Debt-trap risk from pandemic crisis

In terms of potential loan losses, JP Morgan is setting aside US$8.3bil; Citigroup (US$4.9bil); Wells Fargo (US$4bil) and Bank of America (US$3.6bil).

The size of government debts and budget deficits incurred in the fight against the coronavirus may possibly “explode to World War Two levels.”

As massive amounts of debt are raised by governments to keep their economies afloat, issues related to debts and deficits that used to get people all worked up are now thrown to the wind.

‘Spend now, worry later’ is no longer as lighthearted as it used to be ; it is serious business to basically keep bringing food to the table.

What matters is the size and sufficiency of the stimulus or rescue packages; some track, to their increasing concern, the number of phases that these have been rolled out.

This time, the debt trap caused by the inability to pay is not due to high interest payments.

Despite ultra low rates, most businesses just do not have the cashflow to pay.

For governments, many are wondering how they are going to exit from these borrowings; even when the pandemic is over, they will have to keep supporting their economy.

With these debt problems, and huge stimulus worldwide, a low growth environment will be the new reality.

Keen competition and weak earnings will mark this new environment that is being kept afloat by government stimulus and low borrowing costs, said RHB Research Institute chief Asean economist Peck Boon Soon.

Ballooning budget deficits due to unprecedented overspending by governments, are running into the trillions; stimulus passed last month will add US$1.76 trillion to US federal budget deficits, the Congressional Budget Office said.

Compared to the US$831bil spent in the last financial crisis, the US could add US$5 trillion in deficit spending in 2020 and 2021.

Budget deficits are incurred when governments spend more than they collect.

There is a possibility that the US fiscal deficit could hit 15% to 20% relative to the size of the economy which is expected to shrink this fiscal year.

Japan, the world’s most indebted nation, will have stimulus close to US$1 trillion, as its sovereign debt to GDP topped 237% compared to 107% in the US.

By the end of September, US public debt will be higher than its economy of US$21 trillion, according to The Washington Post, quoting calculations by the Committee for a Responsible Federal Budget.

Total business debt in the US hit US$16 trillion in 2019, while household debt has hit US$14 trillion.

How much of a drag would all these debts and deficits be on the world economy?

The US which is the world’s largest economy with the most widely used currency, is also engaged in the “race to the bottom, ” but relative risks have not yet risen that sharply.

Relative risks are those attached to one set of assets compared with another.

‘‘Otherwise, the ringgit would have sunk like a stone, ’’ said a market observer.

In an ultra low interest rate environment, even absolute risks (those attached to a set of assets independent of any other assets), have not risen to unmanageable levels.

With countries facing the possibility of downgrades together; it will likely be a “beauty contest” of downgrades.

Among US banks with bigger consumer lending businesses, loan loss provisions are also rising.

In terms of potential loan losses, JP Morgan is setting aside US$8.3bil; Citigroup (US$4.9bil); Wells Fargo (US$4bil) and Bank of America (US$3.6bil).

How strongly will consumer spending and international trade bounce back?

There are no templates for us to chart the future.

All we know is that it will not be pleasant.

In China, consumers have piled on excessive debt in the belief of a better future, while widespread unemployment and severe loss in income will likely constrain any bounce back in the global economy.

Meanwhile, defaults at US companies that issued junk bonds could top 20% in the next two years, said MarketWatch, quoting analysts.

Despite the Federal Reserve’s move to buy up junk bonds, defaults among these risky assets are starting to climb, with Frontier Communications Corp and Quorum Health Corp defaulting on US$14.3bil of these bonds.

Following the slump in oil prices, Singapore-based oil trader Hin Leong Trading, one of the largest suppliers of marine fuel in Asia, is seeking to restructure US$4bil in debts; it is set to file for bankruptcy protection.

Within China’s US$3 trillion trust industry, which is a source of funding for weaker companies, defaults may double this year.

Borrowers of these products are usually of higher risk, and their troubles could ripple through banks and asset managers that have bought them.

Just as in fire fighting, the priority is to save lives; in this case, it is to save livelihoods.

Columnist Yap Leng Kuen notes that cynically, governments may just have to ‘print the damn money.’

Views expressed here are the writier’s own.

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Debt-trap , risk , pandemic , crisis , Plain Speaking , Yap Leng Kuen ,


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