The US dollar’s status as the dominant global currency is at risk of being eroded because of mounting government debt, according to Zhu Min, former senior executive with the International Monetary Fund (IMF).
His warning comes as the United States is expected to double down on its fiscal stimulus measures to soothe the economic fallout from the Covid-19 pandemic. Congress is considering a new round of relief that is likely to cost at least $1 trillion on top of the more than $2 trillion passed earlier this year.
With the US Federal Reserve continuing its aggressive monetary policy of quantitative easing, there is a rising risk of a sudden loss of confidence in the dollar, said Zhu, who was deputy managing director of the IMF from 2011 to 2016. He is currently the head of the National Financial Research Institute at Tsinghua University in Beijing.
“The concern isn’t whether the US dollar will see an accumulated decline of 30 percent in the future, but whether there will be a blow-up event that causes a sudden loss of confidence in the US dollar, and its market to collapse,” Zhu told the South China Morning Post.
He added that at the same time, companies have become much more vulnerable globally than during the 2008 global financial crisis, because the low interest rate environment has sharply boosted corporate borrowing. The official explained that while the US Federal Reserve’s aggressiveness in easing financial conditions has succeeded in halting a further decline in the economy, companies could still go bankrupt as they adapt to the new norm in which work resumption must coexist with social-distancing measures because the coronavirus crisis has persisted longer than expected.
“So, the question of whether there will be a financial crisis will depend on whether a major company will be the next to go bankrupt, and thereby result in a jump in the corporate default ratio, leading to a sovereign debt crisis,” Zhu said.
