt jubilee”. The phrase refers to a passage in the Bible which refers to an overall forgiveness of debts:

“Some argue that there is: a “debt jubilee”. Drawn from the Old Testament book of Deuteronomy, the concept derives from the biblical injunction for a day of rest one day out of every week, a “sabbath” day that reflects the teaching the God rested on the seventh day after creating the world in six.

“There is another injunction for a sabbath year every seventh year, in which people are to not work and on the year after the seventh of those sabbatical years , i.e. the 50th, (one year after the 49th) there would be a jubilee year during which any slaves would be emancipated and everyone would return to their land and family to live off of natural providence. A clear implication of this teaching is that all obligations, including debt obligations, would be forgiven in the process.”

The forgiveness of the debts of poor countries is probably the only way to avoid an economic catastrophe in them which would have a serious effect on the overall global economy. Overall forgiveness sounds far fetched, but the truth is that these debts will never be repaid–the debts are too large and the ability to repay is insufficient. Forgiving the debts is likely the only way to avoid the chaos of generalized defaults.

Posted May 13, 2020 by vferraro1971 in World Politics

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