During the coronavirus pandemic, processes of financialization began to emerge with renewed energy, which first intensified in the 1980s and reached its apogee before the global financial crisis.
This was announced during the round table “Financialization of the World Economy and Growth in Global Debt: Challenges and Opportunities for Ukraine” by Scientific Director of the Growford Institute, Doctor of Economics Tetiana Bogdan. The event was organized by the Growford Institute and the Gorshenin Institute with the support of the Internet portal LB.ua.
Bogdan presented a global scientific study “Financialization of the Global Economy and Growth in Global Debt: Challenges and Opportunities for Ukraine”. The paper examines global financial and economic trends in recent years and during the coronavirus pandemic.
“Financialization is the enhancing role of the financial markets, financial motives, financial institutions and financial elites in the operations of the economy. The main negative consequences in the financial markets are increasing volatility and inflating of “bubbles”, the possibility of rapid transmission of the financial shocks and crises in the future, and unproductive use of a part of savings and shrinking investment in the real sector,” – said Doctor of Economics.
On the example of the USA, she explained that from 1996 to 2017, bank loans in the private sector, capitalization of the capital market, and bonds of external loans of enterprises increased significantly. In addition, the share of the financial sector in US GDP rose from 4% to 8% of GDP. Since the beginning of the coronavirus crisis, there has been a boom in the capital market and the volume of issued money has been growing.
The amount of global debt from 2011 to 2020 increased from USD 200 trillion to USD 277 trillion. The main sectors that accumulated debt were non-financial corporations (the debt at the end of the year was 105% of GDP) and the general government sector.
The US Federal Reserve and the European Central Bank used the following monetary incentives during the coronavirus crisis:
- targeted long-term refinancing operations for banks (for loans to the corporate sector),
- pandemic emergency longer-term refinancing operations
- special programs with negative interest rates entitled for the refinancing of bank loans to small business
- expanding existing asset purchase programs
- direct lending by central banks to reliable corporations
- direct lending by central banks to municipalities and and local governments
“Under the conditions of such incentives, money supply increased rapidly. As a result, inflation is projected to increase in the coming years, “bubbles” in the capital market are being inflated and fragility of the financial system is increasing,” – concluded Bogdan.
In her view, all this enhances the risks of default of small enterprises, insolvency of governments and corporations, and increases the fiscal risks of high corporate debt and the vulnerability of financial condition of borrowers to fluctuations in interest rates and exchange rates.
At the same time, Tetiana Bogdan noted that in emerging market economies, foreign investment may also decline. In Ukraine, however, there are several deterrents that mitigate the impact of global risks, including the low level of development of the national credit system and lack of leverage in the private sector.