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Private-Debt Risks Are Hiding in Plain Sight

The debt moratoria introduced early in the pandemic provided temporary relief for private borrowers, and may have limited the fallout of the economic disruption. But recent data reveal that they also created a potentially disastrous non-performing loan problem.

WASHINGTON, DC – When Russian tanks rolled into Ukraine, private-debt crises were probably already brewing – albeit hidden from view – in many parts of the world, as a result of the economic disruptions caused by the COVID-19 pandemic. Now, the war is pushing even more countries toward similar crises.

The pandemic recovery has always been uneven. According to analysis based on the International Monetary Fund’s most recent World Economic Outlook, per capita income hit a new high in almost 37% of advanced economies in 2021. That share drops to about 27% in middle-income countries and under 21% in low-income countries. And these disparities may be about to deepen.

Early in the pandemic, many countries introduced debt moratoria, in order to give households and businesses a reprieve at a time when many faced a sharp income decline that left them struggling to meet their obligations. The moratoria were often accompanied by policies that gave banks the regulatory flexibility not to reclassify the affected loans in a higher risk category, as is typically required, thereby enabling banks to avoid the higher capital provisioning that reclassification would entail. Policymakers hoped that banks would use the available liquidity to continue lending.

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