Kryzys fiskalny w Europie Strategie wyjścia. Mark Allen stały y przedstawiciel MFW na Europę Centralną i Wschodnią. 110 seminarium 2010

Transcription

1 Kryzys fiskalny w Europie Strategie wyjścia Mark Allen stały y przedstawiciel MFW na Europę Centralną i Wschodnią 110 seminarium BRE-CASE Warszaw awa, 30 września

2 Presentation based on: Fiscal Space Ostry, Ghosh, Kim and Qureshi SPN/10/11 (September 1, 2010) Default in Today s Advanced Economies: Unnecessary, Undesirable, and Unlikely Cottarelli, Forni, Gottschalk and Mauro SPN/10/12 (September 1, 2010)

3 Growth of debt has been very rapid Debt to GDP ratio Austria Belgium Canada France Germany Greece Ireland Italy Japan Netherlands Portugal Spain Sweden UK USA

4 Recession, not stimulus, is to blame. G-20 Advanced Economies: Increase in Public Debt, (Total increase: 39.1 percentage points of GDP; 2009 PPP weighted GDP) Interest-growth dynamics Interest-growth dynamics 0.7 Lending operations 4.0 Financial sector support 3.2 Fiscal stimulus 4.5 Revenue loss 19.2 Source: World Economic Outlook, April 2010; Staff estimates

5 Adjustment of primary balances starts in earnest in change change Spain Portugal Ireland UK Belgium Japan Italy France Netherlands USA Canada Austria Sweden Germany Denmark CAPB PB overall Spain Ireland Netherlands UK Portugal France Canada USA Italy Belgium Sweden Japan Denmark Germany Austria 6.3

6 Some definitions Debt limit Point at which debt dynamics become unstable without exceptional fiscal effort Fiscal space Room to borrow before hitting debt limit Paper makes definitions operational and estimates fiscal space in advanced economies

7 Simple dynamics of the debt limit Determination of Debt Limit pb, (r-g)d Interest rate schedule with endogenous risk premium and default probability, p (r(p)-g)d (r(0)-g)d Primary balance reaction function d* d ˆ _ d ~ d Conditionally stable Debt limit long-run debt ratio (given cty s historical reaction function) Debt/GDP

8 Reaction function looks plausible Primary Balance and lagged Debt to GDP Primary Balance to GDP 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% 1st quartile 3rd quartile Median Lagged debt to GDP

9 Elements in the regression Dependent variable General government primary balance to GDP Independent variables Lagged debt (cubic)** Output gap*** Government expenditure gap*** Trade openness*** Inflation** Age dependency (present and future) Commodity prices Political stability** IMF arrangement Fiscal rules

10 The interest-growth differential is deteriorating in some cases Projected interest rate growth differential ( ) Ireland Spain Greece Portugal 1 Netherlands -0.5 Sweden -1 USA UK France Italy Belgium Germany Japan Austria Canada Historical interest rate growth differential ( ) 45 degree line

11 2015 and stable debt levels (d*) Conditional long-run equilibrium Debt to GDP (2015) Equlibrium at historical market rates Equlibrium at projected market rates Equlibrium at model implied interest rates

12 _ 2015 debt and debt limit (d) Model implied debt limit Debt to GDP (2015) Debt limit at historical market rates Debt limit at projected market rates Debt limit at model implied interest rates

13 Estimates of fiscal space Fiscal Space p(fs>0) p(fs>50) p(fs>100) (percent of GDP) Austria Belgium Canada France Germany Greece Ireland Italy Japan Netherlands Portugal Spain Sweden UK USA Probability lower than 50%

14 Some points to note Estimates are based on historical patterns and do not exclude exceptional responses Shocks can push countries beyond their debt limit Having fiscal space and using it are different things

15 Why do some commentators think default is inevitable? Needed adjustment is too large Interest rates make debt burden unsustainable Fiscal adjustment will hurt growth and make debt unsustainable Once primary balance reaches balance it makes sense to default

16 Markets have become worried about possible defaults The Four Phases of the Crisis (5-yr sovereign swap spreads, basis points) I. Financial crisis buildup II. Systemic outbreak III. Systemic response IV. Sovereign debt crisis USA Germany Italy UK Japan 0 Source: Bloomberg

17 Particularly in some European countries The Four Phases of the Crisis in Europe (5-yr sovereign swap spreads, basis points) I. Financial crisis buildup Belgium Greece Ireland Italy Portugal Spain Hungary Latvia II. Systemic outbreak III. Systemic response IV. Sovereign debt crisis Source: Bloomberg

18 High spreads are not a very good predictor of default Episodes where EMBI>1000 Evolution in the following 2 years: ARG POL VEN NGA ECU NGA BGR BRA MEX Country defaulted RUS Spreads remained high ECU Spreads declined until Lehman ARG Spreads declined TUR PER MAR MEX ARG URU MYS UKR BRA VEN HRV CDI UKR RUS LBN TUR DOM COL BGR ALG PAK COL NGA ECU

19 Primary balance adjustment to stabilize debt Cyclicaly Adjusted PB Residual PB Debt stabilizing PB after 50% debt haircut Debt stabilizing PB Ireland USA United Kingdom Spain Greece Japan France Portugal Netherlands Debt stabilizing adjustment (after haircut) 6.4 (6.2) 7.6 (7.6) 4.7 (5) 7.1 (6.5) 15.5 (12.8) 6.4 (6.4) 4.5 (4.6) 5.8 (4.9) 4.2 (3.8) Italy 0.8 (-0.1)

20 Other debt targets are important Stabilizing debt at the 2012 level may not be sufficiently ambitious In most cases further action would be needed to bring debt to 60 percent of GDP Aging and health-care costs will require further adjustments

21 Recent large adjustment episodes Structural PB improved by more than 7 percent Advanced (14) Belgium (1998), Canada (1999), Cyprus (2007), Denmark (1986), Finland (2000), Greece (1995), Ireland (1989), Israel (1983), Italy (1993), Japan (1990), Portugal (1985), Sweden (1987), Sweden (2000), United Kingdom (2000) Emerging Economies (26)

22 Episodes of large fiscal adjustment Large fiscal adjustment experiences Length (years) Expenditure reduction Revenue Increase Size of adjustment

23 Primary balance surpluses in large fiscal adjustments Large fiscal adjustment experiences CAPB average over five years after end of the adjustment Japan (1990) Israel (1983) Italy (1993) Portugal (1985) UK (2000) Ireland (1989) Sweden (2000) Greece (1995) Canada (1999) Sweden (1987) Belgium (1998) Denmark (1986) Finland (2000) CAPB at End-Year

24 How high debt ratios were reduced Residual G-I Primary Surplus Ending Debt Ratio Starting Debt Ratio

25 Interest-growth differential below past default episodes Real interest and real growth rates ( or two years prior to default average) Real growth rate (inverted scale) Real interest rate Real interest - Real growth 60.7

26 Maturities longer than in past defaults Share of short-term debt , ,6 20, Advanced economies (2009) Emerging economies (2005) Default cases

27 The average maturity of Government debt gives countries time to adjust Average maturity of sovereign debt Apr-09 Apr

28 The structure of debt is more resilient Advanced Economies (2009) Emerging Economies (2005) Default Cases (year prior to default) Japan Central Government Debt to GDP Greece 80 Phillippines Brazil Indonesia (1998) Portugal 60 Malaysia UK France Argentina (2001) Chile Indonesia Turkey Argentina Ireland USA Netherlands 40 Russia (1997) Colombia Poland India Spain Chile (1982) Venezuela Mexico Thailand 20 Phillippines (1982) Mexico (1981) Brazil (1982) Russia China Venezuela (1981) 0 Argentina (1981) Local Currency share of Debt Italy

29 Residency of holders discourages default in some cases 0% 20% 40% 60% 80% 100% Austria Greece Portugal Ireland Netherlands France Belgium USA Germany Spain Denmark Italy UK Canada Japan Residents Non-residents

30 Some observations (1) The primary balance surplus required to stabilize debt is not unprecedented. Large deficits in some cases reflect recent wrong policy decisions which could be more easily reversed. Once countries have incurred the initial pain of adjustment, they persevere and go to great lengths to avoid default. The problem today is the large primary deficit, not high interest rates and a high interest bill.

31 Some observations (2) Countries have time to convince the markets before their total government interest bill becomes too high. Many countries have faced serious market tensions and similarly high spreads but could stabilize the situation. Current market signals should not be interpreted as pointing to an inevitable negative outcome.

32 Main message of paper A large fiscal adjustment is unavoidable for today s advanced economies for a durable increase in economic growth. A restructuring would be no substitute for the needed fiscal and structural reforms, and would be a distraction.

33 Thank you