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Reinhart seminar november_2013

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Seminario de la profesora Reinhart en Sarriko 15/11/2013

Seminario de la profesora Reinhart en Sarriko 15/11/2013

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  • 1. A Decade of Debt Carmen M. Reinhart Harvard University Universidad del País Vasco November 15, 2013
  • 2. The challenges of global setting in the sixth year after the crisis  The advanced economies: Public and private debt overhang, deleveraging, lower growth and persistent high unemployment  The emerging markets: Large capital inflows and their recent reversals, inflationary pressures, bubble and crisis risks Reinhart
  • 3. Preamble and definition: Financial repression … includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, heavier regulation (including of cross-border capital movements, i.e. capital controls), and (generally) a tighter connection between government and banks. It is a tax on bondholders and more generally savers… Reinhart 3
  • 4. Financial de-globalization since the crisis Reinhart
  • 5. Banking Crises, Financial Globalization and Its Reversals: 1870-2013 High 1 0.9 1931 30.00 1914 2006 0.8 WWI capital controls 0.7 Share of Countries Banking Crisisfirst year 3-year Sum (right scale) Crisis, depression and WWII 25.00 2013 20.00 Percent 0.6 Index 35.00 The Great Globalization Gold Standard--heyday of financial globalization 0.5 The era of financial repression 0.4 15.00 1980 0.3 10.00 Capital Mobility 0 to 1 Index (left scale) 0.2 5.00 1945 0.1 1918 Low 0 0.00 1870 1880 1890 1900 1910 1920 1930 1940 Reinhart 1950 1960 1970 1980 1990 2000 2010
  • 6. Where are the advanced economies in the current conjuncture? Reinhart
  • 7. Real per capita GDP growth Real per capita GDP growth rates are significantly lower during the decade following severe financial crises and the synchronous world-wide shocks. The median post-financial crisis GDP growth decline in advanced economies is about 1 percent. (from about 3.1 to 2.1 percent per annum) Reinhart 7
  • 8. In 7 of 15 episodes there was a double dip Reinhart 8
  • 9. Unemployment rates In the ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. The rise in unemployment is most marked for the five advanced economies, where the median unemployment rate is about 5 percentage points higher. (from 2.7 to 7.9 percent) Reinhart 9
  • 10. Unemployment Rate in the Decade Before and the Decade After Severe Financial Crises: Post-WWII, Advanced Economies Probability density function, five advanced economies Big five: Spain, 1977; Norway, 1987; Finland, 1991; Sweden, 1991, Japan 1992 t-10 to t-1 t+1 to t+10 median 2.7 7.9 min 1.1 2.5 max 6.1 21.2 obs. 50 50 50 45 Pre-crisis, (t-10 to t-1) 40 35 30 25 20 15 Post-crisis (t+1 to t+10) 10 5 0 1 3 4 6 7 9 10 12 13 15 16 18 19 21 22 Unemployment rate, percent Reinhart 10
  • 11. In ten of the fifteen post-crisis episodes, unemployment has not fallen back to its pre-crisis level, not in the decade that followed… This was also the case for past systemic crises in the US. Reinhart 11
  • 12. Post 2008 is the third peak in public debt—the two previous episodes (especially post WWII) were marked by a lengthy period of negative interest rates.
  • 13. Public debt as a percent of GDP: Advanced Economies: 1900-2013 100 90 Unweighted Average Advanced economies 80 70 60 50 40 30 20 10 0 1900 1910 1920 1930 1940 1950 1960 Reinhart 1970 1980 1990 2000 2010
  • 14. Gross external total debt (public plus private) is in uncharted territory….deleveraging, especially in Europe, has been halting. For a contrast in external deleveraging—see post crisis Asia Reinhart
  • 15. Gross Total (Public plus Private) External Debt as a Percent of GDP: 22 Advanced and 25 Emerging Market Economies, 1970-2013:Q1 300 250 Unweighted Average Advanced Economies 200 150 100 50 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Reinhart 15
  • 16. External Total (Public plus Private) External Debt: Six Asian Economies, 1970-2013:Q1 (percent of GDP) Percent 85 Average for India, Indonesia, Korea, Malaysia, Philippines, and Thailand 75 65 55 45 35 25 Banking crises in at least three countries (shaded) 15 1970 1975 1980 1985 1990 1995 2000 2005 2010 Sources: International Monetary Fund, World Economic Outlook, Reinhart and Rogoff (2009), Reinhart (2010), World Bank Reinhart (2013), International Debt Statistics, Washington DC http://data.worldbank.org/data-catalog/international-debt-statistics,
  • 17. Domestic private indebtedness indicators point to a comparable internal debt overhang. Private debts migrate to the public sector balance sheet… Reinhart
  • 18. Private Domestic Credit as a Percent of GDP: Advanced Economies, 1950-2013: August 180 Unweighted Average Advanced Economies 160 140 120 100 80 60 40 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Reinhart 18
  • 19. Domestic Credit to the Private Sector, Six Asian Economies 1955-2013:Q2 (as a percent of GDP) Percent 135 115 95 75 Average for India, Indonesia, Korea, Malaysia, Philippines, and Thailand 55 Banking crises in at least three countries (shaded) 35 15 1955 1960 1965 1970 1975 1980 1985 Reinhart 1990 1995 2000 2005 2010
  • 20. Throughout history, debt/GDP ratios have been reduced by: (i) economic growth; (ii) fiscal adjustment/austerity; (iii) explicit default or restructuring; (iv) a sudden surprise burst in inflation; and (v) a steady dosage of financial repression that is accompanied by an equally steady dosage of inflation. (Options (iv) and (v) are only viable for domesticcurrency debts). Reinhart
  • 21. The first of these is relatively rare and the rest are difficult. Reinhart
  • 22. Crisis Resolution: How different are advanced economies and emerging markets??? Not as much as widely believed. There is an extensive “forgotten” history of pre-WWII credit events in advanced economies (default, restructurings, conversions and other forms of confiscation…) Reinhart
  • 23. Debt relief (based on haircuts) as a percent of GDP Trinidad & Tobago, 1988-1989 Austria, 1934 Uruguay, 2003 Macedonia, 1992-1997 Ecuador, 2008-2009 Belgium, 1934 Jordan, 1989-1993 Serbia & Montenegro, 2003-2004 Greece, 1934 South Africa, 1985-1993 Grenada, 2004-2005 Russia, 1991-2000 Ecuador, 1999-2000 Dominican Rep., 1982-1994 Peru. 1980-1997 Argentina, 2001-2005 Brazil, 1983-1994 Poland. 1981-1986 Average EMs 1978-2010 United States, 1933 Seychelles, 2008-2010 Italy, 1934 Dominica, 2003-2005 Bosnia and Herzegovina United Kingdom, 1934 Panama, 1983-1996 Argentina, 1982-1993 France, 1934 Jamaica, 1978-1993 Ecuador, 1982-1995 Uruguay, 1983-1991 Chile, 1983-1990 Mexico, 1982-1990 Venezuela, 1983-1990 CostaRica, 1983-1990 Bulgaria, 1990-1994 1.6 1.7 2.1 2.1 2.9 3.3 5.3 8.1 8.9 9.2 10.2 11.3 12.0 13.3 13.8 14.2 14.3 15.1 15.7 16.6 18.5 19.1 21.6 22.1 22.2 22.9 24.0 24.2 24.4 31.2 34.3 35.6 36.2 41.6 43.4 Reinhart 55.6 23
  • 24. A global issue The return of financial repression? Reinhart
  • 25. Financial repression as a tool for public debt reduction In the heavily regulated financial markets of the Bretton Woods, restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates reduced debt servicing costs while a high incidence of negative real interest rates liquidated the real value of government debt. Reinhart 25
  • 26. Real Interest Rates Frequency Distributions: Advanced Economies, 1945-2012 1945-1980 1981-2007 2008-2012 40 Real interest rates Share of observations at or below 35 1945-1980 1981-2007 2008-2012 0 9.1 53.2 61.6 20.8 87.1 2 percent 78.6 33.3 96.8 3 percent 25 46.9 1 percent 30 88.6 52.1 100.0 20 15 10 5 0 -10 -8 -6 -4 -2 0 2 Reinhart 4 6 8 10 26
  • 27. Official Holdings of United States Marketable Treasury Debt, 1945-2013:Q2 (as a percent of total marketable debt outstanding) Percent 60 Share of Marketable Treasury Securities held by All Official Institutions 50 40 30 The difference between Total and Foreign is the Share Held by the Federal Reserve 20 10 Share of "Marketable Treasury Securities Held by Foreign Official Intitutions (i.e. central banks) 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Reinhart
  • 28. The Re-emergence of Financial Repression, 2008-2011 France, December 2010: Liquidation of Fonds de Reserve Pour Les Retraites (FFR) The French government changed the law to shift the €37bn FFR from providing long-term financial support to the French PAYG pension system after 2020 to instead pay an annual €2.1bn to the Caisse d’Amortissement de la Dette Sociale (CADES) from 2011 to 2024 and at that point transfer all remaining assets to the CADES in one lump-sum payment. This shift in FFR’s investment horizon has meant a radical shift in asset allocation from longer-term diversified riskier assets to a short-term LDI-strategy dominated by liability matching short-term French government bonds. For the duration of its lifespan the FRR has consequently been transformed into a large captive buyer of French government bonds. Ireland, 2010: Use of the National Pension Reserve Fund to Recapitalize Banks As a result of the banking crisis, Ireland National Pension Reserve Fund (NPRF) may have to contribute up to €17.5bn to recapitalize Ireland’s banks. The NPRF was originally set up in 2001 to help finance the long-term costs of Ireland's social welfare and public service pensions from 2025 onwards. However, a 2010 law directed the NPRF to invest in Irish government securities and provides the legal authority for the Irish government to fund capital expenditure from the NPRF from 2011-2013. April 2011: Levy on pension funds. The Irish government has further recently suggested to fund job creation schemes through a special 0.5% levy on private pension funds. Japan, March 2010: Reversal of Post Privatization and Raising of Deposit Ceiling The new DPJ government reversed the 2007 plan to privatize Japan Post, the world’s largest financial conglomerate with more than ¥300tr in assets. Crucially, the DPJ government with the new law also doubled the deposit cap at Japan Post Bank to ¥20mn and raised the life insurance coverage limit at Japan Post Insurance Co. from ¥13mn to ¥25mn. Given Japan Post’s traditional roughly 75 percent asset allocation to JGBs, and under the assumption that consumers will transfer deposits to a company certain to enjoy a government guarantee, the reversal of the Japan Post privatization provides additional incentives to a captive customer of Japanese government debt. Reinhart
  • 29. Portugal, 2010: The transfer of the previously privatized Portugal Telecom pension scheme back to the Portuguese government, which in the process immediately booked €2.8bn (1.6% of GDP) in extra revenues. This enabled the Portuguese government to improve its budget deficit in 2010 sufficiently to cosmetically appear to be in line with annual EU deficit reduction targets. Spain, April 2010: Interest rate ceilings on deposits. The Ministry of Finance (MoF) requires that institutions offering deposit interest rates that are considered to be above market rates (determined by MoF) double their contributions to the Fondo de Garantía de Depósitos. UK, October 2009, UK Financial Services Authority (FSA) puts a global regulatory liquidity marker. The proposal by the FSA requires UK banks, investment banks, and subsidiaries or branches of foreign banks operating in the London market to hold more high quality government securities—at least around ₤110 billion more (at that time), and cut their reliance on short-term funding by 20 percent in the first year alone. 2011? Royal Mail privatization, which will see an expected £23.5bn in assets transferred to the UK treasury ahead of privatization (as well as an expected £29.5bn in liabilities). Reinhart
  • 30. Fed proposes new liquidity rules for banks October 24, 2013 Reinhart
  • 31. In emerging markets, financial repression has been manifested in steadily rising reserve requirements (to sterilize inflows) and “prudential measures” to reduce inflows. Controls on outflows have just begun to re-emerge… Reinhart
  • 32. Questions and discussion Reinhart