There is no moral hazard involved now in offering help to struggling economiesby Megan Greene / April 18, 2020 / Leave a comment
The Pope’s Easter message doesn’t usually wade into economics. But this year Pope Francis called for “debt reduction, if not forgiveness” for the world’s poorest countries that are being hit hardest by the pandemic. Pope Francis is right that countries need help in the face of this truly exogenous shock. In the short term, debt forbearance is absolutely necessary, and when the dust settles we should look into forgiveness.
The coronavirus crisis has been unprecedented in the scale and speed with which it has decimated global growth. Many governments have launched massive programmes to fund health and economic policy initiatives designed to protect the lives and livelihoods of their populations. It is too early to know how the world has been changed by coronavirus, but we know for sure it will involve a lot more sovereign debt. Governments are absolutely right to throw fiscal caution to the wind right now and in some cases to lean on their central banks for support, but not all countries are able to do this. Emerging and frontier economies in particular are already shouldering high debt burdens often denominated in ever dearer US dollars as they see record capital outflows that push borrowing costs up further.
In an increasingly go-it-alone environment, the rest of the world should still worry about this, and not just out of the kindness of their hearts. While the developing world has been hit by the financial and economic turmoil caused by coronavirus, much of it has not yet felt the full force of the virus itself. If governments in emerging and frontier markets funnel their money to debt servicing, they will be unable to address the imminent health challenge. If they cannot contain the virus in these regions, it will come back in subsequent waves to hit the rest of the world as well. Furthermore, developing economies account for roughly 60 per cent of global GDP and as such are an important source of demand for the rest of the world. If we want a quick economic recovery, the best way is to make it synchronised.
Thankfully, church and state seem to be aligned on this and some debt relief is coming for the poorest countries in the form of forbearance. Earlier this…