IMF: The Fiscal Situation in Advanced Economies

The IMF has released three major studies on the fiscal situation in advanced economies.

The summary is here, while the papers are available at:

16 thoughts on “IMF: The Fiscal Situation in Advanced Economies”

  1. Thanks Philip. This is a very useful set of papers. I think the “Default in Advanced Economies: Unnecessary, Undesirable, and Unlikely” in particular is a useful corrective to exaggerated fears of an Irish default. Using the useful approximation that identifies the primary surplus needed to stabilise the debt to GDP ration as being the gap between the real growth rate and the real interest rate multiplied by the debt/GDP ratio, it shows that a surplus of about a half a percent of GDP would stabilise the ratio for Ireland.

    Even more interestingly, it shows that even a 50 percent haircut on the debt would have a negliable effect on the required primary surplus. There is very little to be gained by restructuring. The same sort of analysis also shows that even the revolting numbers that we are facing with the bank bail-out has little impact on the stablising primary balance. Governor Honohan has been taken to task for saying the bail-out is managable. But this approach would support his view.

  2. intersting papers
    one thing that i find interesting in the “default” paper is the very strong assersion, by reference to Sturzenegger and Zettelmeyer (2006), that defaults are costly and that this effect lasts a long time. This seems to conflict with the empirical evidence given in a more recent analysis
    Panizza, Sturzenegger, and Zettelmeyer: Sovereign Debt and Default Journal of Economic Literature, September 2009
    sect 4.4.2
    surveying the literature they say
    “Overall, these findings do not lend much support to theories of sovereign debt based on maintaining a good reputation in credit markets. Except in the short run, the effects of defaults on borrowing costs seem small, and eventually disappear. Defaults do not seem to affect borrowing costs in a way which is both long-lived and quantitatively important”

    and from some econometric analysis they conclude

    “The main result is that—controlling for changes in global
    financial conditions (via time dummies)—postdefault spreads return to predefault levels within twenty-four months or less”

    So, time to lay that bogie man to rest. Thats not to say that there may be other costs of default and restructuring.

    BTW – they also find little evidence of exclusion from markets, such exclusion being shortterm (while the restructuring is being prepared) or negligible
    .

  3. Since when did any defaulting country anywhere, ex-ante, think default was necessary, desirable and likely?! It happens just the same. It only occurs when there is no other choice – the country is cut off from financing, so they default. The IMF wants to believe no default is likely because that is consistent with their role as financier. They are even hoping to lend more to nations like ourselves. We, of course, should reject their funds if it means we must bail out creditors that made bad loans to our banks. But we won’t. A good farce it is!

  4. http://jutiagroup.com/2010/08/31/why-covering-up-fraud-losses-impairs-economic-recovery/

    The zombie economy!

    No one sees the absence of clothes. The Emperor walks naked. Until all debts are done away with, economic activity fails. See Japan.

    I agree with all the comments except for the mercantilist, McHale!

    When many countries default, the roles of creditor and debtor are reversed: when you owe the bank 1000 they own you, when you owe the bank 100,000,000,000 you own them!

  5. Those who advocate debt restructuring appear to see it as an alternative to structural reform, which involves challenging powerful vested interests whether for example in Ireland, in the protected private sector, the public sector and the supporters of the status quo in a failed governance system.

    In the period 1973-2008, Ireland was the beneficiary of net receipts from the European Union of €40.8bn, amounting to 3% of average GDP. It hit a high point in 1991 at 6.2% of GDP.

    By mid-2008, when voters rejected the Lisbon Treaty, the hubris of the Celtic Tiger years that was encapsulated in Tánaiste Mary Harney’s comment that in economic terms Ireland was closer to Boston than Berlin, was still strong.

    In the past decade, Germany implemented painful labour and welfare reforms, which resulted in a loss of public support for the left-of-centre SPD and Gerhard Schröder effectively sacrificed his chancellorship by embracing change.

    Asking Germany to pick up the tab again is a bit rich given that the Croke Park deal on public service reform is only a set of headline aspirations while apart from change at the Central Bank, most other sectors are reform-free zones.

    The lifestyles of almost all those responsible for the dénouement remain untouched — 2 Cabinet ministers have the option to return to teaching after a first year out-of-office bonanza and then an annual pension of about
    €135k; apart from the unemployed and private sector workers facing big cuts in pension payouts if they’re lucky, it’s business as usual for many others.

  6. Hopefully the end of this game of ´bail out everything in sight’ is near. As is said, these things happen slowly and then all at once.

    I for one will welcome our IMF/EU over lords and hope their crash diet of essential reforms leave the foundations for a better Ireland for all.

    God knows the slow car crash approach to economic policy. implement to date, is getting tiresome and more importantly is not working.

  7. @ Michael
    ” Those who advocate debt restructuring appear to see it as an alternative to structural reform”
    I don’t think this is true. The point is that structural reform in the absence of debt restructuring simply will not work.

  8. @Paul
    Default is not always exogenously forced. It can and sometimes is a rational policy choice.

    @Michael Hennigan
    Spot on – deafault/restructuring is absolutely not a panacea for fundemental restructuring, of finance and governance. As Eureka implies the two need to go together.

  9. @Brian

    In light of your article in the IT today, I would draw a very bright line between sovereign default /default of sovereign guarantees on one hand, and making non-guaranteed bondholders in private corporations bear losses on their bad investments on the other. The distinction is not always kept sufficiently clear.

  10. @John
    Yes. That line was blurred and smudged in 2008. Time to get the fresh paint out. But, guarantees expire and they are legal de jure instruments. Theres a popular political will which converges with an economic need, but collides with massive investments of political capital…

  11. @ Eureka/ Brian Lucey

    It seems evident to me that there is no support at a political level for significant reform.

    Eamonn’s Gilmore’s ‘big idea’ is a 4-year gabfest on a new constitution; the status quo came out strongly against Enda Kenny’s proposal on the Upper House. It had overtone’s of the Nazi era according to some of the self-serving patriots.

    Others argued about constitutional implications and so on.

    Is Ireland a better governed country than New Zealand?

    Across the spectrum from ICTU to IBEC and various professional bodies in between, nobody appears to want to upset the public funding jackpot that keeps many of them in clover with tribunal lawyers and hospital consultants leading the golden fleece rankings.

    Danny McCoy did issue a statement on the Taxing Master’s disgust at a multi-million euro expense claim but don’t expect any push for reform.
    Whose interest is protected by the lack of transparency on public commercial contracts?

    The saga of the Dublin incinerator clearly illustrates that despite the destruction of the lives of tens of thousands of people, it’s still Planet Bertie ‘business as usual’ with a minister always awaiting a report.

    The media likes to believe it can hold politicians to account but it’s a delusion.

    What is striking is that despite the popularity of overseas ‘fact-finding’ missions, there is no interest in seriously examining how well-run countries operate.

    The multi-billion faith-based science policy has only evoked a limited response from within the academic community.

    This makes me wonder if Colm McCarthy’s late arrival in the academic world means he is not constrained by concern about negative reaction to his views?

    While the banking crisis is important, it is the result of a failed governance system with limited responsibility at best and and a culture of cronyism.

    David Piling in the FT today says that in the two decades since the bubble burst, Japan has had no fewer than 14 prime ministers, twice the number that Italy managed over the same period.

    It would of course be hard to bring about change in Ireland and Japan.

    Why are academics generally silent on the issue of reform?

  12. @Michael
    “Why are academics generally silent on the issue of reform?”
    Well, i think i speak quite enough on issues banking…plus a day job. Theres a lot of silent people out there in the academic economic community – if we believe Lenihan last year they all supported NAMA wholescale and were bullied by BL/KW. Maybe thats the problem

  13. I’ve beeen reading the ‘Fiscal Space’ document, which is a fun little piece on the room governments have to maneuver before interest rates go to infinity and debt costs become unserviceable. Its use for policy formation is obviously limited due to its reliance on past actions as an indicator for how countries respond to increasing debt burdens, but the exercise is interesting nonetheless.

    Surprisingly, Ireland and Iceland get lumped in with Spain, the US and the UK as a group of countries whose fiscal space is merely constrained, rather than the group of countries that have almost no room to maneuver at all (Greece, Italy, Japan and Portugal).

  14. @Brian
    It is usually rational far before it gets chosen, and I agree fully. In our case we should bring on the default one year ago, but now is better than never.

    @Michael and Brian
    Academics are just human – I think the largest error they make is failing to criticze their own due to our human desire to belong. Look at how Patrick is still deitized despite all his obvious failings in his current work by other economists, same with Mervyn King in the UK. Some sort of reverance matched by terror of being ostricized by these powerful insiders seems to explain it, but I find it puzzling. In our case, that leaves us with these nonsensical leaders who have not figured out (or refuse to deal with it if they have figured it out) that their policies are generating a far more damaging end (national bankruptcy rather than bank defualts) to an already ugly story.

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