IESE Insight
Emerging economies on brink of default
IESE Insight
Artículo basado en: COVID-19 Here and now
Año: 2020
Idioma: English

By Pedro Videla

In late April, I had a wide-ranging conversation with my colleague Mike Rosenberg in IESE's Strategic Management Department on geopolitics and the global economy. There's a link to the full 50-minute video below, but first, here's a quick recap of some topics I discussed.

First of all, let me emphasize that the 2008-9 crisis is peanuts compared to the economic crisis we are facing now. In mid-April, the International Monetary Fund (IMF) revised its forecasts down from 3.9% GDP growth in 2020 to a contraction of 3% globally. What might this contraction mean on the ground? It implies unemployment rates hitting 20% and many businesses failing. Your spouse may lose his or her job and your favorite café may never reopen.

What can we do about it? Well, we can utilize all the monetary and fiscal ammunition that we have: Lowering interest rates and increasing government spending, for starters. But the problem is: how do we rescue the small and medium enterprises who really need rescuing now? Because it's the big companies that tend to get bailout money first. And even if interest rates are basically zero, it's not easy to get a loan if you can't show the bank your future stream of income. Finally, if you didn't work in the formal economy, it's hard to show what income you have lost.

For many reasons, the economic situation is worse in emerging and developing countries than it is for advanced ones. It's more dire than anything we've seen in the past 100 years. Many emerging economies are now teetering on the brink of default. The IMF could help by issuing them more stable "money" -- that is, by issuing more Special Drawing Rights (SDRs), which is a reserve asset based on the weighted averages of various major currencies -- to make payments on debts.

Basically, issuing SDRs could help countries that have debt denominated in dollars right now. As there's been a "flight to quality" during the current crisis, the U.S. dollar is appreciating in value against other weaker currencies. So, the dollar has appreciated some 25% against the Brazilian real, 20% against the Mexican peso, and also against the Argentine peso and the Turkish lira, etc. The big problem is that these countries' liabilities are ballooning at the same time as their assets are losing value.

If, for example, the central bank of Argentina decided to print more money right now, it would not help. On the contrary, it would make things worse. So, what countries like Argentina need is international help. But the United States is opposing the IMF's use of this particular tool to help emerging countries manage their debt, blocking a proposed $1 trillion emission in SDRs.

In sum, we are not seeing the help that's needed today. If the IMF and other international institutions are not useful now, we'll come to question them. And that could have far-reaching consequences for the global economy beyond the COVID-19 crisis.

WATCH: "COVID-19 here and now: spotlight on geopolitics and the global economy" with Pedro Videla and Mike Rosenberg.

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