Economic perspectives: Aid packages and loan guarantees worldwide

All around the world, governments have put together aid packages and issued huge loan guarantees to combat the economic consequences of the coronavirus crisis. But these on their own will not be enough, and further stimulus programmes and government rescues of companies in difficulties are being lined up. Most industrialised nations can afford it. Even so, the massive increase in government debt will affect future trends in interest rates.

Fortunately interest rates are already low, and this will persist as a result of the current situation. The influence of the central banks on the bond market will also lead to low rates. Governments are issuing debt which the central banks are buying on a huge scale. The profits this generates go straight back to the governments. So effectively they are lending money to themselves and parking the debt with the central bank. This is reminiscent of the situation in Japan. Now the practice is encountering resistance in Europe: the ECB ruling by the German Constitutional Court could potentially put a stop to this and considerably restricts the flexibility available to the European Central Bank.

The issue of how to bring down the mountain of debt remains regardless. The obstacles here are weak inflation and the fact that spending cuts reduce growth. The only way to shrink the debt burden over time is to ensure long-term growth and stimulate rigid demand.