What is a coronavirus “debt jubilee”?
As COVID-19 has wreaked havoc on the global economy, a raft of solutions have been put forward. One that is gaining momentum is the idea of a debt jubilee. So, how would this work?
Who would be the target?
The first question to answer is who is likely to benefit from what would be a pretty radical plan. There are several possible candidates at both a macro (country) and micro (business and consumer) level.
The idea sounds simple enough – to relieve countries, businesses and consumers from the burden of debt that may never be repaid, fans of a jubilee suggest that it could just be cancelled
After all, if you are a homeowner who is struggling to repay a mortgage, there is an argument that says the bank should let you off part, or all, of the loan rather than end up holding an empty asset should you default instead.
Although simple sounding in conceptual terms, there is some debate amongst economists about how such a jubilee would work in practice.
Most version involve a state issuing the currency it needs to fund a debt repurchase before buying liabilities in the form of IOUs and cancelling them.
Fans say that such a move would allow indebted countries, businesses and consumers to focus on spending and growth rather than repaying debt and saving. This is the only way to give proper and targeted economic and financial relief, in their view. As such, it is a move that could provide indirect societal as well as direct financial benefits.
Critics, however, point to several big flaws in the concept. First, it could create moral hazard – the idea that you can borrow without consequence. It could also make borrowing harder and more expensive in the future. And finally, it could dent the reputation of state and corporate lenders for prudence and financial responsibility and have huge implications for currencies too
The bottom line therefore is that, whilst discussion about debt jubilees are likely to continue, we are some way off the point where central banks are likely to look seriously at implementing one.
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