Nations have been scrambling to keep their economies afloat. Photo / Getty Images
Nations have been scrambling to keep their economies afloat. Photo / Getty Images
World leaders have committed almost US$8 trillion (NZ$13 trillion) to battling the coronavirus and its economic fallout as countries go into lockdown across the world, driving public debt up to dangerously high levels.
Health, tax and spending measures so far announced come to US$3.3 trillion, according to the International MonetaryFund (IMF), alongside US$1.8 trillion of public sector loans and equity investments, plus another US$2.7 trillion of loan guarantees and other liabilities, totalling US$7.8 trillion.
At the same time, tax revenues will slump as the economy grinds to a halt.
The IMF said: "This amount is higher than the stimulus during the global financial crisis that began in 2008."
"The human cost of the pandemic has intensified at an alarming rate, and the impact on output and public finances is projected to be massive."
The global lender of last resort also warned that debt levels are already high, so piling extra borrowing on top brings serious risks for the future stability of national finances and economies.
The IMF expects government debts to hit almost 100pc of world GDP, underlining the growing pressures of the bailout.
Debt is set to jump from 79.6pc when the world was shaking off the hangover of the financial crisis in 2012 and 83.3pc last year to 96.4pc of GDP by the end of 2020.
In the rich world, the situation is even more stark.
The IMF's Fiscal Monitor report said that average public debt of advanced economies plateaued at about 100pc of GDP in the 2010s, up from 74pc in 2007. It is now set to rise substantially once again - sparking fears years of austerity may be needed to bring the pile back down.
Debt
This indicates those nations failed to use the years of recovery and growth to significantly pay down their debts, which would have left them in better shape to fight the pandemic.
The IMF expects the burden on developed countries to rise to more than 120pc of GDP this year, with the US at more than 131pc and Italy's debt rising to more than 155pc.
Those worries can be seen already in the rising borrowing costs facing the Italian government. Its bond yields - which rise when investors see debt as higher risk - are now 2.2 percentage points above those in Germany, reflecting growing concerns in markets despite the European Central Bank's efforts to keep a lid on lending costs.
Britain's national debt will rise from 85.4pc of GDP last year to 95.7pc this year.
Debt
Such large debts increase the risk of a surge in interest rates in years to come, the IMF said, though central banks are currently helping keep borrowing costs down. Financial markets have also made borrowing cheap as investors rush to hold the safest assets they can find.
The situation will get worse before it gets better as governments switch from saving jobs and businesses to supporting the post-pandemic recovery – but in the longer term they will need to work out how to cut their debts once more.
The IMF said: "As countries contain the pandemic and shutdowns end, broad-based, coordinated fiscal stimulus – depending on countries' financing constraints – will become a more effective tool to foster the recovery."
"Exit from the exceptional measures introduced during the crisis will also be appropriate.
"Once economies recover, achieving progress on ensuring debt sustainability will be needed."
