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

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