-Analysis-

The black Monday that shook global stock markets reveals a situation of economic instability that actually began a while back, fueled by increased aversion to risk, multiplication of negative rates and corporations absorbing fears of another big recession. It arose with the winds of protectionist threats heard in the U.S. trade war with China and those swirling around Brexit.

But the COVID-19 epidemic that suddenly came crashing through the world, riding roughshod over social, economic or political barriers, has made its geometry worse. At such a sensitive juncture, an oil spat between Russia and Saudi Arabia, which might have caused minor harm at other times, pushed markets over the brink on Monday. Prices fell like they had not since the débacle of 2008 and downfall of Lehman Brothers. The stock markets on Wall Street and in Sao Paulo suspended their sessions before the precipice.

Behind this was the unfortunate disagreement between Moscow and Riyadh that fractured OPEC, the Organization of Petroleum Exporting Countries. The Saudi kingdom wanted a cut in crude production to sustain prices already hit by coronavirus. Russia objected, prompting Riyadh to submit the matter to its own theory of chaos, directed at its rival but indifferent to its planetary consequences.

OPEC had proposed that Russia cut its production to 1.5 million barrels a day, thus in theory adjusting output to reduced demand. The Kremlin's refusal was in line with its own, strategic policy of competing directly with Riyadh. The kingdom reacted with a counterpunch of ramped up production meant to twist Putin's arm, causing crude prices to tank. The barrel of Brent, the European benchmark crude, has fallen from its average January price of $66 to around $36, and the U.S. benchmark crude, West Texas Intermediate, was also trading at around $34.

The fight has come at the worst time, just when the novel coronavirus COVID-19 is depressing the global economy — and the effect is clear. If the economy slows further as is happening, demand for oil will fall as production and trade decline. That is happening in China, which has registered a tremendous fall in exports in the first two months of the year. The spat was precisely the spark to avoid in a world that is anything but stable right now.

In normal times, falling oil prices would be good news for a global economy in need of a fillip.

There are other considerations. In normal times, falling oil prices would be good news for a global economy in need of a fillip. Cutting costs stimulates production. But presently with competing tensions, it has become an aggravating factor as markets have shown, and may trigger a wave of bankruptcies and wipeouts of wealth .

This combination is producing a scenario similar to or worse than the conditions that triggered the crisis of 12 years ago. The background is a time bomb of vast amounts of debt amassed in the northern half of the world since 2008. The Institute of International Finance calculates the ratio of global debt to GDP has reached an extraordinary 322%, or a packet of obligations worth around $235 trillion. To get a sense of its size, the U.S. GDP is about $20 trillion and China's about $4 trillion less.

COVID-19 and other factors are pushing the system of global debt accumulation toward a critical point, which may provoke another global recession. Its social and political effects would be enormous. The pandemic is destroying people's trust in their governments, and reviving demands for the public health systems that have faced relentless cutbacks on all continents in recent years. And then of course, in countries like the United States, public healthcare is virtually absent.


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