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1. Zombies at Large? Corporate Debt Overhang and the Macroeconomy

Author:
Òscar Jordà, Martin Kornejew, Moritz Schularick, and Alan M. Taylor
Publication Date:
10-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
What are the macroeconomic consequences of business credit booms? Are they as dangerous as household credit booms? If not, why not? We answer these questions by collecting data on non-financial business liabilities (primarily bank loans and corporate bonds) for 17 advanced economies over the past 150 years. Unlike household credit, business credit booms are rarely followed by macroeconomic hangovers. Data on debt renegotiation costs—instrumented by a country’s legal tradition—show that frictions to debt resolution make recessions deeper and longer—an important factor in explaining the differences with household credit booms.
Topic:
Debt, Economics, International Political Economy, Global Recession, Macroeconomics, Credit, and Corporations
Political Geography:
Global Focus

2. Hezbollah Has a New Strategy to Survive Lebanon’s Financial Crisis

Author:
Hanin Ghaddar
Publication Date:
03-2020
Content Type:
Policy Brief
Institution:
The Washington Institute for Near East Policy
Abstract:
Unless Washington and its allies respond to the protestors’ legitimate demands for reform, the group will survive through measures such as expanding its smuggling activity, promoting its financial institutions, and selectively scapegoating corrupt politicians. When IMF officials visited Lebanon late last month amid its accelerating economic freefall, many wondered whether these developments might alter the behavior of Hezbollah, the designated terrorist group that has a deep financial stake in the country’s public and private sectors. During a previous funding crisis—the increase in U.S. sanctions against the group’s chief underwriter, Iran—the “Party of God” and its foreign sponsors formulated a new strategy to evade these measures and create alternative sources of funding. Such sources allowed Hezbollah to make further inroads into government agencies following the 2018 parliamentary elections. For example, the group’s leaders insisted on controlling the Health Ministry, which commands Lebanon’s fourth-largest budget at $338 million per year; they also gained more access to the Ministry of Public Works and Transport, the Agriculture Ministry, and the Ministry of Energy and Water, whose assistance was used to fund their affiliated projects and businesses. That worked until Lebanon’s own economy began its current nosedive. Unemployment has hit a record high of 40 percent, and the lira has slumped by about 60 percent on the parallel market, hiking inflation. Officially pegged to the dollar, the currency has plummeted 40 percent on the black market as local banks ration dollars necessary for imports of food, medicine, and other essential goods. Meanwhile, Lebanon has one of the highest debt-to-GDP ratios in the world (over 150 percent) and may not be able to pay $1.2 billion in Eurobonds this month. As with the Iran sanctions, however, Hezbollah has a strategy to survive this domestic pressure, at least in the near term.
Topic:
Foreign Policy, Corruption, Debt, Politics, Protests, and Hezbollah
Political Geography:
Middle East, Lebanon, and United States of America

3. The Cost of Debt-financed War: Public Debt and Rising Interest for Post-9/11 War Spending

Author:
Heidi Peltier
Publication Date:
01-2020
Content Type:
Special Report
Institution:
Watson Institute for International and Public Affairs at Brown University
Abstract:
Throughout the 18 years the U.S. has been engaged in the “Global War on Terror,” mainly in Iraq and Afghanistan, the government has financed this war by borrowing funds rather than through alternative means such as raising taxes or issuing war bonds. Thus, the costs of the post-9/11 wars include not only the expenses incurred for operations, equipment, and personnel, but also the interest costs on this debt. Since 2001 these interest payments have been growing, resulting in more and more taxpayer dollars being wasted on interest payments rather than being channeled to more productive uses. This paper calculates that the debt incurred for $2 trillion in direct war-related spending by the Department of Defense and State Department has already resulted in cumulative interest payments of $925 billion. Even if military interventions ceased immediately, interest payments would continue to rise, and will grow further as the U.S. continues its current military operations.
Topic:
Debt, War, Military Spending, and 9/11
Political Geography:
Pakistan, Iraq, Middle East, Yemen, Syria, North America, and United States of America

4. A New Policy Toolkit Is Needed as Countries Exit COVID-19 Lockdowns

Author:
Olivier Blanchard, Thomas Philippon, and Jean Pisani-Ferry
Publication Date:
06-2020
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The measures that most governments took in response to the sudden collapse in economic activity during the COVID-19 lockdowns nearly exclusively focused on protecting vulnerable workers and firms. These measures included unemployment benefits, grants, transfers, loans at low rates, and tax deferrals. As lockdowns are lifted, governments must shift policies toward supporting the recovery and design measures that will limit the pain of adjustment while preserving productive jobs and firms. This Policy Brief explores how such measures can be designed, with particular emphasis on Europe and the United States. The authors propose a combination of unemployment benefits to help workers, wage subsidies and partially guaranteed loans to help firms, and debt restructuring procedures for small and medium-sized companies handicapped by excessive legacy debt from the crisis.
Topic:
Debt, Economics, Government, Labor Issues, Unemployment, and Coronavirus
Political Geography:
Europe, North America, and United States of America

5. Lebanon: The 3-Decade Impossible Power Sector Reforms

Author:
Jessica Obeid
Publication Date:
03-2020
Content Type:
Commentary and Analysis
Institution:
Italian Institute for International Political Studies (ISPI)
Abstract:
Lebanon defaulted on its debt for the first time in the country’s history. Many factors have contributed to this economic and fiscal crisis, but at the heart of them is the electricity sector, accountable for more than $39.5 billion, equivalent to 43 percent of the public debt, and embodying the core structural issues of Lebanon; a non-functioning confessional system built on the foundation of vested interests.
Topic:
Debt, Infrastructure, Financial Crisis, Economy, and Electricity
Political Geography:
Middle East and Lebanon

6. Money, Stability, and Free Societies

Author:
Steve H. Hanke
Publication Date:
06-2020
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Monetary instability poses a threat to free societies. Indeed, currency instability, banking crises, soaring inflation, sovereign debt defaults, and economic booms and busts all have a common source: monetary instability. Furthermore, all these ills induced by monetary instability bring with them calls for policy changes, many of which threaten free societies. One who understood this simple fact was Karl Schiller, who was the German Finance Minister from 1966 until 1972. Schiller’s mantra was clear and uncompromising: “Stability is not everything, but without stability, everything is nothing” (Marsh 1992: 30). Well, Schiller’s mantra is my mantra. I offer three regime changes that would enhance the stability in what Jacques de Larosière (2014) has asserted is an international monetary “anti-system.” First, the U.S. dollar and the euro should be formally, loosely linked together. Second, most central banks in developing countries should be mothballed and replaced by currency boards. Third, private currency boards should be permitted to enter the international monetary sphere.
Topic:
Debt, Foreign Exchange, Monetary Policy, Developing World, Inflation, and Currency
Political Geography:
Europe, United States of America, and European Union

7. Who Are These Bond Vigilantes Anyway? The Political Economy of Sovereign Debt Ownership in the Eurozone

Author:
Tobias Arbogast
Publication Date:
04-2020
Content Type:
Working Paper
Institution:
Max Planck Institute for the Study of Societies
Abstract:
This paper examines the ownership structure of eurozone public debt and the distribu- tional consequences thereof. Through both a comparative perspective and an explorative case study of Italy, this paper asks two research questions. Firstly, it asks who holds gov- ernment debt in Spain, France, Germany, and Italy. I focus in on Italy to provide, to the author’s knowledge, the first highly disaggregated view of the holding structure of public debt. Secondly, for Italy I study distributional effects by examining who benefits from the interest received on government debt. This is accomplished through an investigation of the various stakeholders associated with public debt. Results indicate that most of the public debt is held by private and public financial institutions but rarely directly by households. Both direct and indirect beneficiaries of the interest received on government bonds in Italy turn out to be largely wealthy households, reflecting the unequal ownership of wealth more generally. However, prominent public financial institutions are also significant beneficiaries, which likely ameliorates a possible regressive distributional effect of the public debt hold- ing structure. The paper discusses the results with an eye on inequality and contributes to further study of the political economy of public debt.
Topic:
Debt, Inequality, Financial Institutions, and Public Debt
Political Geography:
France, Germany, Spain, and Italy

8. Quarterly Review of the Georgian Economy (III Quarter, 2019)

Author:
Merab Kakulia, Nodar Kapanadze, and Lela Bakhtadze
Publication Date:
01-2020
Content Type:
Special Report
Institution:
Georgian Foundation for Strategic International Studies -GFSIS
Abstract:
The Quarterly Review of the Georgian Economy is an electronic publication of the Georgian Foundation for Strategic and International Studies (Rondeli Foundation), which aims at informing readers about the ongoing processes within the country’s economy. The review is based on data of official statistics and on expert estimates.
Topic:
Debt, International Trade and Finance, Foreign Direct Investment, Budget, Employment, Economy, Economic growth, Banks, and Inflation
Political Geography:
Eurasia, Caucasus, and Georgia

9. How ‘demos’ met ‘cracy’: debt, inequality, money

Author:
Andreas Antoniades and Ugo Panizza
Publication Date:
03-2020
Content Type:
Working Paper
Institution:
Centre for Global Political Economy, University of Sussex
Abstract:
The recurrence of ever more destructive economic crises and patterns of pervasive indebtedness and inequality threaten the social fabric of our societies. Our main responses to these trends have been partial, focusing on symptoms rather than causes, often exacerbating rather than improving the underlying socio-economic dynamics. To reflect on these conditions and on ‘what needs to be done’ this paper turns to a similar socio-economic malaise faced by the city-state of Athens in the 6th century BC. Most historical studies dealing with this crisis focus on the comprehensive debt relief policy (seisachteia) implemented by Solon. We argue that this debt relief, although necessary, was the least important of Solon’s reforms. Solon read the problem of debt as a problem of money so he went on to reform the monetary and exchange system. But he did not think that these reforms alone could restore socioeconomic sustainability. For this, a redefinition of what was counted as valuable economic activity and as income had also to take place. And for all these to work, citizens had to be involved more in the commons. Far from only achieving socioeconomic sustainability, these reforms gave rise gradually to the demos that we meet in the golden age of Democracy. It is indeed interesting that Democracy, in its ideal type of the 5th century BC, finds its origin in the way in which a society responded to a major socioeconomic crisis, characterised by pervasive indebtedness and destabilising inequalities. Such a broader historical horizon may help us grasp better the problems, stakes and challenges of our times.
Topic:
Debt, Political Economy, History, Democracy, and Global Political Economy
Political Geography:
Greece and Global Focus

10. China is Not Conducting Debt Trap Diplomacy in the Pacific--At Least Not Yet

Author:
Jonathan Pryke
Publication Date:
03-2020
Content Type:
Commentary and Analysis
Institution:
East-West Center
Abstract:
In an atmosphere of heightened geostrategic competition, China’s Belt and Road Initiative (BRI) has raised questions about the risk of debt problems in less-developed countries. Such risks are especially worrying for the small and fragile economies of the Pacific. A close look at the evidence suggests that China has not been engaged in debt-trap diplomacy in the Pacific, at least not so far. Nonetheless, if future Chinese lending continues on a business-as-usual basis, serious problems of debt sustainability will arise, and concerns about quality and corruption are valid.There have been recent signs that both China and Pacific Island governments recognize the need for reform. China needs to adopt formal lending rules similar to those of the multilateral development banks, providing more favorable terms to countries at greater risk of debt distress. Alternative approaches might include replacing or partially replacing EXIM loans with the interest-free loans and grants that the Chinese Ministry of Commerce already provides.
Topic:
Debt, Development, Diplomacy, Geopolitics, and Belt and Road Initiative (BRI)
Political Geography:
China, Asia, and Asia-Pacific