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VideoFebruary 15, 2022

Will the Pandemic Lead to a Financial Crisis? | World Bank Expert Answers

On this edition of Expert Answers, we’re examining the findings of the newly-released World Development Report. As governments around the globe wind down the extraordinary economic support measures enacted during the pandemic, the World Development Report highlights the risk of a global financial chain reaction. The threat of hidden risks – especially undeclared loans – are of particular concern as slowing growth, rising rates, and mounting debt underline the need for greater transparency, early detection, and swift action.


00:00 Introducing Carmen Reinhart, World Bank Group Chief Economist
00:54 Global economic crisis as a consequence of the pandemic
01:43 Financial chain reaction, interconnectedness, threats
03:32 Global risks
05:49 Private debt
07:34 Hidden risks
09:41 Inequality
11:04 Addressing global challenges
12:01 Thanks Carmen Reinhart for sharing your expertise!


00:00 - [Expert] Protracted declines in income, now rising inflation, rising poverty rates all these things combine to a lot of financial stress. 

[Host] On this edition of Expert Answers, we're asking if the COVID-19 pandemic could lead to a financial crisis. And if so, what can be done to prevent it? Over the past two years, governments around the world have enacted massive support programs and those programs have helped blunt some of the worst impacts of the pandemic but they're gonna have to be scaled back. And when they are, what happens then? Are we in for a global financial chain reaction? For answers to these and other questions, I recently spoke to the World Bank Group’s Chief Economist, Carmen Reinhart

00:54 [Host] Well, Carmen, thank you so much for being here. You warn here in the latest edition of the World Development Report that we're facing the largest global economic crisis in more than a century. Is this an inevitable consequence of the COVID-19 pandemic?

[Expert] Well, very few things are inevitable but certainly this has been a once in a century pandemic. So the ramifications, especially for developing countries, protracted declines in income, now rising inflation rising poverty rates, all these things combine to a lot of financial stress for households, for firms, and for financial institutions. And so that's the big focus of the World Development Report, these interconnected vulnerabilities of the various sectors.

01:43 [Host] And you talk about in the report this idea of a financial chain reaction. Can you explain that? I imagine it has to do with some of that interconnectedness you're talking about and what are some of the biggest threats you're seeing?

[Expert] Look, you have within-country interconnectedness and across-country interconnectedness. Let me give you examples of the former and of the latter. And the causality in this interconnectedness run both ways. So if households and firms have a tough time repaying debt, if the quality of bank assets deteriorates they may need support from the government. In the most extreme cases, government bailouts often inform government taking on all the debt or a substantial portion of the debt of banks. So starts out as private debt, becomes public debt. It's a problem. It's a spillover from the private sector to the public sector. Reverse causality also is a big issue. This is the so-called doom loop. So governments borrow a lot. They place a lot of their debt at the banks. If they have a debt servicing problem it becomes a problem for the banks. It's very interconnected. And so there is this internal interconnectedness within country, and then there is the potential for you know, cross border spillovers.

03:32 [Host] Talk to me about some of the global risks that you've seen and identified in the latest copy of the World Development Report.

[Expert] I think when you talk about the global context and a global chain reaction, you're really talking about countries that have a big footprint in the global economy. So let's talk about the U.S. and let's talk about China. I think you asked me about risks that could have ripple effects on not just a couple of emerging markets or developing countries but on a lot of them. I think high on everyone's list is what do rising interest rates in the U.S. mean for developing countries and emerging markets? In the short run, it's adding to the risks that they already face. U.S. interest rates go up, international interest rates go up. This means that debt servicing which is already quite high and significant for many of these countries, the cost of borrowing gets higher, debt servicing burdens increase, that's not good news. In the short run, I say, because I think it's in everyone's it's good news for everyone to get inflation down. So, but let's focus on the short term risk. The other short term risk that has, you know chain reactions across countries is China was the biggest lender and the biggest engine of growth after the global financial crisis to many developing countries. Especially low income countries – borrowed a lot from China. And that engine of growth that China, that role that it played after the global financial crisis... Remember, you know, on average, China grew about 10% between 2003 and 2013. It's not gonna be there this time around, and not only is it slowing in growth, but also I think they will be much more reticent to lend to developing countries because they have their own domestic financial sector issues with the crash in real estate.

05:49 [Host] This report has a special focus on private debt. What are you finding about it? What are some of the implications looking forward?

[Expert] Look, if you take 2020, 90% of the countries in the world had simultaneous output declines, income declines, that's more than the depression than World War I, than World War II. Imagine what that kind of across the board decline in income does to households and firms. Many firms don't have the cushion, the buffer, to keep their businesses open beyond a couple of months. Many households faced with that decline in income don't have this saving cushion. And so this creates, as I said, all kinds of strains on their ability to repay existing debt. We saw major financial forbearance during 2020 and 2021. We still continue to see it. What this means is that once those forbearance policies which have allowed households and firms to delay repayment in many instances, once those policies are scaled back or done away with, then we're gonna find out what the true underlying vulnerabilities are that were masked to some degree by the support measures.

07:34 [Host] So Carmen, the report talks about this idea of hidden risk. What do you mean by that? What should we be worried about?

[Expert] Well, Paul, for years now I've been working on financial crises issues and in crises I always make the point, it's not what you see that often gets you, it's what you don't see. The hidden problems have two dimensions. One is in a nutshell, the government has a higher level of debt than what has been disclosed. These are the hidden debt problems. There's been a lot of lending by non-Paris Club creditors and accounting of those debts is not as complete as it could be. On the newer side, the post-COVID or the COVID-legacy side, what we have is the potential for non-performing loans because for across the board, many countries relaxed accounting standards, adopted forbearance in what banks declare as non-performing. And in effect, a lot of the data on non-performing in 2020, and 2021 looks a lot like non-performing loans in 2019. Yet however, if you look at things like corporate surveys that ask firms to to identify themselves as having debt problems, as not being able to repay, the response rate would make you think that non-performing loans should be much higher. If you look at firm bankruptcies, same story. So there's clearly now the opaqueness problem the lack of transparency problem, has not only hidden debt at the sovereign level, but risks in the form of hidden non-performing loans at the bank level.

09:41 [Host] We talked a lot about inequality. The Bank has talked a lot about how the pandemic has made inequality, both within countries and between countries worse. You talk about that in this report. What are some of the findings? What are you highlighting when it comes to inequality in this report?

[Expert] The most vulnerable households and firms are probably the ones that, they're the last to have access to credit. And they're probably the first to lose it. When conditions of economic uncertainty, like what we're living through, greater uncertainty about economic prospects, about recovery, financial institutions become much more risk averse. They tighten lending standards. Which means that some of the small businesses are big employers, but they also importantly rely on working capital. Households that have little buffer or no buffer in terms of saving may also rely on in including micro loan you know, micro lending networks. If the access to credit is lost, the impact is disproportionately felt on the most vulnerable.

11:04 [Host] So Carmen, you've laid out some of the problems that you found and are highlighting in the World Development Report, what practically to be done to address some of these challenges?

[Expert] So look, the first part is diagnosing the problem. It's early detection. Early detection in this environment is very tricky. So knowing the true extent of non-performing loans in financial institutions is a task that's easier said than done. So detection, and once the problem and the scale of the problem is assessed, then comes the following actions which is fast restructuring. And so from prompt detection to prompt resolution, debt write offs, restructuring, that is the agenda, if you will.

12:01 [Host] Well, Carmen Reinhart, thank you so much for joining us today. Really appreciate you taking the time.

[Expert] Thank you for having me.

[Host] A huge thanks to Carmen Reinhart for her time. If you wanna learn more, be sure to check out the latest edition of the World Development Report. You can find that at And send us an email with your feedback, we'd love to hear your comments your questions about this program Until next time, goodbye. 


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Every episode of Expert Answers sits you down with a World Bank specialist: an expert answers with expert answers. From debt relief to gender equality. From COVID-19 response to inclusive growth, and much more. Our goal is to help you understand some of the biggest issues in international development today by asking our colleagues about what works on the ground and what we can do to meet the biggest global challenges. Watch previous episodes of Expert Answers!