Dealing with Sovereign Debt—The IMF Perspective

By Sean Hagan, Maurice Obstfeld, and Poul M. Thomsen

Versions in Français (French), Deutsch (German), ελληνικά (Greek), and Español (Spanish)

Debt is central to the functioning of a modern economy. Firms can use it to finance investments in future productivity. Households can use it to finance lumpy purchases, such as big consumer durables, or a home. Sometimes, however, firms’ investments do not pan out or a household’s main earner loses his or her job. Countries’ legal systems generally recognize that in these cases, debtors and creditors alike—along with society at large—may be better off if there is an orderly procedure for reorganizing debts. 

Acting Collectively: A Better Way to Restructure Government Debt

By Sean Hagan 

(version in Español)

To restructure or not to restructure? That is a question few governments would like to face. Yet, if a country does find itself with an unsustainable debt burden, one way or another, it will have to be restructured. And if that time comes, it is better for the debtor, creditors, and the entire financial system that the restructuring be carried out in a prompt, predictable, and orderly manner.

The global financial crisis ushered in a new wave of sovereign debt crises that has reinvigorated discussions over the current framework for sovereign debt restructuring. The experience with Greece’s debt restructuring in 2012 and the ongoing litigation involving Argentina, in particular, provide a salutary reminder that vulnerabilities remain.

The Trillion Dollar Question: Who Owns Emerging Market Government Debt

By Serkan Arslanalp and Takahiro Tsuda

(Version in Español, Français, Português, Русский, 中文 and 日本語)

There are a trillion reasons to care about who owns emerging market debt.  That’s how much money global investors have poured into in these government bonds in recent years —$1 trillion.  Who owns it, for how long and why it changes over time can shed light on the risks; a sudden reversal of money flowing out of a country can hurt.  Shifts in the investor base also can have implications for a government’s borrowing costs.

What investors do next is a big question for emerging markets, and our new analysis takes some of the guesswork out of who owns your debt.   The more you know your investors, the better you understand the potential risks and how to deal with them.

Taming government debt—it can be done, but it ain’t easy

By Helge Berger and  Justin Tyson

Sooner or later, and one way or the other, government debt in advanced economies will have to come down from the record levels reached in the wake of the global economic and euro area crises.  There is no magic number for how much sovereign debt an economy can shoulder. And, as bringing down debt by cutting government spending or raising taxes comes at the risk of reducing growth and employment in the short term, there are arguments to not proceed too hastily. But eventually debt will have to be put back on a downward path in many countries. This will help rebuild fiscal buffers and cope with the costs of aging. So, what should governments do?

Our new analysis takes a closer look at the historical record and key trade-offs.  The bottom line: it is possible to reduce debt when growth is low. Ultimately perseverance should pay off.

Resolutions for the Fiscal New Year—Staying on Track Is No Easy Task

by Carlo Cottarelli and Philip Gerson

Version in Español and عربي

We’re one month into 2013, and if past experience is any guide, by now many people will have all but forgotten the promises they made about the things they planned to do over the coming year.

It’s a time-honored tradition in many countries for people to make resolutions at the New Year, usually involving things that are good for them, like achieving a healthier weight. Unfortunately, it’s also traditional that these commitments quickly fall by the wayside, only to be taken up again next year, usually with the same results.

But unlike many of these resolutions, the ones made by most advanced economies to reduce their 2012 fiscal deficits were by and large kept. The average headline deficit in these countries fell by about ¾ percent of GDP last year, bringing the cumulative deficit decline to 3 percent of GDP since budget shortfalls peaked in 2009. This is good news.

Fiscal Glass is Half Full: Some Reasons for Optimism

By Carlo Cottarelli

(Versions in عربي, Français, 中文 and  Русский)

In the midst of jittery financial markets, and global economic doom and gloom, it’s easy to become pessimistic. Perhaps too much so; amid what seems like a steady drum beat of bad news, one can lose sight of what has been  achieved over the last couple of years.

Public debt and fiscal deficits in many advanced economies remain very high. Nevertheless, important progress has been made in fiscal adjustment in many advanced economies. For most countries, government deficits have fallen substantially—by 2¼ percentage points of GDP on average compared to two years ago.


The fiscal outlook in most countries is stronger than we expected two years ago.

Euro Muscles in Brussels: Christine Lagarde on Greece

by iMFdirect

The head of the IMF Christine Lagarde was clear during her press conference in Brussels yesterday—European leaders’ deal to help Greece and the euro area is a very constructive and comprehensive package of measures to resolve debt problems.

“What to me is critical—really a game-changing decision—is the leaders’ commitment and determination to provide support to countries until they have regained market access, provided that they successfully implement their programs.”

Watch the press conference:

The 17 heads of state of the eurozone have agreed to provide €109 billion in fresh financing for Greece. Together with voluntary contributions from the private sector and continued support from the IMF, this will close the financing gap in Greece’s budget and give the country the breathing room it needs to restore growth and competitiveness.

Greece has not yet requested a new program from the IMF, but Lagarde said it was the global lender’s intention to be an active participant in helping Greece restore growth, debt sustainability and return to financial markets.

The European leaders also agreed to make the terms of the European Financial Stability Facility more flexible, a measure called for by the IMF in its recent assessment of the euro area.

“This flexibility is a key element, in the view of the IMF,” said Lagarde.

The Solution Is More, Not Less Europe

By Antonio Borges

(Versions in عربي,  中文, 日本語, Español, Français)

It is hard to hold the course in the middle of a storm, but European policymakers need to if they want European integration to succeed. The sovereign debt crisis is a serious challenge, which requires a strong and coordinated effort by all involved to finally put it behind us.

Surviving the storm will be of little consequence if the euro area finds itself trapped in the perpetual winter of low growth. Germany may be expanding at record speed right now, but it wasn’t so long ago when it grew much more slowly—just 1.5 percent per year between 1995 and 2007. In contrast, Sweden grew by 3 percent a year and the United States by 2 percent during the same period.

Many experts fear that without reforms, growth in Germany could drop even lower in the next 5‑10 years and beyond when global trade cools again. The situation is worse in the countries that currently find themselves in the eye of the storm.

BRICs and Mortar—Building Growth in Low-Income Countries

By Dominique Desruelle and Catherine Pattillo

(Versions in 中文, Português, Español,  Русский)

The so-called BRIC nations—Brazil, Russia, India and China—could be a game changer for how low-income countries build their economic futures.  

The growing economic and financial reach of the BRICs has seen them become a new source of growth for low-income countries (LICs).

LIC-BRIC ties—particularly trade, investment and development financing—have surged over the past decade. And the relationship could take on even more prominence after the global financial crisis, with stronger growth in the BRICs and their demand for LIC exports helping to buffer against sluggish demand in most advanced economies.

The potential benefits from LIC-BRIC ties are enormous.

But, so too are challenges and risks that must be managed if the LIC-BRIC relationship to support durable and balanced growth in LICs.

Avoiding Another Year of Living Dangerously: Time to Secure Financial Stability

By José Viñals

In various guises, the “Year of Living Dangerously” has been used to describe the global financial crisis, the policy response to the crisis, and its aftermath.

But, we’ve slipped well beyond a year and the financial system is still flirting with danger. Durable financial stability has, so far, proven elusive.

Financial stability risks may have eased, reflecting improvements in the economic outlook and continuing accommodative policies. But those supportive policies—while necessary to restart the economy—have also masked serious, underlying financial vulnerabilities that need to be addressed as quickly as possible.