IMF paper warns of 'haircuts' and massive debt write offs

Rick Moran
Remember the Greek 'haircut' where investors in government bonds were forced to take a 50% loss on their investments?

Something very similiar could be in our near future, according to a paper prepared by the International Monetary Fund.

Ambrose Evans-Pritchard:

Much of the Western world will require defaults, a savings tax and higher inflation to clear the way for recovery as debt levels reach a 200-year high, according to a new report by the International Monetary Fund.

The paper says the Western debt burden is now so big that rich states will need same tonic of debt haircuts, higher inflation and financial repression - defined as an "opaque tax on savers" - as used in countless IMF rescues for emerging markets.

While use of debt pooling in the eurozone can reduce the need for restructuring or defaults, it comes at the cost of higher burdens for northern taxpayers. This could drag the EMU core states into a recession and aggravate their own debt and ageing crises. The clear implication of the IMF paper is that Germany and the creditor core would do better to bite the bullet on big write-offs immediately rather than buying time with creeping debt mutualisation.

The magnitude of the debt problem is "difficult to overstate," says the paper. "The current central government debt in advanced economies is approaching a two-century high-water mark."

The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its "toolkit" for emerging market blow-ups.

"The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point," said the paper, by Harvard professors Carmen Reinhart and Kenneth Rogoff.

The paper said policy elites in the West are still clinging to the illusion that rich countries are different from poorer regions and can therefore chip away at their debts with a blend of austerity cuts, growth, and tinkering ("forbearance").

The presumption is that advanced economies "do not resort to such gimmicks" such as debt restructuring and repression, which would "give up hard-earned credibility" and throw the economy into a "vicious circle".

But the paper says this mantra borders on "collective amnesia" of European and US history, and is built on "overly optimistic" assumptions that risk doing far more damage to credibility in the end. It is causing the crisis to drag on, blocking a lasting solution. "This denial has led to policies that in some cases risk exacerbating the final costs," it said.

What rich countries are able to do that poor countries can't is more easily kick the can down the road, delaying a resolution of the crisis and forcing some other unlucky politician to have to deal with it. Eventually, as the IMF points out, even rich countries run out of real estate and the can has to be picked up.

As long as American policy makers are held in thrall by the notion that we can go on printing money forever and drive up the debt by trillions, we are in danger of experiencing a scenario as laid out by the IMF.


Remember the Greek 'haircut' where investors in government bonds were forced to take a 50% loss on their investments?

Something very similiar could be in our near future, according to a paper prepared by the International Monetary Fund.

Ambrose Evans-Pritchard:

Much of the Western world will require defaults, a savings tax and higher inflation to clear the way for recovery as debt levels reach a 200-year high, according to a new report by the International Monetary Fund.

The paper says the Western debt burden is now so big that rich states will need same tonic of debt haircuts, higher inflation and financial repression - defined as an "opaque tax on savers" - as used in countless IMF rescues for emerging markets.

While use of debt pooling in the eurozone can reduce the need for restructuring or defaults, it comes at the cost of higher burdens for northern taxpayers. This could drag the EMU core states into a recession and aggravate their own debt and ageing crises. The clear implication of the IMF paper is that Germany and the creditor core would do better to bite the bullet on big write-offs immediately rather than buying time with creeping debt mutualisation.

The magnitude of the debt problem is "difficult to overstate," says the paper. "The current central government debt in advanced economies is approaching a two-century high-water mark."

The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its "toolkit" for emerging market blow-ups.

"The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point," said the paper, by Harvard professors Carmen Reinhart and Kenneth Rogoff.

The paper said policy elites in the West are still clinging to the illusion that rich countries are different from poorer regions and can therefore chip away at their debts with a blend of austerity cuts, growth, and tinkering ("forbearance").

The presumption is that advanced economies "do not resort to such gimmicks" such as debt restructuring and repression, which would "give up hard-earned credibility" and throw the economy into a "vicious circle".

But the paper says this mantra borders on "collective amnesia" of European and US history, and is built on "overly optimistic" assumptions that risk doing far more damage to credibility in the end. It is causing the crisis to drag on, blocking a lasting solution. "This denial has led to policies that in some cases risk exacerbating the final costs," it said.

What rich countries are able to do that poor countries can't is more easily kick the can down the road, delaying a resolution of the crisis and forcing some other unlucky politician to have to deal with it. Eventually, as the IMF points out, even rich countries run out of real estate and the can has to be picked up.

As long as American policy makers are held in thrall by the notion that we can go on printing money forever and drive up the debt by trillions, we are in danger of experiencing a scenario as laid out by the IMF.