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The COVID-19 Default Time Bomb

Summary:
The world is facing a potential flood of disorderly sovereign defaults at a time when developing-country governments need to be spending huge sums on keeping their citizens healthy. To avoid a catastrophic outcome, the International Monetary Fund should coordinate a broad debt moratorium. BERKELEY/CHICAGO – Without a comprehensive debt moratorium, the COVID-19 pandemic will lead to a wave of uncontrolled sovereign defaults, especially among emerging and developing economies. Should that happen, global efforts to contain the public-health crisis will fail, and the current economic collapse may well turn into a permanent decline. Witnessing Wuhan PS OnPoint

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The world is facing a potential flood of disorderly sovereign defaults at a time when developing-country governments need to be spending huge sums on keeping their citizens healthy. To avoid a catastrophic outcome, the International Monetary Fund should coordinate a broad debt moratorium.

BERKELEY/CHICAGO – Without a comprehensive debt moratorium, the COVID-19 pandemic will lead to a wave of uncontrolled sovereign defaults, especially among emerging and developing economies. Should that happen, global efforts to contain the public-health crisis will fail, and the current economic collapse may well turn into a permanent decline.

Rich and poor countries alike are facing an unprecedented economic crisis as businesses close and workers lose their income. A downturn of this magnitude can cause tremendous long-term damage, as critical economic linkages vanish. Scores of firms will close permanently unless urgent action is taken. To this end, the United States Congress recently passed a $2 trillion rescue package, while the Danish and Canadian governments, for example, are subsidizing 75% of the payroll of their countries’ small and medium-size enterprises (SMEs). China, meanwhile, has...

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