BoG Conference on Public Debt concluded

Share:

BoG Conference on Public Debt concluded

08/11/2024 - Press Releases

The international conference on “Public Debt: Past Lessons, Future Challenges”, which was organized by the Bank of Greece, was concluded successfully on Thursday, November 7, 2024. The conference was widely attended by people from the business and banking sectors, as well as several academics and researchers.

The conference was opened by the Governor of the Bank of Greece, Yannis Stournaras, who presented a series of policy lessons learned from the recent debt crisis, both at the national and at the European level, before concluding that “the challenges we face today – ranging from high debt levels to climate crisis, geopolitical risks posed by conflicts, geoeconomic fragmentation, demographic shifts, low productivity and deglobalisation trends – require us to remain vigilant and adaptive. Should we confront rising debt vulnerabilities, the need for innovative and sustainable fiscal solutions will be more urgent than ever. The decisions we make today will determine not only Europe’s financial stability, but also the well-being of future generations. Striking the right balance between fostering growth, ensuring fiscal sustainability and protecting the long-term interests of our societies is no easy task, but it is one we must face together.”

In his keynote lecture, Barry Eichengreen, Professor at the University of California at Berkeley, retraced the history of public debt to remind us that “prudent governments borrow to meet emergencies but restore that capacity to borrow when the emergency passes, by reducing their indebtedness.” Historical experience suggests that “the two robust correlates of sustained debt reduction are robust growth and low levels of political polarization.” The first reduces the burden of debt on the economy, while the latter permits the forging of the necessary consensus to maintain fiscal discipline. Given the recent slowdown in growth and increase in polarization “this means that for many countries sustained debt reduction will be challenging in present circumstances.”

Several speakers focused on lessons from previous debt consolidations. Rui Esteves, professor at the Graduate Institute of Geneva, presented aggregate data from 183 countries over a period of 220 years, from 1800-2019. Having identified hundreds of episodes of debt reduction, he pointed out that “episodes of debt consolidation where nations did not resort to restructuring or default have been more frequent and have led to greater reductions in debt ratios, compared to defaults”. Focusing on a single case, Tobias Straumann, professor at the University of Zurich, spoke about the 1953 London Debt Agreement, which restructured German debt and deferred the payment of war reparations. This generosity vis-à-vis Germany may have bred justified grievances, but it also contributed to the West Germany’s post-war economic reconstruction and political rehabilitation. At the same time, it enabled the Federal Republic of Germany to compensate individual victims of the Holocaust. In this context, the London Debt Agreement highlights the dilemmas arising from post-war debt settlement, as well as the potentially beneficial financial consequences of a generous debt haircut.

Other speakers sought to challenge some common “lessons” drawn of the past. Kim Oosterlinck, a professor of Finance at the Université Libre de Bruxelles, used the example of bond conversions in 19th century France to show how “a politically very powerful national bondholder group may force the state to engage into suboptimal policies, thus questioning whether institutional safeguards of bondholder rights are sufficient. “Institutions protecting bondholders’ rights are beneficial for the state as long as the interests of the state and bondholders are aligned,” he cautioned. Focusing on the Greek experience with debt between 1824 and 1932, the Scientific Advisor to the Historical Archive and Assistant Professor at Panteion University, Andreas Kakridis, sought to revise the notion that Greece had been “had been repeatedly overindebted, overcharged and overpowered by its creditors, who thus contributed to the weakening of the Greek state capacity. Quite on the contrary, in the 19th and early 20th centuries, helped Greece finance the emergencies arising from the Eastern Question. More generally, “loans not only provided much-needed resources to increase the state’s authority in the short-run; they also provided the mechanism whereby the state imposed the tax reforms needed to increase its resources in the long-run.” What is more, Mr. Kakridis emphasized the stark difference between the Greek economy in the nineteenth and twenty-first centuries, which led to past defaults having a much milder impact on the economy. “These differences suggest we should be cautious before using the past to evaluate present debt challenges,” he concluded.

Turning to the most recent years of Greece’s fiscal history, the Advisor to the Governor of the Bank of Greece, George Chouliarakis, presented the Bank of Greece’s Debt Sustainability Analysis (DSA) and observed that – as the positive effect of the growth rate minus interest rate differential on debt subsides, further debt consolidation will depend primarily on the maintenance of primary surpluses of around two percent. He then added that “in order to avoid fiscal fatigue, the growth rate of potential output needs to rise and remain high; an equally crucial parameter is the fair distribution of the burden of maintaining primary surpluses around two percent of GDP, by fighting tax evasion and protecting those most vulnerable”.

Marco Buti, professor at the European University Institute in Florence, and former Director General for Economic and Financial Affairs at the European Commission, discussed the newly-agreed EU fiscal rules, which in his opinion “represent an improvement compared to the old Stability and Growth Pact in term as of debt sustainability, counter-cyclicality, promotion of reforms and investment.” At the same time, however, he added that “considering the huge investment needs the EU is facing for competitiveness, the green transition, the building of a defence union, the buttressing of strategic autonomy, the new fiscal rules need to be complemented by a permanent central fiscal capacity as a successor of NGEU. The latter should finance European Public Goods in the economic and non-economic areas thereby ensuring vertical coordination and help reconcile the EU’s domestic and global agendas.”

The director of Bruegel, in Belgium, Jeromin Zettelmeyer, presented estimates concerning the primary surpluses that heavily indebted advanced countries will need to run, in order to stabilise or bring down their debt-to-GDP ratios in the next few years. To do that “several advanced countries will need to undertake large fiscal adjustments (more than 3.5% of GDP). Fiscal adjustments of this magnitude are historically rare in several of these countries”. What is more, Mr. Zettelmeyer highlighted the dangers presented by low growth rates and increase political polarization. On the other hand, he felt it was encouraging that most of the “medium term fiscal-structural plans” submitted to the European Commission seem to be consistent with debt stabilisation.

Philip R. Lane, a Member of the Executive Board of the European Central Bank (ECB), welcomed the Bank of Greece’s initiative to organize the conference, adding that “It's very important for central banks to be involved in the discussion of sovereign debt. On top of the direct fiscal questions and public finance questions, public debt is fully integrated into the overall macroeconomic outlook in both directions. Α stronger macro outlook helps the public finances, but stability in the public finances is really a precondition for financial stability and price stability.”

The conference was concluded by two round table discussions. The first, which included the Governor of the Bank of Greece, Yannis Stournaras, the Member of the Executive Board of the ECB, Philip R. Lane and the former Governor of the Bank of Spain, Pablo Hernández de Cos, was be devoted to the interaction between debt and monetary policy. The second brought together the Greek Minister of National Economy and Finance, Kostis Hatzidakis, the Governor of the Bank of Greece, Yannis Stournaras, and the Director General of the Foundation of Economic and Industrial Research (IOBE), Nikos Vettas, in a conversation on the future of the Greek economy. Commenting on the rise of political polarization and populism in many countries, at the end of their discussion, the speakers pointed out that modern political leaders should not only seek to maintain their argumentation level-headed and fact-based, but also try to inspire people with a positive vision for the future, able to counterbalance the fear often propagated by the political extremes.

Related links

Photos

Photo 1: Yannis Stournaras

Photo 2: Philip Lane, Pablo Hernández de Cos, Marco Buti, Yannis Stournaras, Barry Eichengreen, Andreas Kakridis, Nikos Vettas

Photo 3: Jeromin Zettelmeyer, Pablo Hernández de Cos, Yannis Stournaras, Marco Buti

Photo 4: Katerina Spyrou

Photo 5: Barry Eichengreen

Photo 6: Rui Esteves, Tobias Straumann, Heather Gibson

Photo 7: Andreas Kakridis

Photo 8: Kim Oosterlinck, Andreas Kakridis, Daphne Papadopoulou

Photo 9: Jeromin Zettelmeyer, Marco Buti, George Hondroyiannis

Photo 10: Philip Lane, George Chouliarakis, Dimitris Malliaropulos