Cracks form as governments face pressure from global debt burdens: Don Pittis

Even as millions of Canadians look to Ottawa for support through the COVID-19 lockdown, there are growing concerns that chaos in the world's most indebted regions will delay a global economic recovery.

Reports of a breakdown in civil control in places such as Iraq, following the loss of oil revenues, may be an early indicator of wider economic and political fallout.

"Fears are growing that the state will collapse," an Iraqi official told The Economist magazine in a worrying report titled Dark times ahead: The risk that Iraq may fall apart.

Yesterday, the International Monetary Fund released its latest world economic outlook titled The Great Lockdown, in which it forecasts 2020 will see the greatest global economic decline since the Great Depression of the 1930s.

Facing catastrophe

As the IMF warns that absolute global output will shrink by three per cent and that GDP will come in more than five per cent below expected levels, some experts caution that without support from the world's richest economies, some of the world's poorest countries will face catastrophe.

Many economists, including Bessma Momani, a specialist in international financial institutions at Ontario's University of Waterloo, think the IMF outlook simply isn't gloomy enough.

"I think it was actually optimistic. Too optimistic, in my humble opinion, and I can understand why," Momani said.

Momani says the world's poorest people, not just in South Asia, sub-Saharan Africa and South America but in U.S. inner cities, too, will suffer the most, and in ways that could lead to revolts. Places such as Venezuela, already chaotic, may collapse into something worse.

She says the IMF, which is structured to be able to help individual countries when they suffer from unique problems, is not equipped to help everyone at the same time.

It would be like if an insurance company, which is perfectly prepared to help a client in the very unlikely event their house is damaged in a fire, was suddenly overwhelmed by a forest blaze that burned out everyone in the area. In the current crisis, the economy of every country in the world will be affected by the coronavirus and the lockdown to prevent its spread.

It may be no surprise that Argentina is on the way to its ninth default on its sovereign debt as it asks the IMF for help. But this time, Argentina will not be alone.

An Italian default?

In Italy, for example, high levels of national debt have been overlooked in the past because of the country's large output of goods and services, Momani says. But now, with a production collapse, Italy is facing a sovereign debt default of its own.

"There's no other solution," says Momani. "It has nothing but, you know, basically asking for an IMF full-on sovereign debt rescue package akin to what we saw with Greece and Argentina."

But, she says, with half of IMF members already putting in requests for money, and fewer alternative sources of cash, there won't be enough to go round.

That's why James Boughton, senior fellow with the Centre for International Governance Innovation, a Waterloo-based think-tank, says wealthy governments must authorize the IMF to extend the use of special drawing rights (SDRs), non-dollar currency units held by the fund.

According to a recent report by Soumaya Keynes, who happens to be a relative of John Maynard Keynes, the economist who helped conceive SDRs, such a plan faces hurdles that could delay it for months.

"Most important," she writes, "America is reluctant to issue any SDRs at all, let alone $4 trillion worth."

Boughton, who has written two histories of the IMF, says there is growing support for an increase in the fund's resources.

"But it's not a slam dunk," he says.

Boughton worries that the world's recent move toward every-country-for-itself thinking could lead to a calamity much worse than the IMF's latest projected $9-trillion loss in global output, which he fears would block an economic recovery in 2021.

And while everyone will suffer, he expects, like Momani, that the poorest people in the poorest countries will bear the brunt of it. Despite the cancellation of some debts by the IMF and the World Bank, more will need to be done by the world's wealthiest countries to prevent a humanitarian catastrophe that we will live to regret, he says.

"The potential for a real disaster here is enormous."

Follow Don on Twitter @don_pittis

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