Covid-19 may set off debt crisis, threaten global economy
Realty major DLF has raised
`1,000 crore through the issue of non-convertible debentures on a private placement basis. The company has allotted
10,000 senior, secured, rated, listed, redeemable, non-convertible debentures of the face value of `10 lakh each at par, according to a regulatory filing. The tenure of the NCDs is three years with coupon rate of 9.25 per cent and 9.5 per cent annually.
Indian Oil Corp (IOC), the nation’s biggest oil firm, has begun the supply of the world’s cleanest petrol and diesel across the country with all its 28,000 petrol pumps dispensing ultra-low sulphur fuel a good two weeks before the April 1 deadline. “We have successfully rolled out the supply of BS-VI grade fuel across the country,” Indian Oil Corporation (IOC) chairman Sanjiv Singh said.
The global economy may be staring at one of the biggest debt crises in the history as countries shut own production lines and lock down people at their homes to stop the spread of deadly Coronavirus.
According to the Institute of International Finance, the global debt in October 2019 stood at $253 trillion, which is 3.2 times of the value of annual global productivity — the highest ever in the recent history.
A general shutdown to quarantine people has halted the operations of companies, affecting their revenue. An expectation to continue paying workers during the lockdown would further put stress on financials of companies. While governments have signalled that banks would go easy on repayments, the companies would accumulate further debt by the time Covid-19 is buried. Governments also would have to raise debt or easy restrictions to mint new money — despite fragile economic conditions — to deal with an unprecedented health and financial crisis.
According to the UN Conference on Trade and Development, sustained debts could pose a larger problem for the global economy and financial system.
“Today’s financial fragility far predates the Covid-19 “black swan.” Given the massive accumulation of debt in both developed and developing countries since the 2008 financial crisis, it has long been clear that even a minor event — some “known unknown” — could have far-reaching destabilising effects. Yet, until recently, rising asset prices – owing to a long period of extraordinarily loose monetary policies in advanced economies – disguised mounting debt levels,” economist Jayanti Ghosh wrote in Project Syndicate.
“Worse, more sovereigndebt repayments on shortmaturity international bonds will soon be due. And foreign exchange reserves, which have declined in many emerging markets and developing economies as a result of recent capital outflows, will be less robust in the face of further outflows as bond markets become more fraught,” she wrote.
With investors turning risk averse, the debt market may dry up for companies which don’t have robust credit ratings.
Unless government takes steps to oil financial markets, the crisis triggered by Coronavirus could explode decades long debt bubble.
According to India Ratings and Research, about 25 per cent of `10.52 lakh crore of the lowrated corporate debt — `2.54 lakh crore — is vulnerable to default over the next three years. Delinquencies in corporate debt could add to an already piled-up bad loans of `11 lakh crore, affecting the health of the country’s banking sector.