Economic crisis and how nations and the world cope with it

Economic crisis
Written by Daily Life

Even if one or more successful vaccines are developed in time to stop the pandemic, the COVID-19 crisis has severely harmed the global economy and financial institutions’ balance sheets, as I argued in March 2020. Beyond the traditional fiscal and monetary policy framework, forbearance programs have proven to be a helpful stimulus tool. Grace periods, on the other hand, will end in 2021.

Policy fatigue or political constraints mean that future US fiscal and monetary stimulus would not match the scale seen in early 2020, according to the US Federal Reserve’s November 2020 Financial Stability Report. Many emerging markets and developed countries have reached or are approaching their monetary policy ceilings. If 2021 progresses, it will become apparent whether many businesses and households are facing insolvency rather than illiquidity.

Constant Debt

Firms’ high debt would compound the financial sector’s balance-sheet challenges on the verge of the pandemic. The world’s two largest economies, the United States and China, are heavily indebted, with many high-risk borrowers. The European Central Bank still has its concern about the growing share of nonperforming loans in the Eurozone. In contrast, the International Monetary Fund has repeatedly expressed concern about the sharp rise in dollar-denominated corporate debt in many emerging markets. In many parts of the world, exposure to commercial real estate and the hospitality industry is a source of concern.


It takes time to restore balance-sheet damage. As financial institutions become more conservative in their lending activities, previous over borrowing also results in a long deleveraging period. This stumbling-through period, which is often associated with a slow recovery, can last for years. When bailouts convert pre-crisis private debt into public-sector liabilities, these financial crises may also transform into sovereign-debt crises.

Recognize the issue’s complexity and size before restructuring and writing down bad debts as quickly as possible. Putting money into zombie loans, on the other hand, is a recipe for a slow recovery. Given the pandemic’s already tremendous economic and human costs, policymakers everywhere must avoid that scenario as a top priority.

The Cost

Even if panic and fleeing aren’t always part of these crises, they still come with a price. Governments cope with inflation, but how long can they last? For governments and taxpayers, bank consolidation and recapitalization to restore solvency can be costly, and new lending can stay poor, slowing economic activity. The credit crunch has distributional effects, as it disproportionately affects small and medium-sized businesses and lower-income households.

To be sure, the COVID-19 pandemic continues to produce a lot of unwelcome drama, such as high outbreak rates, widespread lockdowns, record-breaking production decreases, and that poverty. A quieter crisis is gaining traction in the financial sector, in addition to these developments. Even if there is no Lehman moment, it might jeopardize long-term economic recovery prospects.


For the near future, financial institutions worldwide will continue to see a large spike in non-performing loans (NPLs). The COVID-19 crisis is regressive and disproportionately affecting low-income households and small businesses with fewer assets to protect them from insolvency.

Since the pandemic outbreak, governments have focused on expansionary monetary and fiscal policies to combat the drastic drops in economic activity triggered by widespread shutdowns and social-discrimination steps. Wealthier countries have had a distinct advantage in their ability to respond. However, a boom in lending by multilateral institutions has also aided emerging and developing economies in financing their response to the health crisis.

Banks have assisted macroeconomic stimulus with a variety of temporary loan moratoria, unlike in the 2007-09 crisis (or most previous crises), as the International Monetary Fund has reported in its Policy Tracker. These interventions have given some relief to families suffering job losses and income losses, as well as companies struggling to keep their operations running during lockdowns and other disturbances (tourism-linked sectors stand out starkly in this regard).

In conclusion

Financial companies worldwide have extended grace periods on current loans, and many have re-contracted loans with lower interest rates and improved conditions. Just as the health crisis is temporary, the rationale has been that so is financial hardship among businesses and households. However, due to the pandemic’s persistence, several countries have decided to extend these, and we are not sure until when.

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