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As economics seems to be devolving into a race to accumulate more debt, an emerging sovereign debt crisis is starting to accelerate. More than a hundred countries are expected to pay $130 billion in debt interest by this year — with about half of that debt being held by private investors.
As COVID-19 forces shutdowns, there is the possibility that tax revenues for states go down while their burden on healthcare systems go down. With businesses and economies shut down, economic growth is slowing down, and tax revenues will decrease. Meanwhile, there will be greater demand for fiscal stimulus from governments to help spur an economic recovery.
Though with monetary policy pushing down nominal interest rate targeting around the world — in theory debt should be easier to service. Yet the IMF is warning that taking on more debt may lead to unstable financial and economic instability. Though economic growth has slowed — interest rates have also been driven down. However, even though interest rate-growth differentials (r-g) as it’s described is very low and even negative in many contexts — these can portend dramatic swings after for countries that take on more public debt. Countries may be quickly swamped by instability in their debt and the increasing interest rates demanded of them.
There is the possibility that with economic slowdown, a raft of sovereign bankruptcies will happen: countries overwhelmed by their debt obligations will see their yields attacked, with investors asking for more return in order to hold certain forms of sovereign debt. This makes it much more difficult for the country to service its debt and at an extreme, negotiate deals with investors that are akin to a bankruptcy.
This is nothing new — after the 2007-2008 recession, there were sovereign debt crises around the world, including the famous Eurozone sovereign debt crisis that started from 2009 onwards. Countries like Greece had to take dramatic austerity measures in order to satisfy private creditors and watchdog international agencies such as the IMF and the European Central Bank. COVID-19 accelerates these debt dynamics and spreads them across a wider expanse of countries.
The immediate effect is that countries struggle to have any money for the fiscal policies recommended to restart economic growth. Lebanon restructured some its debt and went to the IMF after this dynamic forced it to financial ruin. The domestic currency, the Lebanese pound, went through a bout of hyperinflation, destroying the ability of the Lebanese people to benefit from their savings, and driving a push to acquire US dollars as a store of value.
The knock on cryptocurrencies is that they are unstable — yet faced with the possibility of multiple nations declaring default, it’s possible that stablecoins pegged to various different denominated assets might serve as an intuitive bridge for cryptocurrency adoption at large that are safer than chaotic domestic currencies.
It’s no coincidence that countries like Venezuela, which face an unstable local currency, and a raft of barriers (due to sanctions) have some of the highest bitcoin adoption rates in the world. The combination of a rapidly eroding local currency and inability to access a safe-haven will soon be a globally distributed problem — one that will swamp different countries and different citizens who will look for different solutions.
While the default for many countries such as Lebanon has been to get the USD as a store of value against the lower value of their domestic countries, the weaker US dollar and a reckoning over the USD’s position in the global balance of currencies may soon change this dynamic. If cryptocurrencies can find a way to enter the discussion and take this spot, then the macroeconomic trend of sovereign debt will help provide support and a powerful reason for new adoption around the world.
