Peterson Institute Event on Global Debt and Deleveraging
Peterson Institute for International Economics
“Assessment of the Global State of Debt and Deleveraging”
Wednesday, February 18, 2015
Key Topics & Takeaways
- IMF Debt Restructuring: Hagan discussed a recent report from the IMF which suggests reforms to enable sovereign debt restructuring, including giving the Fund flexibility in providing financing in circumstances where a country’s debt is seen as fundamentally “sustainable with a high probability.”
- Private Sector Debt: Lund offered eight reforms that would help attain financial stability in an indebted world: 1) innovations in mortgage contracts; 2) innovations in how debt is restructured; 3) use of macroprudential tools to dampen credit cycles; 4) reducing tax incentives for debt; 5) considering a broader range of tools for resolving sovereign debt; 6) improving data collection and monitoring of debt; 7) creating a healthy mix of bank and non-bank credit sources; and 8) promoting financial deepening in developing economies.
Speakers
- Sean Hagan, General Counsel, International Monetary Fund
- Anna Gelpern, Nonresident Senior Fellow, Peterson Institute
- Adair Lord Turner, Senior Fellow, Institute for New Economic Thinking; McKinsey Global Institute
- Angel Ubide, Senior Fellow, Peterson Institute
- Susan Lund, Partner, McKinsey Global Institute
- Karen Dynan, Assistant Secretary for Economic Policy and Chief Economist, Treasury Department
- Nicholas Lardy, Senior Fellow, Peterson Institute
- Michael Marrese, Managing Director and Head of Economic Research, JP Morgan Chase
Panel One – IMF Report on Reforms to Enable Sovereign Debt Restructuring
Sean Hagan, General Counsel, International Monetary Fund (IMF), discussed a recent report from the IMF which suggests reforms to enable sovereign debt restructuring. He said the reforms would take 6-9 months to implement if adopted. Generally, Hagan said debt restructuring specialists divide issues into three groups: the trigger for a restructuring, the process itself, and the closing mechanism.
Hagan said the most progress has been made on the closing mechanism. Problems exist under the current system, he explained, because minority creditors have developed strategies to have a court to hold back payments to creditors who have agreed to restructuring. He said the simple possibility of this happening may also make creditors inclined to accept a restructuring more cautious about consenting. The report suggests exploring modifying collective action clauses so as to dilute a creditor’s ability to disrupt the restructuring process.
On the trigger to a restructuring process, Hagan said the IMF is essentially a catalyst for initiation because countries with debt distress inevitably come to it for assistance. After issues seen with Argentinean debt, Hagan stated, the IMF decided that it needed a more disciplined approach in deciding whether or not to lend money to a distressed state. He said “constrained discretion” would be exercised, with the idea of preserving IMF flexibility in providing financing in circumstances where a country’s debt is seen as fundamentally sustainable with a high probability.
Hagan said lending to countries whose debts are not sustainable should be eliminated because extending further loans can actually do more harm than good, and said the argument that a loan might contain contagion from spreading to other countries is unproven.
Adair Lord Turner, Senior Fellow, Institute for New Economic Thinking; McKinsey Global Institute (MGI), said the accumulation of sovereign debt in the world is unsustainable and doubted that it could be paid off. He said public debt has risen in response to private debt to fend off recessions, but this public debt has risen too quickly. He said Japan should have been “the canary in the mine” because the problems the world has faced since 2007 are the same that plagued Japan in the 1990s.
Turner then turned specifically to the Eurozone, where he called the debt “sub-sovereign debt” because it is issued by states that do not issue their own currencies. He said this would lead to either “political reactions” when the debt is no longer politically sustainable, or it could lead to citizens of struggling states like Greece to “walk away from the debt” and abandon the burden of taxation by moving elsewhere.
Anna Gelpern, Nonresident Senior Fellow, Peterson Institute, said the IMF policy review comes at a critical time with situations such as those in Greece, Argentina, and Ukraine. “For better or worse,” she said, the IMF is the “glue that holds together a convoluted debt restructuring process.” Gelpern said the IMF’s policies need to be credible and that credibility comes from process and outcome. She said a “thicket of detailed rules and arcane terminologies” do not foster the needed credibility and commented that she was “delighted” by the proposed return to flexibility. Overall, she said she supports fewer rules but more disclosures and justifications for decisions.
Angel Ubide, Senior Fellow, Peterson Institute, said his main worry is that the IMF proposal hinges on the definition of “sustainable with high probability,” yet no one understands exactly what that means. He warned the proposal could create more problems than it solves.
Panel Two – MGI Report on Debt and Deleveraging in the Private Sector
Susan Lund, Partner, McKinsey Global Institute, presented an MGI report on global debt and deleveraging. She said that overall global debt has increased since the financial crisis, with private sector debt alone rising by $25 trillion. However, she noted that there has been significant financial sector deleveraging and household debt-to-income ratios are declining and on the path to sustainability in some countries, including the United States and United Kingdom. Lund warned, on the other hand, that household debt is rising in many other countries, and the important factor to pay attention to is who is borrowing.
Lund then discussed Chinese debt, which has quadrupled in the past seven years. She listed three of the most worrying factors: 1) nearly half the debt is related to the real estate sector and highly dependent on rising property values; 2) local government debt has grown rapidly and 40 percent of loans are repaid with land sales; and 3) China’s shadow banking system accounts for 30 percent of outstanding debt, with unclear underwriting standards. However, she also offered good news in the fact that the Chinese central government has the “firepower” to raise enough debt to recapitalize the financial system even if half of property loans were to default.
Lund offered eight reforms that would help attain financial stability in an indebted world: 1) innovations in mortgage contracts; 2) innovations in how debt is restructured; 3) use of macroprudential tools to dampen credit cycles; 4) reducing tax incentives for debt; 5) considering a broader range of tools for resolving sovereign debt; 6) improving data collection and monitoring of debt; 7) creating a healthy mix of bank and non-bank credit sources; and 8) promoting financial deepening in developing economies.
Nicholas Lardy, Senior Fellow, Peterson Institute, spoke about debt in China, noting that a third of the global increase in credit between 2000 and 2014 has been in China, despite central government debt remaining relatively small. He suggested that the growth of Chinese debt is not as serious a problem as some believe because much of the credit is coming from a banking system that still maintains a low loan-to-deposit ratio and will not be subject to runs. He further pointed out credit growth has been increasing at lower rates and has even decreased so far in 2015. Furthermore, he said high savings rates make China’s high debt-to-GDP ratio “less intimidating” than at first glance.
Karen Dynan, Assistant Secretary for Economic Policy and Chief Economist, Treasury Department, said the need for household deleveraging in the U.S. was highlighted by the financial crisis, and that household debt and leverage are holding back the economic recovery by crowding out spending. She said the U.S. should be reassured by “significant improvements in domestic fundamentals,” and that reduced debts and lower interest rates have freed up income that otherwise would have been used to pay debts. She added that household deleveraging has strengthened the financial system and should make Americans more confident going forward.
Michael Marrese, Managing Director and Head of Economic Research, JP Morgan Chase, said the U.S. has seen household wealth rise close to pre-recession levels while debt has decreased substantially. Despite this rising wealth, however, he said households have deleveraged because of gaps in income distribution and regulation that has made the banking sector much more careful about lending.
Marrese then turned to emerging market economies, noting that some are deleveraging but for bad reasons, such as Ukraine, while others have seen increasing household debt but at deeply discounted rates – he called these rates “poisonous policy.”
For more information on this event and to view an archived webcast, please click here.
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Peterson Institute for International Economics
“Assessment of the Global State of Debt and Deleveraging”
Wednesday, February 18, 2015
Key Topics & Takeaways
- IMF Debt Restructuring: Hagan discussed a recent report from the IMF which suggests reforms to enable sovereign debt restructuring, including giving the Fund flexibility in providing financing in circumstances where a country’s debt is seen as fundamentally “sustainable with a high probability.”
- Private Sector Debt: Lund offered eight reforms that would help attain financial stability in an indebted world: 1) innovations in mortgage contracts; 2) innovations in how debt is restructured; 3) use of macroprudential tools to dampen credit cycles; 4) reducing tax incentives for debt; 5) considering a broader range of tools for resolving sovereign debt; 6) improving data collection and monitoring of debt; 7) creating a healthy mix of bank and non-bank credit sources; and 8) promoting financial deepening in developing economies.
Speakers
- Sean Hagan, General Counsel, International Monetary Fund
- Anna Gelpern, Nonresident Senior Fellow, Peterson Institute
- Adair Lord Turner, Senior Fellow, Institute for New Economic Thinking; McKinsey Global Institute
- Angel Ubide, Senior Fellow, Peterson Institute
- Susan Lund, Partner, McKinsey Global Institute
- Karen Dynan, Assistant Secretary for Economic Policy and Chief Economist, Treasury Department
- Nicholas Lardy, Senior Fellow, Peterson Institute
- Michael Marrese, Managing Director and Head of Economic Research, JP Morgan Chase
Panel One – IMF Report on Reforms to Enable Sovereign Debt Restructuring
Sean Hagan, General Counsel, International Monetary Fund (IMF), discussed a recent report from the IMF which suggests reforms to enable sovereign debt restructuring. He said the reforms would take 6-9 months to implement if adopted. Generally, Hagan said debt restructuring specialists divide issues into three groups: the trigger for a restructuring, the process itself, and the closing mechanism.
Hagan said the most progress has been made on the closing mechanism. Problems exist under the current system, he explained, because minority creditors have developed strategies to have a court to hold back payments to creditors who have agreed to restructuring. He said the simple possibility of this happening may also make creditors inclined to accept a restructuring more cautious about consenting. The report suggests exploring modifying collective action clauses so as to dilute a creditor’s ability to disrupt the restructuring process.
On the trigger to a restructuring process, Hagan said the IMF is essentially a catalyst for initiation because countries with debt distress inevitably come to it for assistance. After issues seen with Argentinean debt, Hagan stated, the IMF decided that it needed a more disciplined approach in deciding whether or not to lend money to a distressed state. He said “constrained discretion” would be exercised, with the idea of preserving IMF flexibility in providing financing in circumstances where a country’s debt is seen as fundamentally sustainable with a high probability.
Hagan said lending to countries whose debts are not sustainable should be eliminated because extending further loans can actually do more harm than good, and said the argument that a loan might contain contagion from spreading to other countries is unproven.
Adair Lord Turner, Senior Fellow, Institute for New Economic Thinking; McKinsey Global Institute (MGI), said the accumulation of sovereign debt in the world is unsustainable and doubted that it could be paid off. He said public debt has risen in response to private debt to fend off recessions, but this public debt has risen too quickly. He said Japan should have been “the canary in the mine” because the problems the world has faced since 2007 are the same that plagued Japan in the 1990s.
Turner then turned specifically to the Eurozone, where he called the debt “sub-sovereign debt” because it is issued by states that do not issue their own currencies. He said this would lead to either “political reactions” when the debt is no longer politically sustainable, or it could lead to citizens of struggling states like Greece to “walk away from the debt” and abandon the burden of taxation by moving elsewhere.
Anna Gelpern, Nonresident Senior Fellow, Peterson Institute, said the IMF policy review comes at a critical time with situations such as those in Greece, Argentina, and Ukraine. “For better or worse,” she said, the IMF is the “glue that holds together a convoluted debt restructuring process.” Gelpern said the IMF’s policies need to be credible and that credibility comes from process and outcome. She said a “thicket of detailed rules and arcane terminologies” do not foster the needed credibility and commented that she was “delighted” by the proposed return to flexibility. Overall, she said she supports fewer rules but more disclosures and justifications for decisions.
Angel Ubide, Senior Fellow, Peterson Institute, said his main worry is that the IMF proposal hinges on the definition of “sustainable with high probability,” yet no one understands exactly what that means. He warned the proposal could create more problems than it solves.
Panel Two – MGI Report on Debt and Deleveraging in the Private Sector
Susan Lund, Partner, McKinsey Global Institute, presented an MGI report on global debt and deleveraging. She said that overall global debt has increased since the financial crisis, with private sector debt alone rising by $25 trillion. However, she noted that there has been significant financial sector deleveraging and household debt-to-income ratios are declining and on the path to sustainability in some countries, including the United States and United Kingdom. Lund warned, on the other hand, that household debt is rising in many other countries, and the important factor to pay attention to is who is borrowing.
Lund then discussed Chinese debt, which has quadrupled in the past seven years. She listed three of the most worrying factors: 1) nearly half the debt is related to the real estate sector and highly dependent on rising property values; 2) local government debt has grown rapidly and 40 percent of loans are repaid with land sales; and 3) China’s shadow banking system accounts for 30 percent of outstanding debt, with unclear underwriting standards. However, she also offered good news in the fact that the Chinese central government has the “firepower” to raise enough debt to recapitalize the financial system even if half of property loans were to default.
Lund offered eight reforms that would help attain financial stability in an indebted world: 1) innovations in mortgage contracts; 2) innovations in how debt is restructured; 3) use of macroprudential tools to dampen credit cycles; 4) reducing tax incentives for debt; 5) considering a broader range of tools for resolving sovereign debt; 6) improving data collection and monitoring of debt; 7) creating a healthy mix of bank and non-bank credit sources; and 8) promoting financial deepening in developing economies.
Nicholas Lardy, Senior Fellow, Peterson Institute, spoke about debt in China, noting that a third of the global increase in credit between 2000 and 2014 has been in China, despite central government debt remaining relatively small. He suggested that the growth of Chinese debt is not as serious a problem as some believe because much of the credit is coming from a banking system that still maintains a low loan-to-deposit ratio and will not be subject to runs. He further pointed out credit growth has been increasing at lower rates and has even decreased so far in 2015. Furthermore, he said high savings rates make China’s high debt-to-GDP ratio “less intimidating” than at first glance.
Karen Dynan, Assistant Secretary for Economic Policy and Chief Economist, Treasury Department, said the need for household deleveraging in the U.S. was highlighted by the financial crisis, and that household debt and leverage are holding back the economic recovery by crowding out spending. She said the U.S. should be reassured by “significant improvements in domestic fundamentals,” and that reduced debts and lower interest rates have freed up income that otherwise would have been used to pay debts. She added that household deleveraging has strengthened the financial system and should make Americans more confident going forward.
Michael Marrese, Managing Director and Head of Economic Research, JP Morgan Chase, said the U.S. has seen household wealth rise close to pre-recession levels while debt has decreased substantially. Despite this rising wealth, however, he said households have deleveraged because of gaps in income distribution and regulation that has made the banking sector much more careful about lending.
Marrese then turned to emerging market economies, noting that some are deleveraging but for bad reasons, such as Ukraine, while others have seen increasing household debt but at deeply discounted rates – he called these rates “poisonous policy.”
For more information on this event and to view an archived webcast, please click here.