Friday, January 4, 2019

Borrowing capacity is an asset that could end up having been consumed and squandered.

The capacity to borrow at a reasonable cost (or the seignorage when printing money) is a very valuable strategic sovereign asset. 

It should not be squandered away by the generation in turn only to benefit its members, or with some non-productive investments. 

When public borrowings are authorized, that should come with a clear recognition that a part of that borrowing capacity is being consumed, and with an indication of who (children or grandchildren born what year) are  expected to have to pay back that debt.

Tuesday, January 1, 2019

Bank regulators are favoring too much public borrowings

The Public Debt Balloon keeps on inflating and flying Up, Up and Away, ever since the Basel Committee cut its moorings, with their Sovereign 0% risk weight

Here part of my letter that was published November 2004 in the Financial Times:

“We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

PS. For example, in 1988 when regulators assigned it a 0% risk weight, the US debt was $2.6 trillion. At end of 2017 it was US$20.2 trillion, and it is still 0% risk weighted. 

Monday, April 23, 2018

A “Public Sector Borrowing Charter”, in order to really mean something significant, needs to be matched by a “Public Sector Lending Charter”

AFRODAD “Aware that African countries face tremendous problems in loan contraction and approval processes and public debt management contributing to unsustainable debt level” is proposing: "The African Borrowing Charter" (The link is to a previous version of the one I read during World Bank and IMF Spring Meetings April 2108)

It is a great initiative and all countries could in fact need something similar. If authorities were just forced to clearly identify in any spending bill, the direct marginal consequences on its public debt levels, that should help to inspire more responsibility. Public borrowings when authorized should come with a clear recognition that a part of their nation’s strategic borrowing capacity is being consumed. As is, it is way too easy for politicians to show great generosity and understanding for today’s needs, by just pushing the repayment of it on future generations.

That said a “Public Sector Borrowing Charter” stands little chance of fulfilling its goals if there’s no parallel “Public Sector Lending Charter” to which all lenders had to sign up to and against which the citizens could hold them accountable.

Imagine if for instance in the case of all those shamefully mortgages to the subprime sector in the US that were originated and packaged into AAA rated securities we were to hold the debtors for signing “odious debt letting the real culprits, with their “odious credits” off the hook.

US Treasury Secretary Steven T. Mnuchin referring to the humanitarian crisis going on in Venezuela recently stated: “Creditors, whether private or public, that provide new financing to the Maduro regime are lending to a government that lacks legitimacy to borrow in the name of Venezuela.”

Do not tell me that Lloyd Blankfein, and all those in Goldman Sachs, were so naïve so as to believe the Maduro regime would give good use, along the lines of a reasonable Public Sector Borrowing Charter, to the credit they awarded Venezuela just about two years ago... and for which they have yet not apologized to the Venezuelan people.

What if violating a Public Sector Lending Charter could cause the credit to be declared illegitimate, and its collection not enforceable? Would that not be of great help for our children and grandchildren?

PS. I hear that the World Bank and IMF are again to raise the issue of Debt-Sustainability-Analysis. I pray the do not mention "sustainable debt levels" but concentrate on pointing out what consideration all debt should fulfill in order to be sustainable contracted.

Next to credit ratings, or perhaps even more, we need ethic and transparency ratings!

Sunday, March 4, 2018

If you know you’re heading straight into debt unsustainability, is it not best to get there as early as possible?

I started decades ago thinking about the theme of (public) debt sustainability, with my homeland Venezuela in mind. Then, when I arrived to the World Bank as an Executive Director in 2002, I widened my perspective to include the public debts of developing countries in general

And so I started this my unsustainable debt sustainability blog.

But now, because of my concerns with the distortions in the allocation of credit to the real economy, produced by the risk weighted capital requirements for banks, almost in shock, I find myself thinking on the debt sustainability of developed countries; including that of the US. And of course, that is scary.

Here are some of my uncoordinated recent thoughts (some tweets) on this whole issue.

Statist ultra low risk weights that for the purpose of capital requirements for banks are assigned to the sovereign, guarantees excessive public debt and places a reverse mortgage on its economy which is going to burden future generations.

In 1988, when statist regulators assigned it a 0% risk weight the US debt was $2.6 trillion. At the end of 2017 it was US$20.2 trillion, and still 0% risk weighted. 

If it keeps on being 0% risk weighted, it is doomed to become 100% risky, just like what happened to Greece. But, any increase of that weight will scare markets out of their mind. 

Very high US debt might hinder investments needed to assure its military superiority, and so, at the end of the day, it could come down to the question of: What is more important, having the strongest military forces in the world, or an AAA rating?

What if so many Americans with too much mortgage debt, car debt, student debt, credit card debt and whatever other debt, intuitively picked Trump because he is a guy who has gone through six bankruptcy processes, and has still ended on his feet, and on top?

What if Trump tweets: “They tell me US already has too much debt. With that debt we have written a reverse mortgage on our economy, which will burden too heavily the next generations of Americans. So, OK, I know a bit ‘bout that. I’ve been there, about six times. I'll get down to some good (Great) negotiations... right away!”

Would that be end of the world, or a much needed cleaning?

It would sure be a dangerous mess... but would not the mess be worse if waiting longer for it to mess itself up even more?

Friday, June 2, 2017

Goldman Sachs financing of Venezuela’s corrupt human-rights violating government, shines the light on odious credits

Goldman Sachs has just provided Venezuela’s government with about $865 million in cash, against about $ 2.800 million in bonds paying an interest rate of 12.75%, for a price about 31% of their face value. That, if the bonds were duly repaid, would produce an internal rate of return of around 48%.

Google “Goldman Sachs” and Venezuela, and you will observe the public uproar this operation has caused… almost everywhere.

This is a perfect opportunity to initiate a much-needed debate on what should be considered as odious sovereign debt, so as to therefore have its right of collection entirely or partially void. I have wanted that debate to take place for a very long time.

Lets face it. Goldman Sachs, to avoid further embarrassment, might sell this credit in the secondary market to a vulture funds that could try to collect 100% of the face value of these bonds plus all its interest.

So let me open this debate by asking:

Lloyd Blankfein, how much do you think someone should rightfully aspire to collect on your 2022 Venezuela bonds?

Sunday, February 7, 2016

If a country was a de-facto concentration camp, could its guards be accused of economic crimes against humanity?

It states: “A mishmash of indiscriminate subsidies, prices and exchange controls, social programs, expropriations and grand larceny by official [and] the collapse in the oil price has exposed the Bolivarian Revolution as a monumental swindle…[and leading to] the supply of medicines fallen to a fifth of their normal level. Many pills are unavailable; patients die as a result…food queues at government stores grow longer by the week…Violent crime is out of control.”

So let me ask, if a country was a de facto concentration camp for many of its citizens who had no opportunities of leaving it, and the guards of the camp had behaved like what has been described above, including the fact that petrol is given away at less that 1/300th of the price of milk; should it not be possible to bring the guards in front of the International Criminal Court, accused of economic crimes against humanity?

And, if knowing the conditions in the concentration camp, financiers had anyhow, because of ultra-high interest rates, given the guards even more resources to waste, and to later be repaid by the prisoners, could not these participations in the bleeding be declared as having no value by that same International Criminal Court?

The world no doubt needs a Sovereign Debt Restructuring Mechanism but, if that is going to help the citizen-prisoners of the world, which it primarily should do, it must begin by making clear the difference between bona-fide normal credits and borrowings and odious credits and borrowings.

Saturday, February 6, 2016

Because of economic crimes against humanity, a Nuremberg type of tribunal needs to classify Venezuela’s public debts.
And there is little doubt of that many of those who were financing the Bolivarian Revolution, were totally aware of that the government was committing what could be deemed as economic crimes against humanity. 

And so the question now becomes, do we need a Nuremberg type of court to classify what are normal bona fide debts and what represent an odious participation in the ransacking of a country?

Monday, October 26, 2015

We must not allow vulture funds to be able to collect rotten odious credits

It would be irresponsible of anyone knowledgable of its economy not to be thinking about the possibility that Venezuela needs to talk with the IMF, to soon begin a process of renegotiating its debt, as well as PDVSA's, which both seem imposible to duly serve in the short term, if the country is not to suffer biafran hunger.

But during the week the Financial Times columnist, Martin Wolf, in an article entitled "Resist Russian blackmail over Ukraine's debt", recalled how the influences of some sovereign creditors could block the constructive actions of the IMF to reach an acceptable solution.

In this regard it may be desirable to first pass before the International Criminal Court in The Hague. I say this because the massive waste of economic resources in a country, for reasons of incompetence, corruption or simply ideological, notoriously verifiable, should qualify as an economic crime against humanity. And the financing of an economic crime against humanity, should not count on any institutional support, like of the IMF type.

Currently there is also much discussion in the world about the need to establish a mechanism for Sovereign Debt Restructuring (SDRM). I agree with this need but, for the results of an SDRM to be acceptable to us citizens, it must:

Remove all incentives that may encourage governments to contract excessive debts.

And make sure it does not provide any benefit, much rather the contrary, to any debt that could be considered as derived from an odious credit.

A loan granted with a lack of transparency, in which an act of corruption might be involved, or that it was originally granted when it was clear that the resulting debt was not sustainable, and therefore it was purely of speculative nature, should not receive the same treatment by the SDRM, as a regular loan to the public sector awarded transparently, and when there were no major doubts about the ability to serve the sovereign credit.

To identify the speculative nature of a loan, one could use for example that the interest rate exceeds 5 percent the rate charged to an AAA rated sovereign.

We must never forget that the best SDRM is the one that reduces the need for it, and thus lowers the risk premiums to be paid to the sovereign.

And we read that investment funds dedicated to capitalize on the opportunities offered by troubled loans, so-called vulture funds, are growing much. These, an even when we like with vultures and buzzards do not like them much, they do in some cases provide important liquidity to the financial and credit markets... and should be duly rewarded for it.

But, since Venezuela already faces major challenges canceling debts duly owed, the last thing we need is that vulture funds also end up collecting rotten credits from us.

Translated from Noticiero Digital

Monday, September 8, 2014

An odious method of contracting sovereign debt in a non-transparent way that needs to be banned

Ricardo Hausmann and Miguel Angel Santos, in their “Should Venezuela default?” refer to a “$5 billion private placement of ten-year bonds with a 6% coupon, it effectively had to give a 40% discount, leaving it with barely $3 billion”

That in cost represents approximately the same as a $3 billion ten-year bond issue with a 13.5% coupon. 

That type of financing of a sovereign should be prohibited for two reasons: 

First, that is, as you can understand, especially when the exact placement price of the issue is rarely reported, a completely non-transparent way of financing. 

Second, in the 2nd alternative, any new government who could obtain access to better credit terms, could much easier offer to repay the $3 billion issue, and thereby free the nation from those usury rates. As is, unless it enters into a default, it has to repay the full usury interests that are hidden away in the repayment of the $ 2bn in principal not received. 

And I would also like to know… who arranged that private placement, and who bought it… so that I could express my contempt for it. Do they not know that Human Right’s Watch has clearly established that in Venezuela human rights are being violated? I mean where does the limit go? Would it be right to buy bonds to finance the building of concentration camps... if the price, the risk premium, is right?

If financiers need credit ratings to base their decisions on, we citizens need governance ratings and ethic ratings to base the permission for our sovereigns to take on debt.

Also… speculative investors should not have the right in any restructuring to have the cake and eat it too, meaning collecting their high-risk premiums and the full principal.

Friday, September 5, 2014

A sovereign debt resolution mechanism should begin by looking at how sovereign credits originate

Joseph Stiglitz in company of many others has recently sent a letter to United Nation’s Secretary General Ban Ki-moon, requesting him to support the implementation of a Convention for the restructuring of sovereign debt.

Of course one cannot but wish for orderly sovereign debt resolution mechanisms, but one needs always to fear the law of unintended consequences… like that the expected benefits of any such mechanism, would just end up being transferred as additional costs to other sovereign borrowers.

Nor would one want lenders who lent to the sovereign at low rates, or acquired sovereign debt when no repayment problems were envisaged, meaning bona fide lenders, to receive the same treatment as those lenders who lending at high speculative rates, perhaps even helped to create the crisis that demands a debt resolution.

Thinking along these lines and reflecting on how often we have seen sovereign debts contracted in an unsustainable ways, perhaps in order to benefit a selected few, it should be clear that any debt resolution mechanism must simultaneously consider the origination of sovereign credits. And, in its simplest form, create a clear distinction between bona fide and speculative sovereign debts.

And, nothing discloses the frontiers between bona fide and speculative debts like the risk premiums charged or implied in the markets. And in this respect, for a starter, I would like to put forward the following definition.

Any sovereign debt that reflects a risk premium that exceeds for instance in 4 percent the lowest interest rate paid for similar debt by other sovereigns, the speculative threshold rate, STR, should be classified as speculative sovereign debt, SSD.

And in the case of a restructuring of a sovereign debt, I propose that any creditor who entered in possession of his credit in conditions that would deem it to be a SSD, should have all interest received in excess of the allowed STR, automatically deducted from the principal.

The basic principle that lies behind this is that if, and only if, a sovereign debt is restructured, a speculative creditor should not have the right to eat the cake and have it too… which translated means should not have the right to obtain the high risk-premiums and 100 percent of the capital too.

And, in presenting this proposal, I am not acting as a creditor, nor as a sovereign borrower, but only as a citizen who wants to avoid governments to mortgage our future on unreasonable terms.

There is currently way too much thinking of what to do if a sovereign credit must be restructured, compared with the thinking of how to avoid unreasonable sovereign debt… or in other words too much talking about odious debts, and too little about odious credit and odious borrowings.

Why for instance is there so much insistence in credit-repayment worthiness ratings, and almost none in ethic ratings which could better show credit-receiving worthiness? 

Thursday, August 28, 2014

Should the collection of very high risk premiums on sovereign debt be allowed to go hand in hand with the collection of 100% of the principal?

I have not discussed this with anyone but myself… so I do not hold myself too much to this my own opinion… and so it can change. 

I am and have always been concerned with sovereign over indebtedness, as that affects foremost the citizens of the over-indebted country's own possibilities to take on debt… to realize their own dreams and not the politicians’ dreams... and so I have been toying around with many ideas. Among these:

If a lender gives a sovereign a loan at an interest rate that exceeds for instance 3% what the "safest" sovereign has to pay for a loan, “the overcompensation”, then, if the sovereign runs into trouble, and declares default, should it not immediately be able to apply all overcompensation to the capital owed?

Why? Because frankly I feel that the lender to a sovereign should not be able to eat his cake and have it too. If he charges a sovereign higher interest rates because of its riskiness, well then he should not be able to expect to fully collect 100% of the principal.

Does this make some sense? 


Thursday, August 29, 2013

Who did you vote for?

Someone asked me who I would vote for as President of the USA among the current republican and democrat candidate. I replied that as foreigner I have no need to torture myself trying to choose, and so I would not answer it. Nonetheless that got me thinking on that indeed your record as a voter should be made public because, as is, it is too easy for the voter to distance himself from his responsibility of a poor choice.

Coming as I do from a country like Venezuela and where the votes were made public and people were fired from their jobs just because they opposed Hugo Chávez, obviously your vote needs to be classified material, for a period, but, sooner or later, you should have to face your grandchild question "Grandpa, did you really vote this way? What were you thinking of?

PS. Just in case, I never ever voted for Chávez, and that is obviously why I dare to make this suggestion. In fact I have a spotless record. I have never voted for a candidate that was elected president.

Credit should be a one sided affair

There is nothing wrong to take credit whenever someone is buying a lot of your products with his income but, if the other one is also buying from you taking credit then, sooner or later, shit will hit the fan.

Wednesday, April 17, 2013

Should not lending to a sovereign be the exclusive prerogative of its citizens, of its taxpayers?

Financial conference after financial conference, the closer I am to believing that the financing of a sovereign, should be the exclusive prerogative of its citizens, those to whom a government should be fully and exclusively accountable to. 

Now if some foreigner or wants to finance a citizen or a corporation of a sovereign that is just great but if it goes behind the back of a sovereign’s citizens and gives credit to its government in easier terms than what the citizen thing it merits, that is probably going to end up very bad. 

For instance, what business had Cypriot banks lending to Greece and what business had the Greek government borrowing from Cyprus? Now both Greeks and Cypriots are suffering big time.

In other words, foreign creditors dilute the representation of citizens and taxpayers.

Wednesday, July 18, 2007

You should not give debt relief to "odious" debt

A letter to the Financial Times

Sir Alan Beattie in “Vultures unlikely allies in anti-graft cause” July 18 quotes Stephen Rand of the Jubilee Debt Campaign saying “Debt relief should never be used as a weapon of economic coercion by creditors” as implying that debt relief should be awarded even when governments are still corrupt.What is this? As a citizen of a country with a government that I consider quite corrupt, I do not like anyone giving it loans, debt relief or anything whatsoever. Frankly, before corruption is ended most of any debt relief given would just end up allowing these countries and governments addicted to debt, to hit the bars again.If the concept of odious debt is applicable in the sense that some debts should not have to be repaid if contracted in an illegitimate way, castigating the creditor, then the same concept should clearly also apply to the granting of any debt relief, punishing the debtor.

Friday, February 16, 2007

Vulture funds

A letter to the Financial Times
Sir, I write to you with respect to Alan Beattie´s “'Vulture fund' in Zambia debt case gain”, February 16. I might not like it too much if a vulture-fund-manager invited any of my daughters out to celebrate a killing in Zambia debt but, having said that, neither am I so sure that the world would be a better place without the vulture funds.

That some can find opportunities in buying uncollectible loans and squeeze fortunes out of them when others have decided to clean up their books, is just part of the circle of life, and part of the same market mechanism which signals how much, or how little, the loans are worth, since the price of a loan indicates the expectations of collecting on the loan and not the expectations of collecting on a “pardoned” loan. Yes, the vulture funds are into an ugly business, cleaning up among corpses, but, by their sheer presence, they might perhaps even help to reduce the number of corpses.

Most, or perhaps all of the scholar papers on the restructuring of sovereign debt, state as the explicit purpose of the whole exercise, that of enabling the countries to regain access to the international capital markets again (something like the torturer waking up his fainted victim) and so, if you really need to pick on one, you might also choose to do so at that moment in the circle when the new born debt-overhang-ridden countries gets thrown out to start defending itself again from the many dogs-of-finance out there.

There is so much written about freeing up the countries in order for them to access the markets while comparatively so little about how they should go about to avoid repeating the same mistakes that perhaps I should even frown when it is a regular investment banker who knocks on my door and asks for my daughter. I mean what is some hundred of percents on some few millions when compared to some basis point on a couple of billions.

Tuesday, May 16, 2006

The Debt Sustainability Analysis (SDL)

Of course the whole SDL debate is based on some very good intentions, like not saddling the countries with excessive debts, and finding adequate means by which to allocate the IDA development resources between loans and grants. Nonetheless, when reading the many papers about “Debt Intolerance,” most of them ridiculously obscured by complex econometrics, I felt that the World Bank was focusing on the issue from a totally wrong perspective.

Instead of analyzing the relevant issues such as the credit-absorption capacity of countries and of how their credits could better contribute to growth and repayment capacity, the WB now seemed to be appearing in the role of any investment bankers, worried about how much of their credit products they could push. In doing so I felt that the WB was, unwittingly and unwillingly, lending force to the belief that a debt was OK, as long as it was sustainable. In my mind, there cannot be a road more conducive to debt turning unsustainable, than to award credits just because they are sustainable.

My potpourri of sometimes somewhat repetitive and not always congruous objections included among others:

SDL analysis is somewhat similar to calculating a sustainable credit line for a compulsive gambler. What politician (anywhere) would resist the multiple temptations of not using an available “allotment” of sustainable credits? Worse, these levels would still be taken only as a minimum, with nothing to stop the rest of the markets pushing even more loans.

The debate on debt sustainability sometimes sounded to me like debating whether you can smoke one, two or three packages of cigarettes a day before smoking kills you. In my case, after not having smoked one single cigarette in more than ten years—and not one single week goes by without being seriously tempted—I am certain that my own “nonsmoking sustainability level” is an absolute zero cigarettes. With respect to public debt, we know there are governments really hooked on public debt and then perhaps their debt sustainability level should be an equally big zero. As it must be very difficult to free someone from a vice with as much addictive power as credits payable by future generations, it might be safer if the Bank and the Fund recommend cutting the habit altogether, cold-turkey, instead of suggesting a life on the border of sustainable (healthy?) levels of debt consumption.

There are cases were SDL calculations are clearly a very valid and needed starting point, as when they are made in relation to the restructuring of debts. Nonetheless, in those cases, attention needs to be focused more on issues such as the amortization profile of the debt, the lowering of interest costs, and the systems put in place to avoid contracting new general nonpurpose debt.

The true purpose of credits
Let us never forget that if credits are correctly awarded and contracted, the whole concept of “debt sustainability” should be a moot issue. New mediocre credits awarded that have small chances to generate repayment capacity, might very well push a country into unsustainability but it is also very possible that new good credits to a country with excessive debt is the only alternative to get it out of unsustainability.

The WB should not be seen as lowering the bar by accepting the concept of unproductive credits as long as they are within certain limits. Instead, the real challenge is to go back to the basics, making effective use of scarce resources, assuring that new credits are productive and, one way or another, generate their own repayment. If this is not so, then the creditor, rightly, even the WB, should also stand to lose as a creditor.

We have been presented a framework for how these debt-sustainable levels are to be determined but in order to mean anything the framework needs to go much further than just determining whether a country can manage public debt of 40, 50, or 60% of its GNP, or of 100, 150, or 200% of its export earnings. Why is there so little analysis about the real causes of its current debt? And why is there so little effort made to ascertain that those causes are truly remedied?

Every dollar of debt that is not used adequately to advance development eats up a dollar of debt-servicing capacity that could be more productively used. In this respect, the use of available space calculated under this framework as a justification for an “increase in poverty-reducing expenditures” or “to meet their Millennium Development Goals” could perversely induce many low-income countries to fill up their credit space without generating the growth they so much need.

The framework, almost as an afterthought, on a case-by-case basis, even when there is no sustainability room left, contains some wording about the importance of accommodating loans designated for specific high-return projects. In fact, the WB should always be looking for those high-return projects that generate poverty-reducing growth.

Moral hazards
One of the yet unsolved mysteries of the world of Public Finance is how politicians can delicately manage the contradiction that arises from declaring all outstanding old public debt to be evil, while simultaneously preaching the virtues of any new credits to their country.

Declaring a debt as “sustainable” (as opposed to self-repayable credit) implies that the debt will be repaid by those coming afterwards. So it would seem that perhaps those in real need of a voice speaking out on their behalf are the future generations.

There is a tough real-world question begging for an answer: What is better: to reach an unsustainable debt level, to have a crisis and get it out of your system, or to condemn yourself and future generations to living forever under the burden of technically correctly calculated sustainable debt levels?

Rewarding countries that have policies that development experts deem to be of poor quality with a higher proportion of concessionality (meaning more grants, fewer loans) screams out the presence of an immense moral hazard. Although reductions in the overall credit volume might in fact mitigate some of the problems caused by excessive debt, the framework has to be crystal clear about what it means, as there are always many parties interested in what it should not mean.

On thresholds
The Bank cares a lot about keeping high standards in procurement, but, out there, in the real world, there are many debt-pushers who just love the addictions they create. Much debt is contracted by nontransparent means, hidden, either in the darkness of smoky-room negotiations or in the technical financial sophistications that make it impossible for any mortal to understand what is going on, especially with so little intelligible data available to their mortal citizens. Odious debt? Yes, there is a lot, but let us not forget that for every penny of odious debt that exists, there is an almost penny by penny match of odious credit. I have written about Odious Debt and about Odious Credits; perhaps it is time for me to write about Odious Thresholds.

Begging for humility
Most of the documents coming out from the Debt Sustainability Analysis (DSA) correctly state that the conclusions should at best serve as rough guidance and indicative guideposts. Nonetheless by including so many references to strong empirical evidence, robustness, and strong analytical underpinnings, they end up anyhow overstating its validity.

The case for more humility and lower expectations with respect to the reliability of the DSA is laid out with crude clarity by the United States General Accounting Office (GAO) in its study of the IMF’s capacity to predict crisis, published in June 2003 (SecM2003-0306). In it, GAO states, among other things, that of 134 recessions occurring between 1991 and 2001, IMF was able to forecast correctly only 11 percent of them, and that it was similarly bad in forecasting current accounts results. Moreover, when using their Early Warning Systems Models (EWS), in 80 percent of the cases where a crisis over the next 24 months was predicted by IMF no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.

Domestic debt
Frequently, just because of the lack of adequate data, there are proposals to disconnect the DSA from the analysis of the domestic debt, an idea which is just plain crazy. There is no way on earth that you can argue, or justify, that a debt-sustainability framework can be developed exclusively for the external public debt of a country, ignoring the domestic.

I guess the above is another prime example of what can happen when we allow the econometrists an excessive influence. Oh we cannot get data? Do not let that stop us! In their desperation, I even heard some of the number-masseurs put forward the weird argument that the assessment of, and the response to, domestic debt in low-income countries, although critical, did not lend itself to a threshold approach. Weird, because they did not seem to notice that, if true, this should cast doubts over the whole DSA framework itself.

Crowding out the private sector
Considering the importance given by the WB to the private sector as a development agent, I was always upset to find so few and sparse references in the DSA to the issue of how public debt crowds out of the private sector from the credit markets. From my point of view, one of the main determinants when calculating debt sustainability should be this factor and indeed if the DSA decrees as untenable any public credit that raises the cost of private debt more than x number of basis points, I might have reacted quite differently to the debate.

Currently defining a country’s debt sustainability in terms of how much public debt it can have before risking default sounds to me like setting the bar unbearably high, since long before that happens, the private sector is probably already long gone.

As a sort of consolation I read somewhere that we Directors had agreed that private external debt was potentially less troublesome than public debt, but this is of course a far cry from declaring as an absolute development need that the private sector should have competitive access to external debt.

Of course there are traders and investors who do have a particular interest in the probability of sovereign risk defaults but, in fact, most ordinary citizens and entrepreneurs are much more interested in making sure that the public debt does not crowd out their own opportunities of accessing credits on reasonable terms and costs. Of course, the Bank and the Fund must know with whom they should team up.

Public debt could sometimes be described as financial emphysema inasmuch as it makes it harder for the private economy to breathe properly. In some cases the secondary hazards produced by public-sector debts, might be so large that they should perhaps be entirely prohibited.

Credit Ratings?
Some of the data and conclusions coming out from the DSA are supposed to be made transparently public, as they indeed should be—to all the market. We have also been told that this information will not develop into a sort of credit-rating system but it is hard to understand why this would not happen. In this respect, the Bank needs to understand better the reactions of the market, because it might very well happen that when the Bank proposes more concessions in response to a low-debt sustainability, other market players might respond by asking for higher interest or shorter repayment terms, so as to make up for the higher risks announced by the Knowledge Bank.

Why consensus?
While we appreciate the worth of a diversity of opinions, I cannot understand how at the same time we give such great importance to having a consensus of opinion between the Bank and the Fund. For instance, on the issue of banking regulations, I have frequently warned that the mentality of a Central Bank regulator who pursues with zealous fervor the avoidance of a crisis, at any cost may lead to the exclusion of other key objectives of a financial system, such as generating growth and distributing income. In this respect, we might on the contrary need the Bank to differ outspokenly from the Fund.

Costs and efforts
Currently there is a lot of frantic activity analyzing debt sustainability, mainly in the Fund. If we add up all the resources used, we might come up with quite an impressive figure, and it would be a shame if all those efforts came to naught just because of a lack of focus. Whatever you do, please rein in all those econometricians who with little or no ideas about debt are having the time of their life, having been given a license to regress on whatever variable they can imagine.

Grants or loans? Neither! Just more open markets, let us trade, in all services as well, and let us do business.

A word of caution about Financial Leverage
If a project is expected to produce 10% in returns and an investor can borrow half of the funds needed at 8% then, on his own investments, he will make 12%. That’s why financial leverage is considered a good thing. Of course if the project then only makes 6% for the investor, as he still has to pay all the interest on the loans, he will see his return drop to 4% and that’s is why financial leverage has risks.

Mixing your capital and debts in such a way as to extract the highest possible profit for a certain level of risk is basically what finance is all about. As good and useful as financial leverage can be for the private sector, its application for the public sector though is far from that straightforward.

The main problem with financial leverage in the public sector is that there is a gap too wide between the immediate beneficiaries and the final payers of the risk. If a private investor does badly he will normally pay for it himself shortly, sometimes even before the investment has taken place, as there are stock markets that evaluate his investment decisions in a flash. However, if it is the public sector, the payee of any loss is an anonymous next generation of citizens or, at the earliest, the next government. When you can reap all the goodies today and have someone else pay for them tomorrow we must know that the stage is set for committing huge mistakes.

That is why I get so angry when financial professionals so haphazardly extol the virtues of debt and believe them applicable across the board.

Extracted from my Voice and Noise