Can a 2021 Debt Crisis Hit the Financial Markets?

History can teach us multiple valuable lessons and for CFD traders actively in the financial markets, analyzing what happened in the previous economic downturn (the 2008 crisis) can provide some insights into what could happen starting with 2021. A week ago we’ve seen what should you consider in December 2020 and now we want to focus on the long-term because the measures adopted by governments and central banks will come with multiple consequences.

debt crisis and CFD trading

Limited ability to bridge economic activity

To counteract the damage generated by the COVID-19 pandemic, the massive new debt had been issued and all central banks monetized it, with the sole goal of bridging economic activity until things came back to normal. However, the health crisis has proven to be a bigger issue, and the economic support will need to go on well into 2021.

The global debt-to-GDP is already around the WWII levels and a deleveraging is bound to take place sooner or later, regardless of what governments are doing. Interest rates on treasuries had been retracing from the lows for several weeks, suggesting investors are no longer satisfied with low yields, given the rising prospects for higher inflation next year.

Emerging markets the most vulnerable

Things are complicated for emerging markets, considering these countries had been financing their activity with debt denominated in other currencies than their own. Since emerging markets are unable to control interest rates for USD or EUR debt, the only way out is to start a fiscal tightening, with potentially great implications on all sectors of the economy.

The 2008 financial crisis was followed by a debt crisis between 2010-2012 that saw countries in Western Europe facing severe problems. A similar situation could occur once again starting from the 2021 spring when there will be vaccines widely available and the pandemic will be under control.

Money printing and debt monetization to continue

Stocks, commodities, or ETFs are expected to continue to benefit, even though short-term periods of uncertainty could put pressure on valuation. The economic damage generated by the COVID-19 pandemic will be felt for years and because of that, money printing can’t stop.

If it would, tax increases and reduction of spending could create a major deflationary spiral, which government will try to prevent. Spikes in volatility, followed by suppression will create plenty of trading opportunities for CFD traders. The good news is that there will be a lot of ups and downs, so you should be prepared and eagerly await what’s to come.

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