World Bank Chief Economist: COVID-19 will fuel a credit crisis

·2-min read
A man wearing a protective face mask walks down Strand during sunset, amid the coronavirus disease (COVID-19) outbreak, in London, Britain, November 5, 2020. REUTERS/Henry Nicholls
“Financial institutions are facing (and will face for some time) a marked rise in non-performing loans,” the World Bank's chief economist said. Photo: Henry Nicholls/Reuters

“The COVID-19 crisis did not start as a financial crisis, but it is morphing into a global one,” according to Carmen Reinhart, chief economist at the World Bank.

She made the comments in The Economist’s highly anticipated The World in 2021 report.

News of coronavirus’ spread, record-shattering falls in output, surging poverty and the newly unemployed are just a few symptoms she Reinhart said were leading to a “quieter financial balance-sheet crisis that is gathering momentum across the world.”

“Financial institutions are facing (and will face for some time) a marked rise in non-performing loans,” she added.

Her views echo those of Bank of England governor Andrew Bailey, who said on Tuesday at TheCityUK conference that changes to the structure of the UK economy were likely, despite the recent “big step forward” with COVID-19 vaccines that could end the pandemic.

He compared the current state of affairs to the “deep and painful structural change in the economy in the late 1980s and into the 1990s with the transition from heavy industry and mining to a much more services oriented economy,”

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Reinhart wrote that the coming credit crunch will not be driven by a boom-bust pattern as had been the case in previous credit crunches, such as the one in Europe in 2007-2009, but instead to the the “historic magnitudes and likely persistence of the slump in economic activity.”

The most pronounced impact, she added, would be to low-income households and smaller firms that have fewer assets to avert insolvency.

Governments around the world have tried to help businesses with various aid packages amid economic stress. In the UK, the government has stepped in to offer furlough schemes and push debt repayment deadlines back as well as offer businesses grants in the hopes they will recover from the slump in demand brought on by tightening COVID-19 restrictions.

Yet, these efforts may just be delaying the inevitable.

“Given the emergency, these policies have provided a valuable stimulus tool beyond the conventional scope of fiscal and monetary policy,” said Reinhart.

“But by 2021 grace periods will come to an end and it will become apparent whether the problem facing countless firms and households is insolvency rather than illiquidity. And extended credit crunch has been a major headwind to economic recovery in the past. There is little to suggest that it will be different in the post-pandemic landscape.”

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