Jan 6, 2021 - World

World Bank president warns of "red alert" for debt

David Malpass

Photo: Samuel Corum/Getty Images

More countries will soon face serious debt problems and likely defaults this year if swift action is not taken, World Bank president David Malpass said Tuesday, calling for debt restructurings and a focus on inequality and investment in the "post-COVID economy."

Why it matters: Malpass is the latest to issue a stern warning about the state of the global economy, calling on creditors, such as China and the Paris Club group of wealthy nations, to share the burden.

Where it stands: Malpass, a former Treasury Department official under President Reagan and Bear Sterns economist who was nominated by President Trump, called the current levels of debt in many countries “unsustainable" and said a growing number were currently on "red alert" for defaults.

  • "Given the sharp decline in short-term and long-term interest rates, we need to find ways to adjust the debt burden process so that the burden of debt on people in poorer countries can be reduced dramatically."

What we're hearing: In addition to the risk of increased debt defaults and rising poverty in developing economies, the World Bank's goal of increasing median incomes in countries "is not being met under the current environment," Malpass said.

  • This is "in part because the stimulus mechanisms that are out there are working toward concentrating the wealth rather than adding wealth from the bottom up," Malpass told Axios during a Q&A session with reporters.
  • "One thing that I think is important is that we recognize that creative destruction is important, meaning small businesses that fail due to the severity of the recession. But even more important is the creation of new small businesses, innovation."

He continued: "And so, that's going to mean countries actually allowing that process to happen and not simply working through their big structures to give funding to big companies."

One level deeper: "The risk is that it may take years for people at the bottom of the income scale to see a sustained improvement in their circumstances."

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