Debt: Use It Wisely - Press Conference Opening Remarks

IMF News, October 6, 2016

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Global debt is at record highs and rising.
Over the last fifteen years the debt of the nonfinancial sector has increased significantly, reaching $152 trillion by 2015 (225 percent of world GDP).
About two-thirds (or $100 trillion) is the debt of the private sector; the remainder is public debt.
Public debt increased from below 70 percent of GDP at the beginning of the century to almost 85 percent in 2015.
Excessive private debt is a major headwind against the global recovery and a risk to financial stability.
Rapid increases in private debt often end up in financial crises; financial recessions are longer and deeper than normal recessions.
Entering a financial recession with a weak fiscal position results in even larger output losses, particularly in emerging market economies that tend to cut government spending in times of crisis.

Private debt is concentrated in advanced and a few emerging market economies.
In advanced economies deleveraging has been uneven; in many cases private debt has continued rising.
Public debt has surged in some advanced countries partly due to the migration of bad private-sector debt onto government balance sheets.
Private debt is also high in some systemic emerging market economies, including China.
Low-income countries generally have low debt levels, but these have been on the rise recently.
The sharp diversity across countries implies the need for country-specific policy diagnosis and prescription: no one size fits all.

Low nominal growth is a major driver behind slow deleveraging in advanced economies.
Comparing the United States and the euro area: the United States experienced a larger increase in private debt pre-crisis but reduced it more in the aftermath.
The United States also enjoyed higher nominal growth—more than 10 percentage points in cumulative terms over the period since 2007.
The weak macroeconomic environment explains about half of the increase in public debt since the onset of the global financial crisis.
Deleveraging is made difficult by low nominal growth.

Fiscal policy can do more to restore growth and stability.
- Targeted fiscal interventions—government-sponsored programs to help restructure private debt and public support for financial sector restructuring—can be very effective in reducing output losses associated with private sector deleveraging.
- Such policies could be particularly useful in China.
- To work, these policies need to be adequately designed and subject to strong governance principles.
- Inaction or delayed action can be very costly.
Fiscal policy cannot do it alone.
- A comprehensive, consistent, and coordinated approach using monetary, fiscal, and structural policies is needed to harness synergies across policies.
- Consistent policy frameworks over time can anchor long-term inflation expectations and lead to an eventual sustainable downtrend in government debt-to-GDP ratios.

The focus should be on growth-friendly fiscal policy.
In some emerging-markets and low-income countries fiscal deficits have increased rapidly over the last year on the back of lower commodity prices and a less supportive global environment.
The speed of adjustment will depend on available buffers.
Improving the quality of public finances and strengthening fiscal frameworks would enhance policy credibility and resilience.
In Latin America, financing costs rose the most where fiscal deficits increases were coupled with the lack of credible fiscal frameworks.
Among low-income countries, particularly oil producers, adjustment has been slow and piecemeal, often forced by lack of financing and effected mainly through across-the-board spending compression.
Tax capacity is insufficient in many of these countries, hampering their ability to close infrastructure gaps and to achieve other sustainable development goals.

History shows it is very easy to underestimate the risks associated with private debt during the upswing; preventive measures are crucial.
Regulatory and supervisory policies should ensure the monitoring and sustainability of private debt.
Tax distortions favoring debt over equity should be gradually eliminated.

Vitor Gaspar, Director, Fiscal Affairs Department — October 6, 2016