A risky and incomplete economic recovery

The stimulus plans applied are not accessible to all the economies that make up the planet. In the same way, indebtedness begins to question whether they are accessible, even for certain developed economies.

Faced with an unforeseen crisis such as the pandemic that threatens our economies today, many are the countries that have begun to apply policies to, in a way, contain the falls caused by said crisis. Due to a forced stoppage of economic activity due to the inability to contain contagions, the inability to open businesses and continue operating has forced countries to activate mechanisms to contain the expected decline in their economies; very expensive mechanisms, for which a historical mobilization of resources has been required.

Regarding the European Union, for example, the mobilization of resources undertaken by the community bloc is not equal to past mobilizations. In which countries such as Greece even had to intervene, with bailouts and the supervision of the Troika. And it is that, when one attends to the precedents that the pandemic has, in the same way one realizes that, as the main macroeconomic indicators show, we are facing a crisis that has no precedent in our recent history; since neither the very nature of this crisis is similar to that of past crises.

In this sense, we are talking about a mobilization of resources approved by the old continent that will reach 750,000 million euros. All this, taking into account that we are talking about the recovery fund, as well as all the funds and budget items that the multiannual financial framework already had and that would not be included in said amount. Well, in this scenario, the need to stimulate the economy has prompted countries to prepare to face one of the greatest crises in history; since we are not only talking about Europe, but also about other countries that, like the United States, are already preparing monetary ammunition to combat the fall.

Thus, the case of the United States is similar to that of Europe. The expected mobilization of resources includes a stimulus plan endowed with up to 2.2 trillion dollars to cushion the consequences of the coronavirus crisis, the largest economic rescue plan in the history of the country, more than double that approved in the recession of the 2008. And the fact is that, even the United Kingdom, facing the pandemic alone and now far from the European project, has decided to implement stimulus plans worth 33,000 million pounds. All this, as we said, in order to reverse an economic situation that does not present anything favorable.

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In this scenario, based on the latest update of the WEO report, published by the International Monetary Fund (IMF), the outlook is somewhat more optimistic, although it continues to predict a rather severe contraction. The report predicts a drop in world gross domestic product (GDP) of 4.4%, five tenths less than in June. However, we must bear in mind that we are talking about forecasts that do not stop undergoing modifications, while, taking into account the statements of the body itself, there are many risks on the horizon that prevent us from falling into complacency and conformism.

Within everyone’s reach?

Faced with what the virus has meant, countries have decided not to be left behind and, as Keynes would say, applying countercyclical policies to combat the pandemic is a mandatory task for all countries, without distinction. However, these measures, and responding to the owner, are not available to everyone. In this sense, Latin American countries, or another series of emerging economies in the world, have shown themselves incapable of undertaking a mobilization, at least, similar to that undertaken by other countries such as those mentioned above. Their lack of resources, as well as the inability to continue assuming debt, prevents them from promoting the stimulus plans applied in other less vulnerable economies with greater capacity.

And, taking Spain and Ecuador as an example, we must take into account some aspects. In this case, although we talk about Ecuador being a country that presents a lower indebtedness than the Spanish economy with respect to its GDP level, the vulnerability that Ecuador presents, with a debt of 60% with respect to its GDP, is clearly higher than the that Spain would present; although its debt was, as today, above 100% of GDP.

In other words, debt levels are not the most worrying thing, but rather the quality of an economy and the ability to pay for it. As we can see, the Spanish economy has debt levels that already exceed 100 of its GDP. However, despite supporting these levels of debt, Spain has a credit rating of A-, which leads it to have to issue debt at lower financing costs. On the other hand, taking the case of Ecuador as an example, its credit rating is B- (poorer quality debt), so it must face a higher cost.

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The risk premium in Spain, that is, the indicator that evaluates the risk of an issuer’s debt, compared to a reference country, stands at 70 basis points compared to German debt. This has led Spain to offer returns of 0.40% in relation to its 10-year bond on its long-term debt obligations. However, in the case of Ecuador, the bond forces the country to pay close to 10% interest on its debt, a relative 13%; which, despite the lower levels of debt that the country bears, its institutional and economic weakness leads it to have to face extra costs when borrowing.

However, Ecuador is just one example. Since, this situation occurs, although with variations, in other more developed countries such as Mexico. Well, according to its indicators, the levels of debt in Latin American countries are relatively low; however, the quality of the debt we were talking about is lower.

Thus, the lower cost of debt, due to its higher quality, provides greater robustness to certain countries, which, despite having a high level of debt, present a low risk, as well as fairly high interest rates. low, compared to emerging countries in Latin America. This is the case of the United States, the country being a clear example of it; since they present a 10-year bond at approximately 1.90%, while the debt levels exceeded 100% of their GDP.

In summary, we can draw a very clear conclusion in almost all the countries analyzed. And it is that, while Ecuador, with debt levels close to 50%, had to agree to a rescue with the International Monetary Fund (IMF) to clean up its public accounts, other countries with a notably higher GDP, as well as levels of debt that was close to, or exceeded, 100% of GDP, have healthier accounts, as well as a higher rating in terms of rating; so their ability to continue borrowing allows them to apply plans as dimensioned as those mentioned.

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Greater capacity, but with limits

Although we are referring to the fact that there are certain countries that, due to the characteristics of their debt, can undertake injections of a greater amount than those undertaken by others, the pandemic has exposed the vulnerabilities of each of the economies that make up our planet. Some vulnerabilities that have been accentuated, as the volume of public debt grew, which is already touching its historical maximum. Well, according to the data published by the World Bank, we are talking about a level of debt that has already begun to arouse the concern of the main organizations on the planet.

As we said, the countries have promoted stimulus plans to combat the pandemic. Along these lines, the plans undertaken include, throughout the planet, a mobilization of resources equivalent to 12 billion euros. However, although it is obvious, the injection carried out adds to a scenario in which the income of the States plummets, while the economies stagnate in a context of generalized economic contractions on all continents.

Thus, the situation has caused that, for the first time in history, global sovereign debt has equaled the size of the world economy. Well, as we said, due to the strong increase in international public spending to combat the virus, added to the sharp fall in tax revenues as a result of the paralysis of the activity imposed to contain the spread of the virus, the global public debt has registered a maximum historic that already touches 100% of world GDP.

Well, in conclusion, we are facing a necessary response that has cushioned the expected fall. However, as we said, we are talking about a debt that is not an option for all countries, which makes inclusive and generalized recovery difficult for all economies. Thus, in addition, it should be noted that the volume of debt on the planet is already beginning to represent a risk of unknown dimensions, which will force countries to tighten their belts in the future, given the need to recover budgetary stability, today extinct.

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