A man wears a protective mask as he drives past the People’s Bank of China in Beijing.
Emmanuel Wong | Getty Images
SINGAPORE – Risks for investors and developed countries are mounting as debt escalates during the coronavirus pandemic, a director of the Institute for International Finance (IIF) said Friday.
The coronavirus crisis brought global debt to a new high of over $ 272 trillion in the third quarter, the institute said a day earlier. Global debt will break new records in the coming months, reaching US $ 277 trillion by the end of the year.
Governments around the world have had to spend a lot of money on fiscal stimulus measures to support consumers and businesses as pandemic-ravaged economies.
Sonja Gibbs, IIF’s chief executive officer for global policy initiatives, told CNBC on Friday that one of the big problems is in developed markets, which are simultaneously struggling with slow growth and rising debt.
“In mature markets, debt has just continued to rise. No government makes hay while the sun is shining. In other words, when growth has been strong, governments haven’t lowered their debt. So it keeps getting higher.” She told CNBCs ” Street Signs Asia “.
During the pandemic, the governments of these developed countries are facing a double blow that has seen weak growth and debt at the same time – by another 50 percentage points, according to Gibbs.
Gibbs added, “In the long run, mature market risk is a kind of stagflation – weak growth, having to keep rates low indefinitely. That’s a big problem.”
Gibbs also pointed to increasing dangers for investors who choose to invest in government bonds for reasons of traditional stability.
China sold its first government bond with negative yield this weekafter the United Kingdom, which did so for the first time in May of this year. This is because rates fell even further during the pandemic. National debt in Europe and Japan has long been offered with zero or negative returns as central banks continue to cut interest rates around the world.
“This is one of the biggest risks associated with persistently high and growing debt. You see negative-yielding debt even in China. You have a situation where you are just building huge bias,” Gibbs said.
A negative yielding bond means that the Chinese government is effectively being paid for loans. Bond yields move inversely with prices. Those who buy negative yield bonds are essentially betting that interest rates will stay low and prices will rise. However, should interest rates rise even a little, it will affect bondholders’ capital appreciation.
Gibbs pointed out the risks to investors who hold such debt.
“Investors who want to stay in government bonds for security reasons are being driven into increasingly risky categories of investments simply because they can earn returns when their benchmark is negative.” she warned.
“(It’s) been a problem in Europe for years, in Japan, and now you add China. It’s really a serious market distortion,” Gibbs said.