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Global Economy > World Debt Threat

Rogoff on debt restructuring and risk sharing

"A lot of people think—if you read the op-eds about the IMF and the US Treasury—that they block debt restructuring. That’s simply not true. Most who don’t want to have a debt restructuring are all these leaders of developing countries. They will typically lose their job.
"Many people don’t realize that the International Monetary Fund and the World Bank, which incidentally are run by the same people—you wouldn’t know it from some of the polemics—have fairly limited funds. Relative to the size of world trade and world markets, they’re very small. Contrary to what a lot of the polemics write, their leverage is fairly limited. China’s reserves are roughly triple all the IMF’s resources. The IMF really doesn’t have a lot of money to bail out emerging markets, and in many situations, it’s like a man drowning in 20 feet of water. If you throw him eight feet of rope, it doesn’t work very well. And for that reason, they have little leverage....

Figure:
Half a century of IMF lending failed to spur growth. Why not invest in companies directly, share the risk, and reap the return?
"I think what we most need to move away from in international capital markets is debt finance and toward forms of finance where there’s some kind of risk sharing. In the United States, when the stock market drops from 12,000 to 8,000 it’s painful, but it just doesn’t cause nearly the problems that similar events do in emerging markets when there’s a depreciation of the exchange rate.

"I think what the world needs to work toward is automatic burden sharing. There are a number of proposals. The simplest is to force more investment in to direct fund investments.... But right now the playing field is tilted very much toward borrowing. The reason for that is if you make a loan to Argentina, you can force a court—your leverage is limted but it’s not zero,either—to force judgment. And you can’t do that with equity or direct foreign investment."

Excerpts from remarks by Kenneth Rogoff, Director, Center for International Development, Harvard University