The rise of EM fiscal risks

April 20, 2016

The latest IMF Fiscal Monitor quantifies the significant deterioration in emerging market government finances. The average deficit-to-GDP ratio in EM is expected to reach 4.7% of GDP this year while the average debt ratio is approaching 48%. The structural deficits of many commodity exporters seem too large to sustain if commodity prices fail to recover. Moreover, dangers from contingent liabilities related to banks and the massive EM corporate debt stock have increased.

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What we can learn from the “fiscal theory of inflation”

February 13, 2016

Fiscal policy is as important as monetary policy for inflation dynamics. Government debt has features similar to money and affects private wealth and prices. In particular, if monetary policy protects debt sustainability expansionary fiscal policy is inflationary and restrictive fiscal policy is dis-inflationary or deflationary. Moreover, high interest rates are inflationary and low interest rates are deflationary.

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A mini briefing on global public finance trends

October 30, 2015

According to IMF estimates the structural government deficit in the developed world has returned to its pre-crisis level. This reflects cumulative fiscal tightening of over 4% of GDP since 2010. Government debt ratios remain elevated, however, at close to 105% of GDP, some 33%-points above pre-crisis levels, leaving public finances more sensitive to real interest rates. Emerging market fiscal indicators continue deteriorating.

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Understanding duration feedback loops

October 17, 2015

When long-term government bond yields are low enough, further declines can ‘feed on themselves’. European insurance companies and pension funds are plausible catalysts. The duration gap between their liabilities and assets typically widens non-linearly when yields are low and compressed further, triggering sizeable duration extension flows.

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Liquidity risk in European bond markets

October 10, 2015

There are signs of liquidity decline and liquidity illusion in euro area government bond markets. Citibank research suggests that liquidity risk is rising due to increased capital requirements for dealers, reduced market maker inventories, enhanced dealer transparency rules, elevated assets under management of bond funds, and the liquidity transformation provided by these funds.

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When is public debt a problem for growth?

August 22, 2015

A new empirical analysis quantifies the (historic) link between public debt and economic growth. Critical thresholds depend on country features, such as access to financing. Average thresholds might be 60% and 80% of GDP for emerging and developed countries respectively. Importantly, debt dynamics matter more than levels. High debt is less of a drag when it is on a declining trajectory.

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Key global fiscal numbers and trends

April 25, 2015

The latest IMF fiscal monitor underscores three key fiscal trends. First, deficits in the developed world keep narrowing, thanks to past fiscal tightening and present economic growth Second, public debt ratios remain high and are unlikely to fall back below 100% of GDP this decade. Third, emerging markets fiscal numbers are deteriorating.

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The global debt problem(s)

February 14, 2015

A new McKinsey report estimates that total debt of households, corporates, and governments has expanded 40% since 2007, reaching a total of 286% of GDP last year. Government debt ratios will be hard to contain through fiscal tightening and economic growth alone. China’s non-financial debt has quadrupled, with credit quality critically dependent on the real estate sector.

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The 1×1 of financial repression

July 12, 2014

Financial repression is a policy that channels cheap funding to governments, typically supported by accommodative monetary policy. After the global financial crisis various forms of financial repression have prevailed in most developed and many emerging countries. These policies have been effective in containing public debt but bear risks for future financial stability.

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Why governments have financial interest in higher inflation

June 21, 2014

With G7 public debt stocks at record highs, inflation has become a key fiscal concern. A new IMF paper estimates that a fall of inflation to zero would raise debt ratios by another 5-6%-points. A rise of inflation to 6% would lower debt ratios by 11-18%-points of GDP through real debt erosion. Inflation would offer additional fiscal benefits, such as higher revenues through “seigniorage” and progressive income tax tariffs.

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