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?