POLICYMAKERS globally should prioritize efforts to prevent the rise of “zombie loans” to avert a “quiet financial crisis,” according to an executive of the World Bank Group.
In a World Bank blog, World Bank Vice President and Chief Economist Carmen Reinhart said that while banks have implemented debt moratoria last year, this is expected to end this year.
With this and other banking regulations that were relaxed last year, the nonperforming loans (NPLs) of banks could already be underestimated, Reinhart said.
“The alternative—channeling resources into zombie loans—is a recipe for delayed recovery. Given the pandemic’s already huge economic and human costs, avoiding that scenario must be a top priority for policymakers everywhere,” Reinhart said.
In order to address this, Reinhart said policymakers should recognize the scope and scale of the problem. This should be followed by the immediate restructuring and writing down of these debts.
Balance-sheet damages, Reinhart said, take time to repair. In the past, overborrowing usually leads to “a long period of deleveraging, as financial institutions become more cautious in their lending practices.”
Reinhart added, “This muddling-through stage, usually associated with a sluggish recovery, can span years. In some cases, these financial crises develop into sovereign-debt crises, as bailouts transform precrisis private debt into public-sector liabilities.”
She said not all financial crises entailed dramatic moments or high points, since asset quality can deteriorate during recessions. This is particularly the case if firms and households are “highly leveraged.”
The “drama” was seen in the 2007-2009 global financial crisis through the “Lehman moment” which not only marked the crisis but also inspired a Broadway show, The Lehman Trilogy.
Reinhart said this means, financial crises would not always involve bank runs and other panics, but will still lead to multiple costs for the government and the economy as a whole.
“Bank restructuring and recapitalization to restore solvency can be expensive for governments and taxpayers, and new lending can remain depressed, slowing economic activity,” Reinhart said. “The credit crunch also has distributional effects, because it hits small and medium-size businesses and lower-income households more acutely,” she added.
Last week, the national government’s outstanding debt reached P10.13 trillion as of end-November last year, just P30 billion short of the government’s expected level for the year.
Latest data from the Bureau of the Treasury showed the country’s debt stock rose by 1.1 percent or P106.37 billion from P10.028 trillion as of end-October last year owing to higher domestic borrowings.
The amount of outstanding debt as of end-November is nearing the P10.16-trillion outstanding debt level that the economic managers had projected for the year.
Since the start of 2020, the national government’s debt stock has already surged by 31.1 percent from P7.73 trillion as of end-2019.
Broken down, the Treasury said domestic debt cornered 71 percent of the total outstanding debt, while the remaining 29 percent was external debt.
As of end-November last year, domestic debt amounted to P7.19 trillion, up by 1.6 percent compared to the P7.077 trillion recorded as of end-October due to the net issuance of domestic government securities.