Working Paper: CEPR ID: DP16775
Authors: Ayhan Kose; Peter Nagle; Franziska Ohsorge; Naotaka Sugawara
Abstract: This paper presents a comprehensive analysis of the impact of COVID-19 on debt, puts recent debt developments and prospects in historical context, and analyzes new policy challenges associated with debt resolution. The paper reports three main results. First, even before the pandemic, a rapid buildup of debt in emerging market and developing economies—dubbed the “fourth wave” of debt—had been underway. Because of the sharp increase in debt during the pandemic-induced global recession of 2020, the fourth wave of debt has turned into a tsunami and become even more dangerous. Second, five years after past global recessions, global government debt continued to increase. In light of this historical record, and given large financing gaps and significant investment needs in many countries, debt levels will likely continue to rise in the near future. Third, debt resolution has become more complicated because of a highly fragmented creditor base, a lack of transparency in debt reporting, and a legacy stock of government debt without collective action clauses. National policy makers and the global community need to act rapidly and forcefully ensure that the fourth wave does not end with a string of debt crises in emerging market and developing economies as earlier debt waves did.
Keywords: fiscal balance; government debt; private debt; global recessions; resolution
JEL Codes: E62; H62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID-19 (I15) | exacerbation of existing debt-related risks in EMDEs (F65) |
| exacerbation of existing debt-related risks in EMDEs (F65) | transformation of fourth wave of debt into a tsunami (F65) |
| pandemic-induced recession (F44) | significant rise in both government and private debt (H69) |
| fiscal stimulus measures (E62) | increased debt levels (F65) |
| historical patterns (B15) | rise in global government debt after recessions (H63) |