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The COVID-19 Debt Deluge

How long the COVID-19 crisis will last, and what its immediate economic costs will be, is anyone's guess. But even if the pandemic's economic impact is contained, it may have already set the stage for a debt meltdown long in the making, starting in many of the Asian emerging and developing economies on the front lines of the outbreak.

NEW DELHI – Pandemics like COVID-19, alarming and destructive as they are, can serve a useful purpose if they remind everyone of the critical importance of public health. When a contagious disease strikes, even a society’s most protected elites must worry about the health of neglected populations. Those who have advocated privatization and cost-cutting measures that deny health care to the most vulnerable now know that they did so at their own peril. A society’s overall health depends on the health of its poorest people.

More immediately, though, the COVID-19 crisis could have many severe economic effects, possibly pushing the global economy into recession. Supply chains are being disrupted, factories are being closed, entire regions are being locked down, and a growing number of workers are struggling to secure their livelihoods. These developments will all lead to mounting economic losses. A world economy already suffering from insufficient demand – owing to rising wealth and income inequality – is now vulnerable to a massive supply-side shock.

Another potential consequence of the pandemic is less recognized but potentially more important: increased financial fragility, implying the potential for a debt crisis and even a broader financial collapse. After COVID-19 is contained and policies are implemented to ease the situation, supply chains will be restored and people will return to work with the hopes of recovering at least some of their lost incomes. But that real economic recovery could be derailed by unresolved financial and debt crises.

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