From Roman to modern times, expanding debt is a time-honored way to grow economies. Economies that expand debt either too quickly or too much eventually face increased risk premia, that is higher borrowing costs.
What are the Economic Implications of COVID-19 outbreak?
From Roman to modern times, expanding debt is a time-honoured way to grow economies.
· Economies that expand debt either too quickly or too much eventually face increased risk premia; that is higher borrowing costs.
· Higher borrowing costs slow growth and can lead to a vicious circle of unwinding debt like the world experienced in the global financial crisis.
· Adverse shocks can also slow growth which can be problematic as debt levels are no longer sustainable at a lower growth rate.
Sometimes debt expansions grow enough that no adverse impacts are felt.
· More often, debt grows too much and adverse consequences lead to an unwind of the debt.
· The unwind can be orderly or, as is more often the case, disorderly.
· The adverse shock of coronavirus is a combination of supply shock, demand shock and financial markets shock.
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