During the COVID 19 crisis, a large amount of borrowing has occurred. This has happened in the public sector and the private. During this time, we can imagine that personal debts may also rise. The world, despite the concerns around risk, is committing to a borrowing frenzy. Indeed many governments are encouraging banks to continue to lend to firms that require it during this situation. The already growing problem of debt had already mostly been forgotten yet now more fuel has been added. This post details some concerning areas that have seen a sudden increase in debt.
Private Individual Debt is a growing fire:
Even before the crisis there where numerous voice stating that the amount of private debt that individuals are taking on is concerning. This is paired with a decreasing level of finical literacy. The focus often remains on student loans, yet the people are increasingly taking on debt for other reasons. Housing loans have gotten bigger in most western countries with a large section of the Australian economy depend on it. These mortgages have become risky as people lose their jobs and find themselves out of work. Many individuals are borrowing to pay other expenses, such as rent. If the current conditions continue, then eventually, people are not going to be able to keep borrowing. Concerning numbers around payments on mortgages have already come out of some areas of the United States.
Small Business keeping its head above water:
While all sections of business have suffered during the current crisis, it is small business that has taken the most substantial impact. Many of the sectors that have seen themselves stopped by lockdown restrictions or a decrease in demand are populated by small business. Government policy in many nations is to work out programs that can keep the business going and even loan programs. The media has focused on the small business firms that are taking advantage of the new climate with disruption to expand. Yet many others are taking loans hoping that the crisis can stop. This has seen business’s that had limited borrowing suddenly have a massive influx of debt.
The long term impacts of small business heavily borrowing will go beyond the crisis. It means that borrowing for expansion will not occur for firms that borrowed to remain in business. However, numerous business’s will close as they are unable to handle the loans and a possible decreased demand. This is is going to be a weight on the business environment as they are slowly paid off.
Big Business suffers big losses:
While most big business can make the needed cuts and also have a degree of liquidity, they are also dealing with more considerable sums with sometimes even tighter margins. Entire systems within the economy have been frozen, and firms have needed to adjust quickly to this. While some larger firms have adapted rapidly to a different environment, others have had a high degree of difficulty adjusting to the new realities of business. Smaller firms can radically change how their business is structured and also functions. With bigger business, this requires more effort and has more risks.
Disney is an example of a firm that is having trouble coping. A park has been opened but not fully functioning. With movies now not making as much money, other problems have developed. The reason we do not hear about the larger firms problems is due to a focus on the humanitarian element and also due to a lot of reporting being focused on governments. With the stock market rocky, there is also an incentive for investors to wait for firms to have better news. Some severe restructuring and reduction of liabilities could be seen as they try to balance themselves. This is to say nothing of the changing geopolitical situation that is adding another point of stress.
Governments jump into debt:
Governments around the world have become united in one thing despite their ideology. A massive amount of borrowing to pay for government programs has begun. Some have focused on the health and fighting the virus, but many have focused on trying to save businesses and jobs. More government projects have been announced in many countries with the end, not in sight. An increase in taxes is also unlikely as there is a concern that it could suppress demand. With the choice to cut spending/increase taxes or go into debt, the decision to go into debt seems universal. While the American experience with debt is well known, it is uncertain how the global economy is going to react to a higher debt percentage across the world.
Some winners have most likely occurred from this. It has been suggested that this may see many national governments change their relationship with debt with an increasing amount being accepted. Future policy decisions are now going to be taken within the environment that has seen a sudden increase. If this sees a reduction in services later or an increase in taxes remains to be seen. One thing that seems inevitable is that the debt is going to keep rising as the crisis continues.
Lending Institutions under stress:
It is easy during this time where it appears every part of the economy is borrowing to assume that the lending institutions are happy. While the increase in lending will be paid back, the rise in risk is not. Another concern is that the surge in demand for credit now is going to decrease demand afterwards by more than what is gained. Firms will be taking out loans now but are not going to take out better loans after. This says nothing of the numerous businesses that will go under and will not take out loans. Some firms that may have been willing to take a new risk and expanded will also delay those plans.
Yet the paying back of loans is also being viewed carefully. With the increase of borrowing by business and individuals, some are worried that existing loans or the new loans are not going to be paid back. How many bankruptcies and changes to loans the banks can accept is uncertain. In the minds of many is the feeling of the GFC with the possibility of an industry bailout again seeming less likely when the government is busy with other sectors.
More loans are being taken and more loans are becoming risky. The Covid crisis is not fixing our relationship with debt and most optimistically it is just making it more complicated. The choices made around the debt and lending are crucial for the recover