However, the economic and financial impact of COVID-19 may likely be the worst in human history. The main cause is the nature of the global financial situation now which is very different from the past. The principal factor is the extent of global indebtedness which is reflected by the size of the global debt which now stands at USD253 trillion, the highest in human history.
All three sectors of the global economy – public, corporate and household are struggling with high debt levels. In October 2019, the IMF noted that companies have debts that risked becoming a USD19 trillion timebomb in the event of another global recession. It further stated that almost 40% of the corporate debt in eight leading countries – the US, China, Japan, Germany, Britain, France, Italy and Spain – would be impossible to service if there was a downturn half as serious as that of a decade ago.
That recession has now obviously arrived due to the COVID pandemic. According to a recent report by Reuters, more than three-quarters of economists based in the Americas and Europe said the current global economic expansion has ended, thus implying that a period of economic recession is about to begin which may be worse than the Great Depression of the 1930s.
Many groups have already demanded financial assistance from their governments. But the fact is most governments are also in financial difficulties. For example, the Malaysian government has a debt burden of over RM1 trillion while the US federal government debt is more than USD25 trillion. Government revenues around the world will also be reduced as tax collections will also decline.
In reality the way out of this situation is pretty straight forward: banks must give time to borrowers to pay back their loans. If possible, their debts should also be forgiven. If banks are able undertake these recommendations, businesses will be able to recover, workers will get back their jobs and the world economy will get back to normal again once the COVID-19 epidemic ends.
Unfortunately, as expressed by one senior manager of the Asian Development Bank following the 2004 tsunami that hit Indonesia, `debt forgiveness’ is not in the vocabulary of banks. During that episode, borrowers, many of whom were poor fishermen, did not receive any debt forgiveness. They were only offered new additional loans on top of their existing loans. This is likely to be the scenario that will be facing businessess and individuals that are currently indebted to banks and unable to service their loans.
The fact is the banking industry is simply not designed to be merciful and compassionate to borrowers. For banks, borrowers are their most important asset category. If borrowers are let off the hook, then a huge chunk of their assets will disappear and as a result, they themselves will end up being insolvent.
However, due to a combination of consumerist values and the desire to achieve fast economic growth, societies have encouraged the growth of debts and the banking industry. Among many businesses, debt-financing is the preferred way of obtaining funds instead of equity. Among households, the practice of saving money to buy goods and services is replaced by the practice of buying things on credit. Investing using borrowed funds is considered a smart way of becoming rich despite the obvious risks. It seems that past episodes of debt crises have failed to make us realise the fundamental flaws of this arrangement and the dangers of being overdependent on debts and the banking industry.
In times of distress, the qualities of compassion and mercy are extremely important. However, the truth is the banking industry, by its very nature, is unable to internalise or practice these noble values. What makes it more grim is the banking industry is also now the most important industry in our economic system since it is the sole creator and supplier of money, which is the lifeblood of the economy. The current COVID-19 epidemic will further expose the dangers and weaknesses of our debt-based economic system. The question is: will humanity be able to learn this lesson from the coming recession?
* The writer is a professor at the Department of Policy and Strategy, Faculty of Business and Accounting, University of Malaya
** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI
