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The risk of mass default

The crisis we are facing is unprecedented in speed, diffusion and depth. And it affects us deeply. In order to face this “exceptional situation”, action must therefore be taken at all levels: national, regional and global.

Increased coordination between countries in response to the pandemic will allow us to go out together faster and at a lower cost. In addressing the coronavirus pandemic as well as saving human lives, the top priority is to maintain the productive capacity of our economies. If not, the consequences would be devastating. In addition to increasing the resources available for health systems, the political strategy during the emergency must focus on supporting businesses, workers and household incomes by acting to prevent liquidity problems from turning into mass defaults. Another condition sine qua consist of preserving the functionality of the financial markets and the stability of the financial system.

In facing this emergency, the western world must not, however, forget about the Third World. The effects of the crisis will be more acute in the poorest and most fragile countries and it is therefore important to engage with economically less advanced countries with all available means. Developing countries are not a world apart: many of them are active in global supply chains and will remain an important part of the global economic recovery.

The World Bank has intervened quickly to help developing countries to respond to the emergency created due to the shock to health systems, demonstrating that it is able to react effectively and promptly to a rapidly changing situation. The size of the initial response of the World Bank has been significant, but more needs to be done. As concerns planning it is important to find the right balance between alleviating short-term needs and maintaining long-term development goals.

In this scenario, the proposal presented by the World Bank and the International Monetary Fund and supported by the G20 was welcomed so that all official bilateral creditors temporarily suspend payments of the debt service from the poorest countries to help them meet their financing needs. We await effective coordination and broad participation of all major creditors to ensure the success of this initiative.

By: Domenico Greco

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