1 100 120 140 160 20 40 60 80 0 1880 1883 1886 1889 - - PowerPoint PPT Presentation

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1 100 120 140 160 20 40 60 80 0 1880 1883 1886 1889 - - PowerPoint PPT Presentation

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1 100 120 140 160 20 40 60 80 0 1880 1883 1886 1889 1892 1895 1898 1901 1904 Publi 1907 1910 1913 WWI lic De 1916 1919 Debt-to 1922 Advanced Economies: Depression 1925 1928 Great 1931 to-GDP Ra 1934 1937 1940

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Advanced Economies: Publi lic De Debt-to to-GDP Ra Ratio, 18 1880 80-2016 2016

20 40 60 80 100 120 140 160 1880 1883 1886 1889 1892 1895 1898 1901 1904 1907 1910 1913 1916 1919 1922 1925 1928 1931 1934 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

WWI

WWII Great Depression Global financial crisis

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Publi lic debt-to to-GDP ratio (in (in percent, 20 2015 15)

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50 100 150 200 250 300

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Hold ldin ings of f publi lic debt by resid sidents (in (in percent of f total l publi lic debt, 2015)

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10 20 30 40 50 60 70 80 90 100

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  • 50

50 100 150 200 Korea United States Netherlands New Zealand Belgium Switzerland Portugal Luxembourg Iceland Spain Norway Germany Austria Australia Slovenia Ireland Finland Lithuania Canada United Kingdom Japan Italy Hong Kong SAR Slovak Republic Czech Republic Israel Singapore6 France Denmark Malta Cyprus Estonia Sweden Latvia

Pension an and heal althcare entit itlement debt (in (in per ercent of

  • f GDP)

1 Net present value of increases in public spending for healthcare (red) and pension (blu) as projected by the IMF Fiscal Monitor for 2016-2050

Source: IMF Fiscal Monitor April 2016, Table A23 1

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1.Exposure to a roll over crisis 2.Lower long term growth

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Why is is hig igh public debt a problem?

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Exposure to a roll over crisis

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Charles Ponzi

(Lugo di Romagna, 1882 – Rio de Janeiro 1949)

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❖Emerging economies: 70 percent of GDP ❖Advanced economies: 85 percent of GDP (high risk) ❖Advanced economies: 120 percent of GDP (unsustainable debt?)

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IM IMF Public debt sustainability th thresholds

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Spread dell’Italia sulla lla Germania

(rendimento dif ifferenzia iale a a 10 10 an anni BTP TP-BUND)

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Monetary base Central Bank’s credit to government

Surge in money base

1

1 In national currency

1000 2000 3000 4000 5000

USA

100000 200000 300000 400000

JAPAN

50000 100000 150000 200000 250000 300000 350000 400000

UK

500 1000 1500 2000 2500

EURO AREA

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Lower long term GDP growth

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Why doe

  • es hig

igh publi lic deb ebt lo lower lon long-term growth?

  • 1. Crowding out:

Olivier Blanchard, “Current and anticipated deficits, interest rates and economic activity” NBER WP n. 1265, 1984

  • 2. Higher Taxes

“I have a long argued that paying down the national debt is beneficial for the economy: it keeps interest rate lower than they otherwise would be and frees savings to finance increases in the capital stock, thereby boosting productivity and real incomes.” Speech held by Alan Greenspan on April 27, 2001 David Ricardo

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Annual l average growth rate (in in percent, 1990-2015)

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0,0% 1,0% 2,0% 3,0% 4,0% 5,0% 6,0% 7,0%

Singapore Korea Taiwan Province of China Ireland Israel Lithuania* Latvia* Estonia* Hong Kong SAR Slovak Republic* Luxembourg Australia New Zealand Iceland Cyprus Slovenia* United States Norway Czech Republic* Canada Sweden Spain United Kingdom Netherlands Austria Belgium Finland Switzerland France Denmark Germany Portugal Japan Greece Italy

* Data for these countries are available since 1995

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➢ Kumar, M., and J. Woo, 2010, ―Public Debt and Growth,‖ IMF Working Paper No. 10/174. ➢ Checherita, C. and P. Rother, 2010, ―The impact of high and growing government debt on economic growth an empirical investigation for the euro area,‖ IMF Working Paper No. 1237 ➢ Cecchetti, S. G., M. S. Mohanty and F. Zampolli, 2011, ―The Real Effects of Debt,‖ BIS Working Paper No. 352. ➢ Reinhart, C. and K. Rogoff, 2010, ―Growth in a Time of Debt,‖ NBER Working Paper

  • No. 15639.

Hig igh publi lic debt lo lowers potentia ial l growth

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Real per capita GDP growth rate Public debt/GDP

  • 1 percentage

point +60 percentage points Source: Kumar M., Woo J., Public Debt and Growth, IMF Working Paper, 2010

Rela latio ionship ip betw tween publi lic debt le level l an and GDP growth

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How to lower public debt

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  • 1. Printing money
  • 2. Financial repression
  • 3. Debt repudiation
  • 4. Debt mutualization
  • 5. Privatiziation

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Shortcuts

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1. . Pri rinting money: what monetary policy can do to alleviate th the effects of f hig igh public debt

  • Printing money to temporarily finance the government if

the demand for liquidity surges (current situation; see above)

  • Stand ready to provide liquidity at times of market

pressure (fighting self-fulfilling expectations). (See de Grauwe, Paul and Ji, Yuemei (2016) Flexibility versus stability: a difficult tradeoff in the Eurozone, Credit and Capital Markets)

  • Risk Inflation
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1. . Prin rinting mon

  • ney: In

Infl flation as as a a sol solution to

  • th

the e public lic deb ebt prob

  • blem
  • How much inflation?
  • It depends on whether the

Fisher effect holds

  • If the FE holds, moderate

inflation is not enough

  • Costs: - inflation is a tax
  • inflation genie out of the bottle
  • the case of Turkey
  • An inflation outburst (20-25

percent for 2 years would be needed)

  • Altogether: not a great idea

Source: IMF Fiscal Monitor, April 2013

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Should Euro Area countries le leave th the euro area?

Nobel Prize winners against the euro

Paul Krugman Joseph Stiglitz Amartya Sen Milton Friedman Christopher Pissarides James Mirrlees

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100,0 110,0 120,0 130,0 140,0 150,0 160,0 170,0 180,0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Italy Rest of the Euro Area

Source: Eurostat

Real l GDP per capit ita, 1980-2015 (in (index 1980 = 100)

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95,0 100,0 105,0 110,0 115,0 120,0 125,0 130,0 135,0 140,0 145,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Italy Portugal Germany Spain France

Source: Eurostat

Nominal unit it la labor costs per person,

2000 2000-2015 2015 (index 2000 = 100)

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2. . Fin Financial repression

Reinhart, C. M., M. B. Sbrancia, The liquidation of government debt, IMF Working Paper 16893M

  • Accidental financial repression?
  • surge in base money
  • tight bank regulation (equity requirenments)
  • lower interest rates and low bank profits
  • will it last?
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3. . Debt repudia iation

a.

Reputational costs

  • Borensztein, E., and U. Panizza, The Costs of Sovereign Default, IMF Staff

Papers 2009, 56 (4): 683–741.

  • Cruces, J. J., C. Trebesch, Sovereign Defaults: The Price of Haircuts

American Economic Journal: Macroeconomics 2013, 5(3): 85–117

  • b. Not alternative to austerity
  • c. High spillover effects

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Italian public debt in euro

Grecee 2011 = 356 billion Italy 2016 = 2219 billion

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4. . Debt mutuali lization

❖Pulling together public debt in the euro area (to replace the debt of individual states) would be nice but... ❖ … it will not happen… ❖…because it does not happen even in monetary areas that achieved political union (federal states)

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5. . Priv ivatizatio ion

Privatization may be good ❖But there is not enough left to privatize ❖Italy: optimistic estimates: 15 percent of GDP in 10 years (against a public debt of >130 percent of GDP and average privatization revenues of 0.25 of GDP in 2011-15).

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The hig ighway:

  • 1. Structural reforms to boost

growth

  • 2. A moderate level of fiscal

austerity

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1. . Th The effect t of f gr growth th on th the public debt-to to-GDP ratio tio

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60% 70% 80% 90% 100% 110% 120% 130% 140% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

baseline +1% (growth increase if revenues are not saved) +1% growth 130.0%

  • 16.5%
  • 58.1%
  • 10.8%
  • 28.6%

years debt ratio

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How can we boost growth?

  • Pulling oneself up by one’s bootstraps (higher deficit)?
  • Plain

lain vanill lla ver ersion doe

  • es not
  • t wor
  • rk (t

(tem emporary gr growth im impact, per ermanent d defi ficit t im impact, public lic deb ebt t may in initial itially ly dec eclin line e but t th then en in increases)

  • Non
  • n plain

lain vanilla illa stories (L (Left win ing ver ersion):

  • Tem

emporary ry in increases in in sp spen endin ing raises pot

  • ten

entia ial l ou

  • utp

tput per ermanently ly (lo (lower hysteresis) (R (Romer, de e Lon

  • ng,

g, Su Summers)

  • Tem

emporary ry in increases in in public lic sp spen endin ing boo

  • ost not
  • t on
  • nly

ly rea eal l GDP but t als lso th the in infla flati tion for

  • r a while

ile (IM (IMF, th the 3C approach)

  • Problemati

tic assu ssumptions: (i) (i) in inter erest rates do

  • not
  • t ris

rise; (ii) (ii) sp spen endin ing in increases are reversed ed at t th the e ri right tim time.

  • Non
  • n plain

lain vanilla illa stories (ri (right win ing ver ersion):

  • Reaganomics, Tru

rumponomics: tax cuts ts rais ise pot

  • tentia

ial gr growth th

  • Problem: it

it doe

  • es not
  • t w

work (p (public lic deb ebt t in increased under er Rea eagan) ➔ you

  • u nee

eed str tructural reforms to

  • boo
  • ost gr

growth (b (but t it it takes tim time) e)

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1. . Th The effect t of f gr growth th on th the public debt-to to-GDP ratio tio

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60% 70% 80% 90% 100% 110% 120% 130% 140% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

baseline +1% (growth increase if revenues are not saved) +1% growth 130.0%

  • 16.5%
  • 58.1%
  • 10.8%
  • 28.6%

years debt ratio

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2. . A moderate le level l of f fi fiscal l austerity (th (the case of f It Italy ly)

What is needed? (March 2016 scenario)

  • 1. Freezing of primary public spending in real terms

at the 2016 level

  • 2. Balancing the budget by 2019-20
  • 3. Maintaining a balanced budget (in cyclically

adjusted terms thereafter)

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Prim imary spendin ing, g, revenues and fis iscal l defic icit

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  • 2,0%
  • 1,0%

0,0% 1,0% 2,0% 3,0% 4,0% 5,0% 6,0% 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

% del PIL

Fiscal deficit Balanced budget

620 640 660 680 700 720 740 760 780 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Billion of euro Real revenues Real primary spending Balanced budget

1

1 Based on the April 2016 medium-term fiscal plan (Documento di Economia e Finanza, Aprile 2016)

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Public lic debt-to to-GDP ratio io (2 (2007-45)

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40 50 60 70 80 90 100 110 120 130 140

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045

2027 2034 2046

SGP debt rule

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Initial public debt

(in % of GDP)

Change of the Detb-to- GDP ratio Period Number of years of decline in the debt ratio Annual average reduction

(in % of GDP)

Average primary surplus Average contribution

  • f r-g and
  • ther

(percentage points)

Average GDP growth rate Ireland 94.6

  • 59.1

1991-01 10

  • 5.9

4.5

  • 1.4

7.8 Sweden 82.0

  • 43.2

1998-08 10

  • 4.3

4.3

  • 3.0

Finland 57.7

  • 23.8

1996-08 12

  • 2.0

5.5 3.5 3.8 Denmark 69.2

  • 42.1

1996-07 11

  • 3.8

5.4 1.6 2.1 Belgium 134.1

  • 50.1

1993-07 14

  • 3.6

4.9 1.3 2.5 Canada 101.7

  • 35.2

1996-07 11

  • 3.2

7.1 3.9 3.3 Netherlands 78.5

  • 27.8

1993-01 8

  • 3.5

2.8

  • 0.7

3.7 New Zealand 76.0

  • 44.0

1987-01 14

  • 3.1

3.4 0.3 2.5 Spain 67.5

  • 31.2

1996-07 11

  • 2.9

2.4

  • 0.5

3.9

Epi Episod

  • des of
  • f str

tron

  • ng de

decli line in n pub publi lic deb debt in n adv advanced eco economie ies dur durin ing g the the las ast 30 year ears

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Can Can it be be do done wit ith low gr growth th? (P (Prim imary ry sur surplus an and gr growth th in ep epis isodes s of

  • f strong de

decli line of

  • f pu

publi lic de debt

0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0

Growth Primary surplus

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If If th the public lic debt t ratio io is is decli linin ing, a hig igh public lic debt ratio io is is le less of f a proble lem

❑ Bassanetti A., Cottarelli, C. and Presbitero, A. F. (2016), Lost and Found: Market Access and Public Debt Dynamics, Mimeo, presented at the Sovereign Debt Restructuring Workshop (CIGI and University of Glasgow, 29-30 September 2016). ❑ Pescatori, A., D. Sandri, J. Simon, Debt and Growth: Is There a Magic Threshold?, ‖IMF Working Paper No. 1434

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THANK YOU FOR YOUR ATTENTION!

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