Debt is central to the functioning of a modern economy. Firms can use it to finance investments in future productivity. Households can use it to finance lumpy purchases, such as big consumer durables, or a home. Sometimes, however, firms’ investments do not pan out or a household’s main earner loses his or her job. Countries’ legal systems generally recognize that in these cases, debtors and creditors alike—along with society at large—may be better off if there is an orderly procedure for reorganizing debts. (more…)
Greece is once again in the headlines as discussions for the second review of its European Stability Mechanism (ESM) program are gaining pace. Unfortunately, the discussions have also spurred some misinformation about the role and the views of the IMF. Above all, the IMF is being criticized for demanding more fiscal austerity, in particular for making this a condition for urgently needed debt relief. This is not true, and clarifications are in order. (more…)
Having successfully pulled Greece from the brink last summer and subsequently stabilized the economy, the government of Alexis Tsipras is now discussing with its European partners and the IMF a comprehensive multi-year program that can secure a lasting recovery and make debt sustainable. While discussions continue, there have been some misperceptions about the International Monetary Fund’s views and role in the process. I thought it would be useful to clarify issues.
All eyes are on Greece, as the parties involved continue to strive for a lasting deal, spurring vigorous debate and some sharp criticisms, including of the IMF.
In this context, I thought some reflections on the main critiques could help clarify some key points of contention as well as shine a light on a possible way forward.
The main critiques, as I see them, fall under the following four categories:
- The 2010 program only served to raise debt and demanded excessive fiscal adjustment.
- The financing to Greece was used to repay foreign banks.
- Growth-killing structural reforms, together with fiscal austerity, have led to an economic depression.
- Creditors have learned nothing and keep repeating the same mistakes.
In various guises, the “Year of Living Dangerously” has been used to describe the global financial crisis, the policy response to the crisis, and its aftermath. But, we’ve slipped well beyond a year and the financial system is still flirting with danger. Financial stability risks may have eased, reflecting improvements in the economic outlook and continuing accommodative policies. But those supportive policies—while necessary to restart the economy—have also masked serious, underlying financial vulnerabilities that need to be addressed as quickly as possible. Many advanced economies are “living dangerously” because the legacy of high debt burdens is weighing on economic activity and balance sheets, keeping risks to financial stability elevated. At the same time, many emerging market countries risk overheating and the build-up of financial imbalances—in the context of rapid credit growth, increasing asset prices, and strong and volatile capital inflows. Here is our suggested roadmap for policymakers to address these vulnerabilities and risks, and achieve durable financial stability.
Undertaking a sizable fiscal adjustment is a lot like driving up a tall mountain: it’s hard work, it can take a long time, and you don’t want to run out of fuel partway up the incline. Countries are starting the climb, cutting back government deficits and debt levels, but according to our analysis often current plans aren’t enough to get countries where they need and want to go. The plans in place are large by historical standards, which brings with it difficult choices, and particular risks and uncertainties. Let me fill you in on what these are.
Bridges to Growth, Not Roads to Nowhere: Scaling Up Infrastructure Investment in Low-Income Countries
For low-income countries, the absence of reliable infrastructure—roads, railways, ports, but also power supply—has become an increasingly binding constraint on growth. And we know that investment in infrastructure can raise productivity, boost growth, and help reduce poverty. But as straightforward as it sounds, getting investment decisions right is no easy feat. The current fragile outlook for many advanced economies also means they’re less likely to be a big source of growth or financing for the foreseeable future. The key issue now is for low-income countries to unlock new sources of growth and investment financing. At the same time, the more robust recoveries of dynamic emerging market economies and their new status as development partners brings fresh perspectives.
It would be unfair for any assessment of global economic and financial stability not to acknowledge the tremendous progress has been made in repairing and strengthening the financial system since the onset of the global crisis. Still, the key message from the IMF’s October 2010 Global Financial Stability Report is clear. Progress toward global financial stability has suffered a setback over the past six months—the financial system remains the Achilles’ heel of the economic recovery. In this blog post, José Viñals discusses two broad issues. What is at the heart of this lingering lack of confidence? And, looking ahead, what are the policy priorities?
Today, fiscal problems are a key concern of policy makers in many industrial countries, and a reassessment of sovereign risk is a palpable threat to global recovery. At the heart of the issue is the extent to which governments have room for fiscal maneuver—“fiscal space”—before markets force them to tighten policies sharply and, relatedly, the size of adjustments needed to restore or maintain public debt sustainability. Yet, much of the talk about fiscal space—how to measure it and the policy implications—has so far been rather fuzzy. In this blog, Jonathan Ostry discusses a new staff position note that he co-authored with several IMF colleagues, which aims to remedy this by providing an operational definition of the fiscal space concept as well as estimates of fiscal space for 23 advanced economies.