MNI INTERVIEW: Reinhart: Risk of Rolling Debt Crisis Rises

--Global Economy Veering Towards Recession

By Ryan Hauser

     WASHINGTON (MNI) - The world may be heading for another debt crisis on

corporate bankruptcies and strained government finances with shocks like

coronavirus and falling energy prices taking the economy towards recession,

Carmen Reinhart told MNI Thursday.

     The coronavirus is "terrible news for U.S. bankruptcies," the Harvard

economist said, adding she is particularly worried about the CLO market. Small

and mid-size enterprises are also especially vulnerable, she said. The pandemic

along with the energy market slump hitting global supply and demand will have

"very powerful balance sheet effects," she said.

     Public debt in emerging economies and advanced economies like Italy also

compound risks, as it did in the Eurozone crisis following the 2008 financial

disruption. This kind of debt will be "unambiguously, sharply up" as a decline

in revenue becomes the "first hit to the budget."

     "Given the severity of all the dislocations and how synchronous it is

globally, it's hard to imagine that, at the U.S. level and at the global level,

we're going to avoid a recession," said the co-author of the book "This Time is

Different: Eight Centuries of Financial Folly." She has also worked at the IMF

and helps advise the New York Fed. 

     Financial markets slumped again Thursday as some investors saw an ECB

meeting and President Donald Trump's televised address Wednesday night as failed

attempts to stabilize the global economy. The New York Fed injected fresh

liquidity Thursday afternoon to keep markets running smoothly, another emergency

step after last week's unscheduled 50bp rate cut. Investors are betting the Fed

will cut rates near zero in coming weeks as coronavirus spreads in the world's

largest economy. 

     --MAGNITUDE AND DURATION

     The "live question" now with the situation is one of "magnitude and

duration," she said. The combined effect of financial and economic shocks could

lead to a situation where it "morphs into a financial crisis itself."

     Some of the danger in debt markets comes from the fact there was "quite a

bit of corporate debt built up" during the recent bull market, she said, a

different scenario that 2008 when problems were concentrated in housing and

banking.

     More industries are at risk now including energy, transportation, retail

and trade. That requires wide-ranging government intervention that will prove

challenging to policymakers, she said.

     The current shock is "engulfing everyone" in advanced and emerging

economies, and "a lot of countries are going to be facing severe dollar

shortages," Reinhart said.

     The overall result could be a contraction of global integration unseen

since the era just prior to World War I, though it is not yet "that extreme,"

Reinhart said. Global capital flows peaked just before 2008, and globalization

has since been hit by the successive "waves" of the financial crisis, Brexit,

U.S.-China trade tension, and now coronavirus.

     Global integration will lose momentum "even if one assumes a more v-shaped

pattern" of recovery after the pandemic, she said. "I don't think we are

returning to the degree of global integration" seen before coronavirus, Reinhart

said. 

--MNI Washington Bureau; +1 202 371 2121; email: ryan.hauser@marketnews.com

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