Thursday, October 8, 2020

Reinhart: Fight the war, then pay for it

In an FT interview, World Bank Chief Economist Carmen Reinhart urges developing countries to borrow money to fight the economic impact of coronavirus. They can deal with the "unprecedented wave of debt crises and restructurings" once the pandemic has been addressed.

"While the disease is raging, what else are you going to do? ... First you worry about fighting the war, then you figure out how to pay for it."

Reinhart makes the case for debt write-offs and transparency, pointing out that we're in an unprecedented situation and we need clear information to manage it.

  • Write-offs: "In terms of the coverage, of which countries will be engulfed, we are at levels not seen even in the 1930s. This is why we are talking about debt write-offs."
  • Transparency: "many loan contracts have non-disclosure agreements so they are not known about." As a consequence, when assessing debt sustainability, the private and official sectors are operating on the assumption that debts are lower than they really are.

Issues might be exacerbated as bond redemptions rise in the next couple years.

Lastly, it's notable that Reinhart is making the case for more borrowing. She is best known for her work with Kenneth Rogoff on the effects of financial crises and debt levels. Using research that was later shown to have errors, they promoted austerity policies in 2010 by claiming that rising levels of government debt are associated with lower rates of economic growth.

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