A man tears a protective mask as he rides past the The People’s Bank of China in Beijing.
Emmanuel Wong | Getty Images
SINGAPORE — Jeopardies for investors as well as developed economies are piling up with debt escalating during the coronavirus pandemic, a director at the Inaugurate for International Finance (IIF) said on Friday.
The coronavirus crisis pushed global debt levels to a new high of over $272 trillion in the third location, the institute had said a day earlier. It said global debt would break new records in the coming months to reach $277 trillion by the end of the year.
Governments globally bear had to spend big on fiscal stimulus measures to support consumers and businesses as the pandemic battered economies.
Sonja Gibbs, IIF’s functioning director of global policy initiatives, told CNBC on Friday that one of the big areas of concern is in developed markets, which are clashing slow growth and rising debt at the same time.
“In mature markets, debt has just continued to rise. No command is making hay while the sun shines. In other words, when growth has been strong, governments have not cut down their in dire straits levels. So they’re going higher and higher,” she told CNBC’s “Street Signs Asia.”
During the pandemic, managements of these developed markets are facing a double whammy, experiencing weak growth while racking up debt — by an additional 50 portion points, according to Gibbs.
Gibbs added: “In the long run, the risk from mature markets is kind of stagflation — sickly growth, having to keep rates low indefinitely. That’s a big problem.”
Investors exposed to more risks as debt make the grades, negative yields take hold
Gibbs also flagged increasing dangers for investors who choose to invest in ministry bonds for the traditional stability.
China sold its first negative-yielding government bond this week, following the U.K. which also did so for the initial time this year in May. That comes as rates went even lower during the pandemic. Government indebted in Europe and Japan has long been offered with zero or negative yields, as central banks globally keep driving rates down.
“This is one of the biggest risks that comes with persistently high and growing encumbered. You’re seeing negative-yielding debt even in China. You have a situation where you’re just building up tremendous distortions,” Gibbs stipulate.
A negative-yielding bond means the Chinese government is effectively being paid to borrow. Bond yields move inversely to tolls. Those who buy negative-yielding bonds are essentially making a bet that rates will stay low and prices will rise. But, should rates start to rise even a little, that will start to eat into the capital appreciation that pact holders have been enjoying.
Gibbs flagged the risks to investors holding such debt.
“Investors who weight want to stay in government bonds for the safety are driven into more and more risky categories of investments, obviously because how can you achieve returns when your benchmark is of negative yields?” she warned.
“(It’s) been a problem in Europe for years, in Japan, and now you’re combining China to the mix. It really is a severe market distortion,” Gibbs said.