Short-term and Long-term Currency Implications in 2020

The coronavirus turns out to be the main catalyzer for the next economic downturn and unfortunately, it managed to resurface some of the flaws the current international monetary system had. Given that the global debt-to-GDP ratio is at the highest it had been since the WWII period, governments and central banks will have a hard time managing to stimulate the economy.

Monetary and Fiscal Stimulation

If we look at the short-term picture, governments around the world had already announced substantially stimulus packages, aimed to alleviate some of the pressure mounting on the business sector and consumers. In the United States, a $2 trillion legislation had been passed a few days ago, and countries like Germany, Spain, and Italy had followed through. We’re talking about some of the countries most affected by COVID-19 and unprecedented measures were needed.

At the same time, central banks had lowered interest rates and also, had restarted or increase quantitative easing programs, to provide enough liquidity. Even though some of the pressure had gone, the US dollar continues to remain strong, highlighting the existing funding issues. Through swap lines and a new international repo market, the Federal Reserve is committed to providing dollars to foreign countries, especially those that have high dollar-denominated debt.

Weak economic activity in 2020

Despite the extraordinary measures taken by public authorities, 2020 will be one of the economic contraction. Emerging markets will have to face currency issues later this year since the bulk of the economic damage will be felt after the outbreak will be under control. Developed countries will also be under pressure since important sectors like consumption, tourism, and transportation are already heavily affected.

Shutting economies down had been an easy task to do, but bringing things back to normal will be a challenging task, given how contagious the virus is. Governments are expected to remain cautious and even after the outbreak will show signs of slowing, the economy will be restarted on a gradual basis.

Challenges for the financial system

All in all, the bottom line is that we already have a lot of debt in the system and the current situation will only make things worse. At some point in time, a new deleveraging will have to take place, until debt levels will get back to sustainable levels. Also, a global financial system with the US dollar as its reserve currency is outdated and at some point in time, that will have to change.

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