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Channeling Capital Flows to Developing Countries: Can International Financial Institutions Help?

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Channeling Capital Flows to Developing Countries: Can International Financial Institutions Help?

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Channeling Capital Flows to Developing Countries: Can International Financial Institutions Help?

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The COVID-19 pandemic has produced a sharp fall in capital flows to developing countries. Meanwhile, high levels of sovereign and corporate debt have raised the need for even more external financing to combat the economic and human costs of the pandemic.

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wbg:topic/health_broad/health_emergencies
wbg:topic/fiscal-policy_broad/fiscal-policy_debt
wbg:topic/fiscal-policy_broad

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July 15, 2020

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00:00 Thanks for joining us in this discussion.

00:02 I'm Jay La Pazar Volo.

00:03 I'm the vice president of

00:05 Equitable Growth Finance and Institutions at the World Bank Group,

00:09 and I'm really looking forward to a

00:11 substantive discussion on channeling capital flows to developing countries

00:16 and the role of IFIs.

00:19 Joined by great experts uh today

00:21 and um

00:23 really,

00:24 look,

00:24 I'm going to introduce them uh with their current positions

00:28 in a few minutes as I give them the floor.

00:30 Their impressive bios are included on the event web page and I'm not

00:35 going to go through that because then we wouldn't have enough time.

00:38 So let's begin with the latest developments and trends in private capital flows.

00:45 prior to the COVID-19 pandemic,

00:47 global economy was already fragile.

00:50 In 2019,

00:52 the global growth registered its lowest rate since the 2008 financial crisis.

00:57 Last year was also the lowest point for economic

01:00 growth in emerging markets and developing economies since 2009.

01:06 The pandemic plunged the world economy into the

01:09 deepest,

01:10 its deepest recession actually since the Second World War,

01:13 with more than 90% of countries will face per capita income losses,

01:18 a larger fraction than in any recession in the past 150 years.

01:22 Emerging market and developing economies will experience

01:25 their first output contraction by about 2.5%

01:29 in at least the past 60 years.

01:32 As we discussed in our recently published Global Economic

01:36 Prospects report,

01:38 the GEP,

01:38 we expect at best a partial recovery in 2021

01:42 and uh lingering damage beyond next year.

01:46 Like previous uh deep recessions,

01:48 if not more so,

01:49 the current one is likely to leave

01:52 lasting scars on the global economy.

01:54 Yet if you look at financial markets,

01:57 they seem to be looking through this year's distress.

01:59 We see,

02:00 we saw a historic

02:02 flight to safety in March,

02:03 but since April,

02:04 global financial markets have rebounded sharply.

02:07 Capital flows to emerging markets and developing economies have largely

02:12 resumed even for.

02:13 Some of the higher risk borrowers.

02:15 In part,

02:16 this is due to the unprecedented policy support by all major central banks,

02:21 even emerging markets and developing economies

02:24 have been engaging in quantitative easing policies and also

02:30 proactively lowered policy rates.

02:32 Yet as with COVID,

02:34 there's a lot of uncertainty and it's not clear

02:37 how long this relatively benign financial conditions will continue.

02:42 I'm gonna turn to Anne Kruger um and ask her,

02:46 how do you see the development in private capital flows since COVID?

02:50 Is there a disconnect between economic fundamentals and financial markets?

02:55 I'm gonna ask each,

02:57 colleague about this,

02:58 as many of you know,

03:00 and Kruger is currently the senior research professor at

03:03 Johns Hopkins University and senior fellow at Stanford,

03:07 and also my former boss at the IMF.

03:09 Anne,

03:09 what are your views,

03:10 please?

03:12 Thank you very much.

03:14 I want to step back just a minute

03:16 because it seems to me that we've got some problems here

03:18 and they need to be sorted out just a bit.

03:21 Let me start with the developing countries and their situation,

03:24 and the first thing to be said,

03:25 I think,

03:26 is that the different ones are in very different shape.

03:29 Some were in reasonable,

03:30 were in reasonable macro balance and

03:33 had relatively stable macro before the onset of COVID,

03:37 but many did not.

03:38 Many were already fiscally stretched,

03:41 and some,

03:41 of course,

03:42 and I have Argentina in mind in this case,

03:44 were already in trouble,

03:45 and others are either in trouble or getting into trouble very quickly.

03:49 And I think

03:50 And because of this,

03:51 it's very hard to talk about capital flows because I think a few of the countries,

03:55 namely those whose macro is satisfactory

03:58 and who in addition do not have heavy overloads of debt already,

04:02 may be able to access public and private capital

04:05 enough

04:06 so that

04:08 for other purposes they're OK,

04:09 but there are many other developing countries.

04:11 Which aren't,

04:12 and there is some,

04:14 I think,

04:14 concern there because when they have the overstretched macro,

04:17 as some do,

04:18 then the problem is one that they need to have,

04:21 needed to have some adjustment

04:23 even before

04:24 the COVID virus came,

04:25 and that makes it very tough to expect

04:28 that there could be much done in private capital flows on that account.

04:33 I could spend a lot of time on this,

04:34 but of course we don't have it,

04:35 so I won't.

04:36 but it seems to me that we have to really think about 4 different needs

04:40 that developing countries have,

04:42 and different ones are in different situations.

04:45 Almost all of them have negative impact from the onset of the worldwide recession

04:50 that came on with the COVID virus.

04:52 I think there's no doubt about that.

04:53 But secondly,

04:55 many needed to get imported supplies and

04:57 equipment for medical purposes in addition to,

05:00 on top of the other things they needed to do.

05:03 Thirdly,

05:04 they need to get the public public health system better

05:07 for a whole variety of reasons,

05:08 and I'll come back to that in a minute.

05:10 But 4th,

05:11 I'm going to argue that we cannot just rely.

05:13 On private or public,

05:15 for that matter,

05:15 capital flows to those countries to solve

05:17 these problems for reasons that I'll come to

05:20 after I've gone through it.

05:22 Now the problem with the public health system,

05:24 the difference they get bit by country,

05:27 but in almost all of them

05:29 there are serious problems that are worse

05:31 than those in industrial countries for a variety of reasons.

05:34 Many of them either cannot lock down or cannot enforce lockdown

05:38 for the simple reason that people live too much on top of each other.

05:41 Or because

05:43 they basically cannot do social distancing.

05:45 It's reported that some of the

05:48 most densely crowded areas in India,

05:50 in the cities,

05:51 are areas where the alley is 6 ft wide and where people have

05:54 to walk down it even to get their water supply every day.

05:56 In that circumstance,

05:57 there's no hope that social distancing will work

06:00 and without water they can't stay in their

06:02 units.

06:03 So that basically

06:04 that problem or that attack on the problem of

06:07 COVID in the short run is absolutely out.

06:10 And social distancing,

06:11 this can't happen when you've got 10 and 12 to a room

06:14 or when you've got alleys 6 ft wide

06:16 and when the wage earner has to walk down the alley to get his daily wage,

06:20 which is paid daily or whatever,

06:21 the result of which is,

06:23 of course,

06:23 that the usual,

06:24 or not the usual,

06:25 but the ones that the advanced countries have

06:28 adopted to try and halt the spread of the coronavirus

06:32 cannot work.

06:33 So what has to happen,

06:34 of course,

06:34 is that other means have to be found in most of these countries.

06:37 They can try as much as they can.

06:39 And some areas may be able to

06:42 reduce the spread by way of social distancing

06:45 or others,

06:45 but not very much.

06:47 So in fact there's got to be

06:48 other things going on

06:50 now.

06:50 The first is they have to develop more competence than they have

06:53 in contact tracing and testing.

06:56 Because they simply cannot do that enough

06:59 if they wait too long,

07:01 because once the COVID virus has exploded,

07:03 as it will,

07:04 then they're going to be beyond the point where even good contact tracing could

07:08 handle it.

07:08 So the real question is,

07:09 can you get that stuff started soon with tests and what have you?

07:13 And then then then that becomes immediately a need for supplies,

07:16 personal protective equipment,

07:18 testing procedures,

07:20 and medical personnel.

07:22 Even for contact tracing,

07:23 you have to have trained people,

07:25 and that's very difficult to do,

07:26 especially once the virus has spread.

07:28 But even in countries like the United States,

07:31 what was a good public health system is overstretched on this one,

07:34 and even that's going to be a problem in those countries.

07:37 But for all of that,

07:39 the more important problem it seems to me,

07:41 and the overriding one,

07:42 is that for all of the things that I just mentioned,

07:46 and all of the personal protective equipment,

07:49 masks,

07:49 testing equipment,

07:50 testing supplies,

07:52 all kinds of medical equipment,

07:54 there is a worldwide shortage,

07:56 and the risk is

07:58 that all countries are going to start trying to look for money

08:01 and then they are all going to start bidding up the prices of all those things.

08:04 And of course if that happens it will be the rich.

08:07 Countries that went out.

08:07 So it seems to me

08:09 that we cannot talk about a private capital flow

08:12 solving the problem,

08:13 for that problem at least,

08:15 because

08:15 with that private capital flow you would

08:17 just be contributing to the excess demand for

08:19 what in the short run at least is a relatively limited supply of various kinds

08:25 of necessary goods.

08:27 And if everybody's competing against each other for them,

08:29 the developing countries will almost certainly lose out.

08:32 It seems to me that yes,

08:33 there can be things done with debt forgiveness or debt.

08:36 A stay on debt service payments and that might work

08:38 and we can talk about that if you're interested,

08:41 but the trouble with that is that does not increase the supply of those goods

08:44 and we,

08:45 I think we need to have an international

08:47 mechanism

08:48 probably

08:49 or it would have been best through the WHO,

08:50 but I'm not sure that's possible now,

08:52 where an agreement could be reached along the lines of the G20

08:55 where medical supplies could be allocated,

08:58 not necessarily on the basis of price

09:00 but rather having supplies allocated to the countries on the basis of need.

09:06 Let me just finish because you didn't want me to talk very long

09:08 by saying that the really long term solution is of course the vaccine.

09:11 We don't know when it will be available,

09:13 but there seems to be some optimism

09:16 that it will be available not too late into the start of next year.

09:20 Even then,

09:22 developing countries are going to need to develop their capacity

09:25 for distributing and administering the vaccine

09:28 and getting their peoples to accept it.

09:30 And it seems to me

09:31 that much more.

09:32 needs to be paid

09:33 to finding ways to increase the competence in the sorts

09:36 of things that their own people will be able to do

09:39 once we have a vaccine available

09:41 and to in the meanwhile do what can be done

09:43 to keep a lid on the surge as best possible.

09:46 I know that's not a very

09:48 optimistic outlook,

09:49 but I'm afraid that's the outlook there is.

09:51 I'll stop there.

09:53 Thank you.

09:53 Thank you,

09:53 and very insightful.

09:56 Our health global practice has been working.

09:58 Very hard on this,

09:59 including also

10:01 uh procurement colleagues trying to come up with mechanisms to

10:05 help countries uh to uh reach these um important uh supplies.

10:10 I'm gonna go to Carmen Reinhardt.

10:12 Carmen is our chief economist as of July 1 this year.

10:16 She has worked on crisis

10:18 for most of her career,

10:19 and it's great to have her

10:21 at the World Bank Group.

10:23 Carmen,

10:23 what are your thoughts?

10:24 What do you think?

10:31 You need to,

10:31 yeah,

10:37 I can no,

10:40 can you hear me?

10:44 Not,

10:44 you mute,

10:45 you have to mute.

10:48 I'm afraid.

10:49 Can you hear me?

10:51 I'm afraid that,

10:52 I'm not going to be that much more uplifting than,

10:55 than,

10:57 the,

10:58 landscape that you set out and that Anne,

11:02 has elaborated on.

11:04 I think

11:05 there are two questions

11:07 that I'd like to address.

11:08 One is

11:10 The issue and raised,

11:12 which is,

11:12 will capital flows,

11:14 will a resumption of public

11:17 or private capital flows resolve the problem?

11:21 And the second question,

11:22 which is a big open question is,

11:24 will those capital flows materialize?

11:27 And if they do materialize,

11:29 what kind

11:30 of capital flows are we really talking about?

11:34 I am very much in line,

11:36 Shaya,

11:36 with your comments about the disconnect.

11:39 At present,

11:40 you know,

11:40 you have side by side,

11:43 what are deteriorating

11:46 economic fundamentals

11:50 That can be said pretty much across the board in varying degrees,

11:54 whether it's advanced economies,

11:55 middle income or low income,

11:57 especially low income,

12:01 the markets are willing

12:05 to uh lend,

12:07 and we've seen

12:09 from the very

12:12 You know,

12:14 Extreme,

12:17 sudden stop that we saw

12:19 earlier this year,

12:20 we've seen some recovery.

12:22 I think,

12:24 my view on the recovery is that it's,

12:27 it is indeed importantly driven

12:29 by the ample liquidity in financial,

12:33 notably the,

12:34 in the US.

12:36 It is very much a search for yield,

12:40 and a search for yield with a very short horizon.

12:44 you know,

12:45 the idea,

12:47 which is a perennial

12:49 in this,

12:49 in this.

12:50 strand of discussion.

12:52 The search for yield has,

12:54 you know,

12:54 very short horizons and

12:58 I think one has to ask the question,

13:02 which is what kind of capital flows,

13:06 would really revive growth,

13:09 in the,

13:10 developing and emerging markets.

13:12 Now,

13:12 often the connection

13:14 Between capital flows and growth,

13:18 on a more sustained and the key element being sustained

13:22 is associated with foreign direct investment.

13:25 Now,

13:25 in this environment of exceptional,

13:27 and I reiterate exceptional uncertainty,

13:31 I don't think,

13:33 we're poised to see over the very short run,

13:38 any kind of significant increases.

13:41 In fixed investment,

13:42 in long-term investment,

13:43 and whether it's at the domestic level in the United States

13:47 or other advanced economies or cross-border.

13:52 I think

13:53 what we're seeing is a revival in,

13:56 commercial flows and the type of portfolio flows

13:59 and bank flows.

14:01 Those two types of flows are notoriously

14:05 Unstable.

14:06 That is very subject,

14:08 very prone

14:09 to sudden stops,

14:13 uh the usual

14:16 Macroeconomic and financial disruptions that are

14:18 associated with those sudden stops.

14:21 I very much are on the same page as Ann that

14:24 a lot of the problems we're seeing,

14:26 particularly the,

14:27 the,

14:28 the what is likely to be a sustained

14:31 period of subpar growth

14:33 and,

14:34 and only gradual recovery,

14:38 whether

14:40 Indeed,

14:41 yes,

14:41 finance is needed at the moment,

14:44 you know,

14:45 governments across the board are

14:47 facing massive revenue shortfalls,

14:52 I'm less confident that the kind of flows that we're seeing or the,

14:56 the recovery

14:57 uh is going to facilitate that over the long haul and I am very concerned

15:03 uh with the possibility of an abrupt reversal.

15:06 So I,

15:07 I would like to,

15:09 move on to the issue of,

15:13 what could be

15:15 done,

15:17 to ensure that

15:18 at least some flows.

15:23 are of a more,

15:25 I hate to use the term permanent,

15:27 but are more,

15:28 more sustainable and more directed

15:30 towards

15:31 uh enhancing productive capacity and I think

15:35 you know,

15:35 the IFI,

15:36 the,

15:36 the World Bank

15:38 included with its,

15:39 it's,

15:39 it's longer-term view,

15:42 and longer-term projects is,

15:44 is very instrumental.

15:45 I think the IMF has done a spectacular job

15:49 in trying to fill in that big hole,

15:52 in the,

15:53 in the revenue collapse that,

15:55 that,

15:57 countries are,

15:59 are,

15:59 you know.

16:00 Facing pretty much across the board and then it is across the board because

16:03 if you're a commodity producer,

16:05 you haven't just had a COVID crisis,

16:08 you're also having a commodity price

16:11 uh uh

16:13 implosion which historically

16:15 has been associated with,

16:17 commodity price collapses or associated with spikes

16:22 the incidence of sovereign defaults,

16:24 new defaults,

16:28 I will not be concluding on a much more of an upbeat

16:32 note,

16:32 I think,

16:34 and we can discuss this later,

16:36 but I think the risk

16:38 of a new spike

16:41 in sovereign defaults is there because of the growth collapse,

16:45 because the fact that

16:47 we have a tendency to recover,

16:50 to confuse,

16:52 rebound.

16:53 With recovery and in some things

16:55 like capital flows,

16:56 like private capital flows,

16:58 we're seeing a modest rebound,

17:00 but rebound is different from,

17:02 from recovery in that it could be sharp,

17:06 but it's not likely to be sustained.

17:09 and I will,

17:11 stop on that,

17:12 note.

17:14 Thank you.

17:14 Thank you,

17:15 Carmen.

17:15 Hyun,

17:17 Hyun Xin is currently the economic advisor and head of research

17:20 at the BIS and a great expert on these issues.

17:24 Also a longtime colleague.

17:26 Huyun,

17:26 what do you think?

17:27 Do you agree?

17:28 Or are you more optimistic?

17:31 Well,

17:31 let me see.

17:32 I think it's been,

17:35 let me,

17:36 let me focus on another area which,

17:38 where you can judge whether,

17:39 you know,

17:39 this is any more optimistic or not,

17:42 But,

17:44 the,

17:45 the pandemic is really,

17:48 It's really unusual in,

17:49 in being,

17:51 3 sharks rolled into one,

17:55 it's a,

17:55 it's a health crisis,

17:57 first of all,

17:57 it is a pandemic after all.

18:01 then we had this very sharp period of,

18:03 of an economic,

18:05 sudden stop,

18:06 partly driven by the lockdowns,

18:07 but also partly,

18:09 by the changes in behavior.

18:13 but much more relevant for this panel is the,

18:17 episode that we saw in March.

18:18 We saw a very,

18:20 sharp,

18:21 but relatively short-lived,

18:25 stress to,

18:27 to the financial system.

18:30 capital flows,

18:33 so a very sharp reversal.

18:37 For about 2 or 3 weeks from the beginning of,

18:40 from the middle of March to,

18:41 to early April.

18:44 I think this is a very important,

18:45 you know,

18:46 backdrop for us because

18:50 where I'm headed is to talk about fiscal space,

18:53 because I think fiscal space is probably going to be the overriding theme

18:58 for the global economy

19:00 and for the,

19:00 you know,

19:00 for the foreseeable future.

19:03 And the reason I say that is,

19:05 you know,

19:06 when we went into the crisis in,

19:09 in March,

19:10 the hope was that this was going to be,

19:12 you know,

19:13 because this was a

19:15 pandemic,

19:16 induced,

19:18 economic downturn that,

19:20 once we

19:21 shut down,

19:22 we see the first wave,

19:26 through,

19:26 and then we're over that hump that we could somehow emerge,

19:30 from

19:31 Suspended animation,

19:33 we can just stop the clock and then re-emerge,

19:35 yeah.

19:37 and during that period,

19:39 one of the really welcome surprises was how

19:42 well,

19:43 the fiscal authorities

19:45 stepped up.

19:46 and the fiscal response has been really,

19:49 really very unprecedented.

19:50 And this is,

19:52 the reason why I say it's a welcome surprise is because one of the enduring themes.

19:57 Since the,

19:57 the,

19:58 the great financial crisis has been

20:00 how central banks,

20:03 are the only game in town,

20:06 central banks are the grown-ups in the room,

20:08 and somehow,

20:08 you know,

20:09 central banks are bearing the,

20:10 the burden of,

20:12 of sustaining activity.

20:14 this time around that,

20:15 that,

20:15 that was not the case.

20:17 the fiscal authorities stepped up in a big way,

20:19 and the numbers are really very telling.

20:21 In the advanced economies,

20:22 the fiscal packages were.

20:25 Were very large,

20:26 so budgetary measures

20:28 are of the order of 10% of GDP.

20:32 and then on top of that,

20:33 we have the guarantees,

20:36 and,

20:36 and the funding,

20:37 the lending schemes,

20:38 which

20:40 is another 12% of GDP.

20:42 So right there you have 22% of GDP.

20:45 Announced within a space of a few weeks in the spring.

20:50 the scale is much more modest,

20:53 in the developing world.

20:55 for the emerging markets,

20:56 the large emerging markets,

20:58 it's of the order of 3% of GDP in terms of budgetary measures,

21:02 and only around 2.5% of GDP in terms of funding and guarantees.

21:06 And I'll come to that because I think this is a very,

21:08 very important,

21:10 distinction and,

21:10 and it's,

21:11 it's useful to ask why.

21:13 But the important point is that these um uh initial fiscal injections were meant to

21:19 tide

21:20 us over a very brief period of disruption.

21:24 you know,

21:24 while we were hunkered down,

21:26 while we were in lockdown,

21:28 this was a way to

21:30 put um uh businesses on life support so that they don't need to,

21:35 you know,

21:35 that

21:36 we can somehow preserve the fabric of the economic relationships.

21:41 So that once we emerge from the crisis,

21:44 we can then

21:45 um restart the economy uh without having done permanent damage.

21:50 So these were meant to be very temporary.

21:53 And um

21:55 everything was predicated

21:58 uh the,

22:00 uh the pandemic um being a short-lived shock.

22:03 but what we see is that,

22:06 and,

22:06 and so the course of the global economy depends very much on the course

22:09 of the pandemic itself.

22:11 If we have a second wave,

22:13 If the first wave lingers,

22:15 the virus lingers

22:16 somewhere in the world,

22:18 and given the epidemiology and given the,

22:21 the seasonal nature of these things,

22:23 it's gonna,

22:24 flare up,

22:24 somewhere again.

22:26 And I suppose,

22:27 you know,

22:27 in that

22:28 less optimistic scenario,

22:30 even

22:30 the really very large fiscal packages are not going to be enough.

22:35 We'll need to dip in again.

22:37 The reason why the emerging markets have been

22:39 much more modest is because uh they have,

22:42 I mean,

22:46 a tautology is to say

22:47 they didn't spend because they have less fiscal space.

22:51 So what does that mean?

22:53 you know,

22:53 in particular,

22:54 well,

22:54 you either,

22:55 you can either,

22:57 finance,

22:58 you can either,

22:59 mobilize resources by,

23:02 issuing government bonds,

23:04 or you can use monetary finance,

23:06 financing of some sort.

23:07 And we know that monetary financing

23:09 doesn't normally end well,

23:12 in emerging markets.

23:14 and so the

23:16 local currency,

23:16 government bond markets,

23:18 you know,

23:18 have played a very important role.

23:21 very,

23:22 encouraging development in the last 20

23:25 years since the 1990s emerging market crises

23:28 has been that the emerging market governments at least,

23:32 have well and truly

23:33 graduated from original sin.

23:36 around 90% of central government borrowing,

23:41 in the emerging markets,

23:42 in the,

23:42 in the bond market at least,

23:44 it's a local currency.

23:46 And um

23:48 I think uh to say that there is limited fiscal space is also

23:53 uh to say that there is limited appetite for investors

23:57 in the local currency bond market to absorb additional sales.

24:01 One thing which has been very encouraging uh this time around,

24:04 compared to last,

24:06 previous crisis is that

24:09 central bank response,

24:11 in those emerging markets that actually suffered the,

24:13 the 1990s emerging market crisis

24:16 has departed from the previous playbook in,

24:19 I think,

24:19 a very encouraging way and that

24:21 normally when you have very sharp uh capital outflows,

24:25 you see monetary policy being tightened.

24:29 this time around,

24:30 what we saw was that emerging markets

24:32 central banks actually loosened monetary policy.

24:34 They cut rates,

24:35 and many of them

24:37 intervened in the bond market to actually,

24:39 restore,

24:40 you know,

24:40 market functioning.

24:41 It's not quite QE,

24:43 but,

24:44 so the scale was very small,

24:46 but this was actually a new,

24:47 development,

24:48 which I think was a,

24:49 was a very salutary one for us.

24:51 So I think there are some encouraging signs.

24:53 But,

24:55 Going forward,

24:57 we're going to need a lot more fiscal space.

25:00 And depending on the course of the pandemic.

25:05 the scale of,

25:06 of that,

25:07 fiscal need is,

25:09 is going to be,

25:11 you know,

25:11 it's going to put,

25:13 could actually even,

25:14 outstrip the,

25:15 the already very,

25:17 aggressive

25:18 spending that we've seen so far.

25:22 Fiscal space,

25:23 I think is going to be the,

25:24 the overriding theme,

25:25 and uh I'm sure that Jeremin will also,

25:28 you know,

25:28 mention this in his,

25:29 in his intervention.

25:30 So let me stop there.

25:31 Thanks,

25:32 thanks,

25:32 hun.

25:33 we actually have a publicly available database um on cross-country fiscal space,

25:39 which includes multiple measures of uh fiscal space update them twice a year,

25:44 and it's very true that fiscal space was

25:46 limited before the crisis and is much more constrained now.

25:50 And uh we,

25:51 and together with the IMF,

25:53 we called for

25:54 debt service suspension for the poorest countries because of this exactly

25:59 uh limited fiscal resources to deal with

26:02 the critical health and economic spending,

26:05 the health spending that Anne was also mentioning,

26:07 and so far,

26:08 40 countries have participated

26:11 and this amounts to a fiscal space of about

26:13 8.7 billion for the period May to December.

26:17 and a key component of this is that an investment transparency.

26:22 There will be a discussion at the G20 this weekend,

26:24 but also in October to see if this should be

26:27 suspended.

26:28 Perhaps we can come to that later.

26:30 I'm going to go to Pierre Olivier,

26:33 and now Pierre Olivier Goinches is a professor of economics at Berkeley

26:39 and uh another very impressive expert.

26:42 what,

26:42 what are your thoughts,

26:44 Pierre Olivier?

26:47 thank you for,

26:48 thank you for having me,

26:49 and I apologize if there's a little bit of background noise.

26:52 I'm,

26:52 I'm outside.

26:52 This is where I have the best,

26:54 Wi Fi reception,

26:55 but it comes with uh a little bit of noise.

26:58 well,

26:58 I think a lot of,

27:00 very,

27:00 very good,

27:00 very salient points have been,

27:01 have been made by Anne Carmen and,

27:03 and Jun.

27:04 let me sort of,

27:06 present things maybe in a slightly different,

27:08 a slightly different light,

27:10 although,

27:11 on the whole,

27:12 I'm not gonna disagree at all with the,

27:13 with the general,

27:14 message here.

27:15 the,

27:16 the first point I want to make is when we look at developing countries,

27:20 there is of course tremendous heterogeneity,

27:22 but,

27:22 the,

27:22 the shock,

27:23 the economic shock is,

27:25 is huge.

27:25 I mean the,

27:26 the,

27:26 the latest,

27:27 real projections

27:29 tell us we have a swing from

27:30 You know,

27:30 of about 6% percentage points in,

27:33 in growth between 2019,

27:35 2020.

27:35 It's,

27:36 it's,

27:36 it's a tremendous blow.

27:38 it may in fact be bigger than the health,

27:41 shock,

27:42 at least at this stage in,

27:43 in the pandemic and again with enormous variation across countries,

27:46 but,

27:47 but the economic,

27:48 impact has been,

27:49 has been first and foremost.

27:52 now the playbook of,

27:53 of advanced economies that

27:55 Yon has,

27:56 has summarized has been to sort of throw everything at,

27:59 at the problem,

28:00 in particular on the fiscal side,

28:02 but also with liquidity measures and,

28:03 and support measures that I'll come back to.

28:06 and,

28:06 and immediately when,

28:07 when this started around March or April,

28:10 many people realized this is gonna be something that many

28:13 developing economies and emerging economies are we're gonna have trouble,

28:17 following.

28:19 fiscal revenues,

28:20 were bound to collapse with the economic downturn.

28:23 Fiscal expenditures,

28:25 were bound to grow,

28:26 if only because of the need to address the health issues,

28:29 but also to support the economy.

28:31 and so this would have to come from somewhere

28:33 and if this is precisely happening at a time when,

28:37 advanced economies are,

28:39 drawing from the market and running fiscal

28:41 deficits are at the unprecedented levels,

28:43 the expectation would be that

28:45 this would put tremendous strain on,

28:47 on emerging market economies and,

28:49 and,

28:49 and many,

28:50 many economists,

28:50 and I among,

28:51 among them

28:52 were expecting that there would be a tsunami of,

28:55 of defaults that would be coming very shortly after,

28:58 after,

28:59 the onset of,

29:00 the COVID pandemic,

29:01 and,

29:01 and the surprise here is that it started that way but it didn't,

29:05 it didn't happen.

29:07 and by and large,

29:08 a lot of countries have,

29:10 been,

29:11 able to avoid,

29:13 you know,

29:13 defaulting on,

29:14 on their external debt,

29:14 and I'm gonna leave out Argentina as a special case here,

29:18 And,

29:19 and even I've been able to access the markets.

29:20 And so I think,

29:21 I think this,

29:22 this,

29:22 tension between what

29:24 I think a number of us on,

29:25 on this,

29:26 on this panel and,

29:27 and,

29:27 and more broadly,

29:29 would have expected,

29:31 was about to happen and,

29:32 and what did actually unfold.

29:33 It's,

29:34 it's,

29:34 it's,

29:34 it's interesting sort of pause and,

29:36 and go back and ask ourselves,

29:38 what,

29:38 what happened.

29:39 And so,

29:39 obviously,

29:42 the,

29:42 the,

29:42 a key factor,

29:43 I think has been the sort of extremely ultra loose,

29:46 monetary policy from the advanced,

29:49 the advanced countries and the Fed and the ECB and the Bank of Japan,

29:52 Bank of New England and all,

29:53 all of these,

29:54 central banks have been playing a very important role.

29:57 And,

29:57 and it's

29:58 very clear that if you think

30:00 that,

30:02 The,

30:02 the COVID-19 crisis is gonna be temporary.

30:06 If you think that a vaccine is gonna be available within,

30:09 say 18 months or,

30:10 or 2 years,

30:12 even if you have terrible numbers for one year or

30:14 two when you're discounting things at close to 0,

30:17 0% interest rates and with relatively mild risk premium,

30:21 that has a very,

30:21 very limited impact on the,

30:23 on the

30:23 NPV.

30:24 So if,

30:24 if you have that sort of calculation in the back of your mind,

30:27 it's not too surprising.

30:29 That you come up with the view that market access maybe was maintained,

30:32 you could do the same calculation in fact for

30:34 uh stock markets in advanced economies and ask yourself why is the,

30:38 you know,

30:38 stock market in the US or in other,

30:40 uh other countries so elevated when

30:42 we have terrible numbers coming from the,

30:43 the labor market or business failures every day.

30:46 And again,

30:47 it's the same kind of calculation.

30:48 If you think that it's temporary,

30:49 even if the news are atrocious but it's a short amount of time,

30:52 then it's not too surprising that the present value is not affected.

30:56 But you have to realize that this is sort of a very optimistic scenario

30:59 and,

30:59 and somehow,

31:01 I think,

31:02 and I will agree with,

31:03 with Carmen on this,

31:04 I think that the markets are,

31:05 are really not necessarily pricing,

31:07 pricing things right.

31:08 Now why would that be the case?

31:10 Well,

31:10 11 view would be that somehow

31:14 there's been a sense in which

31:16 they've been able to convince emerging market economies,

31:19 and developing countries that maintaining market access is,

31:22 is something that is extremely important for their future

31:25 and that somehow these countries should bend backwards and make sure

31:28 that

31:29 the payments to,

31:31 private cap,

31:31 you know,

31:32 private investors

31:33 have to continue,

31:34 and I think that's some of that has been,

31:36 has been going on.

31:36 There's been a tremendous amount of,

31:38 PR activity going in that direction.

31:41 And,

31:41 and,

31:41 and I think that,

31:43 you know,

31:44 it begs the question of

31:46 where uh these countries if I,

31:48 if I go back to the fiscal capacity that Jun was talking about.

31:52 If the payments are made to private,

31:54 private investors,

31:54 where is that coming from?

31:56 It has to be coming from something else and

31:57 it can be coming from basically two places.

31:59 One is that

32:00 those countries are not deploying

32:02 fiscal policy at a sufficient scale

32:05 in their own economy either to help

32:07 people who are sick or uh infected by the virus or,

32:09 or supporting the domestic economy.

32:12 or somehow it's rechanneling some of the

32:14 help they're receiving through other means,

32:15 whether for instance it's for,

32:18 official,

32:18 official,

32:20 assistance,

32:21 that is going,

32:21 sort of going back out and,

32:22 and supporting private capital.

32:24 I think some of that

32:25 is definitely,

32:26 is definitely going on

32:28 and,

32:28 and,

32:28 and we have to keep that.

32:29 We have You have to keep that in mind.

32:30 So when I think about,

32:31 when I think about all this,

32:32 I think the markets are,

32:34 are still sort of

32:35 have a rosy view about the future in terms of

32:38 how quickly,

32:39 things could rebound.

32:40 There is mounting evidence that especially in,

32:43 I mean in any country,

32:44 but especially in developing and,

32:45 and,

32:46 and emerging market economies.

32:47 The,

32:48 the blow to the economy that is happening right now

32:50 could affect potential growth for

32:53 more than just 1 or 2 years,

32:54 but maybe,

32:55 you know,

32:55 10 years out.

32:56 People are talking about a lost decade just

32:58 like there was a lost decade for Latin America

33:00 and,

33:00 and that doesn't require necessarily that there's a

33:02 suspension of payments or there's an outright default.

33:05 It's just the damage to the economic fabric

33:07 that's gonna be,

33:07 that is already underway,

33:09 and I think,

33:09 I think

33:10 that is somehow

33:11 perhaps not quite sufficiently.

33:13 and,

33:13 and,

33:14 and,

33:14 and so the,

33:15 the reassessment of the risk,

33:17 I think,

33:18 is gonna be coming,

33:19 gonna be coming especially for countries where,

33:22 we'll come to that in the second part of the,

33:24 of this panel,

33:24 I'm sure,

33:25 but,

33:26 where the amount of involvement of,

33:28 official assistance and official flows is just not on the scale that is sufficient.

33:32 To somehow ensure private,

33:33 private capital flows and so

33:35 at some point down the line,

33:37 I fully expect that the issues that

33:39 were raised early on but somehow surprisingly

33:41 were not,

33:42 were not realized and that,

33:43 that was sort of a good news in a sense.

33:45 We'd rather not be in a wave of,

33:47 of sovereign defaults right now.

33:49 those issues have not been,

33:52 solved.

33:52 They've just been postponed and they are still looming very,

33:55 very large,

33:56 over us in my view,

33:57 and I'll stop here.

33:58 Yeah,

33:59 thank you.

33:59 Thank you,

33:59 Pierre Olivier,

34:01 very much,

34:02 issues that we have been,

34:05 discussing among ourselves as well,

34:06 of course,

34:07 including with uh Jeromin.

34:09 Jeremin Zettelmeyer is Deputy Director of Strategy Policy and

34:12 Review department at the IMF and another longtime colleague.

34:17 The issue of uh bringing the private sector

34:20 to many of these initiatives have been very much on top of our minds.

34:23 Over to you,

34:24 Jeremin,

34:24 what are your thoughts?

34:26 Thanks.

34:27 so I'm,

34:27 I'm afraid this looks like it's gonna be

34:29 one of these awful panels where everyone basically uh

34:33 agrees,

34:34 and so at this point,

34:35 it's very difficult to say

34:37 anything

34:38 original at this point.

34:38 So what,

34:39 what I thought were edgy remarks on my side

34:42 now read more like a summary of what is said.

34:46 but maybe there's some value to that with,

34:48 with my own little spit.

34:49 So I want to make basically two points.

34:52 so one is uplifting and the other one is,

34:55 is the opposite.

34:56 So the,

34:56 the uplifting point is that this has really

34:59 not been your typical emerging market crisis.

35:03 EMs have been hit by multiple severe shocks,

35:07 including a brief sudden stop in capital flows in March,

35:10 like you said,

35:11 but subsequently,

35:13 Something extraordinary has happened,

35:15 which we really have not seen in many emerging market crises,

35:18 which is that external finance has started to act

35:21 as a shock absorber rather than as an amplifier.

35:23 So that sort of defies

35:25 past regularities.

35:27 And why is this the case?

35:29 Well,

35:29 because of the Fed,

35:31 So emerging markets were really lucky

35:33 that this is a global shock.

35:35 It's not just an emerging market shock,

35:37 so the advanced countries get to react to in a massive way,

35:40 and those spillovers help emerging markets.

35:43 It doesn't mean sort of that the old laws of

35:45 emerging market crisis no longer apply,

35:47 it just means that you have to have this.

35:50 Very massive sideshow from an emerging market perspective,

35:53 which is the advanced markets and that has

35:55 helped them.

35:56 Now,

35:56 it has had

35:58 an enormous beneficial effect though,

36:00 and so if anything,

36:01 I think this has been

36:02 uh not played out enough,

36:04 which is that given continued access to debt finance,

36:08 macro policy reactions in EMs have in fact looked

36:11 a lot like policy reactions in advanced economies.

36:14 So Juan pointed this out for,

36:16 for monetary policy,

36:18 it's also true for,

36:19 for fiscal policy.

36:20 Now,

36:20 it's,

36:20 it's true that we haven't had

36:22 um fiscal expansions

36:24 of the same scale as an advanced country,

36:27 so there has been less fiscal space,

36:29 but there has been some fiscal space and

36:31 I would

36:32 put the difference between A's and EMs as maybe not being quite as dramatic as

36:37 Hun put it.

36:38 So if you,

36:38 if you look,

36:39 say,

36:39 at cyclically adjusted primary balance

36:42 projections over the year,

36:44 the difference is not,

36:45 it's not like

36:46 a factor of 4 or 5,

36:47 it's more like a factor of,

36:49 of 2,

36:50 or so

36:50 in the ability to respond,

36:53 processing.

36:54 so this is sort of the,

36:55 the,

36:55 the first point.

36:58 then the,

36:58 the second point is,

37:00 has also been made,

37:01 which is essentially a variation of the old say that,

37:04 you know,

37:05 past performance is not a guide to future success,

37:08 right?

37:09 we should not derive too much comfort from

37:12 the fact that the crisis has been so unusual and that private flows.

37:16 have played a

37:17 very benign role on net

37:19 for the next phase of the crisis,

37:21 for all the reasons that have been stated by,

37:24 Carmen and,

37:25 and Huhne and particularly by Pierre Olivier,

37:27 and so here's another

37:28 little rundown.

37:30 first of all,

37:30 favorable financial conditions are super fragile.

37:32 They do depend on central bank actions in,

37:35 in advanced economies.

37:37 you know,

37:37 one possible scenario,

37:39 for example,

37:39 is that advanced economies start recovering.

37:42 Before EMs do,

37:44 and then you could get a temper tantrum,

37:47 type,

37:48 effect.

37:48 Now,

37:49 the US for,

37:50 for better or worse,

37:51 doesn't seem to be on that track,

37:53 so we will have very easy financial conditions for a,

37:56 for a long time precisely because,

37:59 you know,

37:59 the,

37:59 the crisis,

38:01 health level is not being fully dealt with,

38:03 but,

38:04 in principle,

38:05 you could get a reversal.

38:06 Then the,

38:07 the other uh obvious argument is that even at unchanged financial conditions,

38:11 so everything staying super easy,

38:13 the room for extra market borrowing is much lower now

38:16 following the first round of fiscal responses.

38:18 simply having

38:19 a low

38:21 Interest rate,

38:22 doesn't help you forever,

38:23 right?

38:23 You're gonna hit your debt ceilings at one point or the other,

38:26 and this is

38:26 the point that Jayla made about fiscal space,

38:29 running out.

38:30 And then the third and most serious point is that,

38:33 you know,

38:33 as this crisis persists,

38:34 we are going to,

38:36 you know,

38:36 the,

38:36 just the availability of finance is,

38:38 is going to,

38:39 you know,

38:40 play less

38:41 and less of a role because solvency problems are gonna come,

38:44 to the forefront in an increasing,

38:47 way.

38:48 And,

38:48 and so how can we deal with all of this?

38:50 So now maybe stepping a bit,

38:52 a bit into sort of the,

38:53 the policymaker or IFI,

38:56 role.

38:57 you know,

38:57 the first two,

38:59 namely

39:00 making up for a

39:02 reversal in financial conditions or,

39:05 helping.

39:06 countries deal with emerging market,

39:09 developing countries deal with lack of fiscal space,

39:11 sort of that is in a sense classic IFI

39:14 territory,

39:14 right?

39:15 That's what we're good at,

39:16 and,

39:16 and we still do have firepower

39:19 and,

39:19 you know,

39:19 we're just getting going,

39:21 you know,

39:21 the World Bank and the IMF,

39:22 they're gonna be there for you,

39:23 and so,

39:24 you know,

39:24 we have some optimism on this.

39:26 On number 3,

39:28 you know,

39:28 the solvency problems,

39:30 of course,

39:30 this is where

39:31 we kind of run out of tools,

39:33 right?

39:33 Because the,

39:34 I mean,

39:34 they are defined as essentially the type of problems that cannot be addressed

39:38 through a combination of fiscal adjustment and,

39:41 and,

39:41 and extra finance,

39:43 and so we're gonna need

39:44 debt restructuring.

39:45 and so then the question is,

39:47 is the financial architecture set up to,

39:50 to do that?

39:52 the answer,

39:53 which I'm not supposed to give now because we have another round in the discussion,

39:58 it depends on the depth of the problem.

40:00 And here,

40:00 frankly,

40:01 I still don't know

40:02 how bad it's going to get,

40:03 right?

40:03 Because my initial instinct was exactly

40:05 like Pierre Olivier,

40:06 that,

40:07 you know,

40:07 we are back to the 80s.

40:08 This is gonna be like a systemic debt crisis in 5 minutes,

40:12 but it wasn't,

40:13 it wasn't.

40:14 You know,

40:14 it was surprisingly,

40:16 there was a surprising amount of resilience.

40:17 We do have

40:19 quite a lot of deep debt problems we're dealing with,

40:22 but it hasn't been sort of this big wave of defaults,

40:25 and the question is,

40:26 you know,

40:27 is it

40:28 yet or

40:28 can we get through with,

40:29 with,

40:30 without it,

40:30 and if we do get more,

40:31 how do we address it?

40:33 Yeah,

40:34 this is exactly the point uh that would be really great to discuss now,

40:38 because as you say,

40:40 this crisis is different from

40:42 many other crises that at least I've seen in the last 30

40:46 years that I've been working because usually you come to a crisis,

40:49 you kind of know what wreck you inherit.

40:51 You design a strategy,

40:53 good or bad,

40:54 and,

40:54 and you deal with it.

40:56 Here,

40:56 it's very difficult to know what is liquidity,

40:59 what is solvency?

41:00 Who is going to be viable?

41:02 It all depends on,

41:03 like what many of you said,

41:05 how long this crisis goes on,

41:07 but it also depends on,

41:09 you know,

41:09 people's expectations,

41:11 behavior changes,

41:12 consumer preferences,

41:13 and all.

41:14 it's very difficult to know

41:17 exactly

41:19 what is it,

41:20 how much of this is a liquidity problem and,

41:22 and.

41:23 Who or what has a,

41:24 as a solvency

41:26 issue.

41:27 And,

41:28 you know,

41:28 firms that appear illiquid or countries that

41:31 appear illiquid may become insolvent after all,

41:34 after a while,

41:35 depending on

41:36 how widespread the bankruptcies are and,

41:39 and,

41:39 you know,

41:40 the banks came to this crisis with buffers,

41:43 but,

41:44 you know,

41:44 banks' balance sheet will be impacted and I'm sure we'll hear from

41:49 from Hernandez.

41:52 Because especially in the MDEs,

41:53 we don't have insolvency regimes.

41:57 These are very weak,

41:58 you know,

41:59 this could trigger potential financial market stress

42:02 and it becomes very difficult to disentangle.

42:06 I guess the question is

42:09 This has started as a health crisis.

42:11 It turned into an economic crisis.

42:13 We have to

42:14 do whatever we can to make sure that this doesn't turn into a financial crisis,

42:19 but inevitably I think it will be the case in some countries,

42:24 The question is,

42:25 what can we,

42:26 what can we do and what can the international community do?

42:30 Jeremy,

42:30 you started talking about this.

42:32 Perhaps I could turn to Anne who has held

42:34 very important positions both at the fund and the bank

42:38 ask the question.

42:39 You know,

42:39 how can the

42:41 international community help mobilize private capital flows,

42:44 and if these are not enough,

42:46 what can the international community do

42:49 to close these um

42:51 financing gaps as you mentioned uh earlier as well?

42:57 And you want me to go ahead on that,

42:59 please.

43:02 You want me to go ahead on that?

43:03 Yes,

43:04 please.

43:06 Well,

43:06 let me,

43:06 let me react to two things.

43:08 First,

43:08 it seems to me,

43:09 at least

43:09 in my judgment,

43:11 that most of the other panelists are

43:15 Downplaying a little bit at least the fact

43:18 that in most of the developing countries,

43:20 the COVID virus has not as yet

43:22 had the impact on economic activity that it's likely to have.

43:26 I tried to stress what isn't there,

43:28 but what isn't there by way of

43:30 ability to cope with a thing in the short run,

43:32 I think means that we are going to see more countries with more difficulties

43:36 quite quickly,

43:37 and that that is going to feed over into.

43:40 Economic activity in the countries affected with or without capital flows,

43:45 with or without anything else,

43:46 simply because we are going to see a large

43:48 number of very sick people before things turn around.

43:52 The sooner the vaccine comes,

43:53 the better.

43:54 The sooner other things come,

43:55 the better it can be mitigated,

43:57 but it seems to me that in the short run

43:59 it's not,

44:00 I don't think we're going to see very much

44:03 private capital almost.

44:04 No matter what,

44:05 in most of the countries,

44:06 because indeed we're going to see the COVID virus getting worse,

44:10 and they're going to be seeing

44:11 how difficult it is to cope with it

44:14 in those circumstances.

44:15 So the first part of my answer would be that.

44:17 The second part of the answer would be,

44:18 of course,

44:19 we already have the initiative

44:20 on the standstill on debt servicing for the least developed countries,

44:25 and that clearly could be of some help.

44:27 There could be more of that.

44:29 How do you get it?

44:29 The private side,

44:30 I have no idea.

44:31 As you know,

44:32 I earlier on thought that we needed to

44:34 get an international sovereign debt restructuring mechanism,

44:37 but quite clearly the private sector thought it could handle it quite well.

44:41 But now that we are in the midst of this,

44:43 I'm not at all sure they will continue thinking so.

44:45 And yet without it,

44:46 to see a clear cut way to handle

44:49 what I think is going to be forthcoming is going to be very,

44:52 very difficult.

44:53 You've mentioned Argentina.

44:55 India doesn't look that far off some kinds of problems.

44:58 Turkey doesn't look that far off some kinds of problems.

45:00 Zimbabwe is already there,

45:02 so are several African countries,

45:03 not to mention Lebanon.

45:05 When two or three of these have difficulty quickly and they make the headlines,

45:09 it's

45:10 very likely that others will follow,

45:12 I think,

45:12 in the same kind of pattern as happened in 1998.

45:16 So I worry a great deal about this,

45:17 but in terms of what can be done.

45:19 I think the main thing is to address as best one can

45:23 the problem of getting the supplies and the personnel

45:26 and other things going to

45:27 at least reduce to the extent possible

45:30 the impact of the COVID virus on economic activity.

45:33 It's big and it's going to get bigger,

45:35 and there's going to be less than developing countries can do about it than in the US

45:39 and even here,

45:40 the lesson seems to be that if you let up too soon and the surge starts growing again.

45:45 economic activity is going to falter,

45:47 almost no matter what else you do.

45:49 Let me stop there.

45:53 Thank you,

45:53 and yeah,

45:54 fully agreed.

45:55 We do see developing economies starting to show some of them are actually

45:59 um in very difficult situation,

46:02 on the health front.

46:06 on the role of debt service moratoriums,

46:08 Olivier,

46:09 you've written on this.

46:10 You have a proposal out.

46:12 What do you think the role of this in easing liquidity pressure?

46:16 How effective are these or any other types of options in

46:22 bringing in the private sector in particular?

46:27 Well,

46:27 you know,

46:29 I was arguing earlier and as many people have mentioned as well,

46:33 you know,

46:34 the,

46:34 the,

46:36 the need to secure or sort of stronger

46:38 or more financing from the private sector hasn't,

46:40 hasn't arisen yet,

46:43 and,

46:43 but it doesn't mean that it will not,

46:45 and,

46:45 and I

46:47 worry

46:48 tremendously that we're gonna get into a phase

46:52 where a number of countries will find it increasingly difficult.

46:56 to secure additional financing or to roll over existing,

47:00 financing,

47:01 and that could be because,

47:02 as Yomi mentioned,

47:03 it could be because

47:04 the,

47:05 some of the advanced economies are sort of moving ahead and,

47:08 and somehow capital flows responding to that,

47:11 redirect helps.

47:13 it could be for a variety of reasons.

47:15 It could be because the pandemic become more severe in that part of the world as,

47:18 as I just,

47:19 just mentioned.

47:20 And,

47:21 and so we have to be ready for that.

47:22 And the,

47:22 and the problem that I see is that it's,

47:25 it's very complicated in the kind of uh

47:28 sort of international bond financing world that we live in.

47:30 It's,

47:30 it's,

47:31 it's,

47:31 it's incredibly complicated to organize,

47:34 to organize,

47:35 some form of relief from,

47:37 from private creditors.

47:39 in some,

47:39 in some,

47:40 some of the writings I've,

47:41 I've,

47:41 I've done with uh

47:43 uh Patrick Bolton and uh uh and Lee Bouchai,

47:45 Mu Gulati and uh uh and,

47:47 and,

47:47 and,

47:47 and,

47:48 and others,

47:49 we tried to come up with a way in which

47:52 there would be some form of uh uh standstill for uh uh interest payments and,

47:57 and,

47:58 and principles due over a,

48:00 a short period of time,

48:01 maybe 2020,

48:02 maybe it could be extended to 2021

48:05 The,

48:05 the,

48:05 the,

48:06 really the basic idea is that this would provide much needed relief.

48:09 I mean,

48:10 even if we think that markets have,

48:11 have currently have access,

48:13 that,

48:13 that additional

48:14 source of uh of funding would be,

48:16 would be much needed

48:18 in many of these countries.

48:20 we came up with estimates that,

48:21 you know,

48:21 are imprecise but You know,

48:23 they are significant.

48:23 They are of the order of,

48:24 you know,

48:24 $800

48:27 billion or so for,

48:28 for the affected countries.

48:29 and so,

48:30 the,

48:30 the,

48:30 the,

48:31 the,

48:31 the issue there,

48:32 I think,

48:33 is one of coordination,

48:35 is that when you,

48:35 when you actually talk privately to some of the

48:39 private investors.

48:41 they tell you that they would not necessarily oppose

48:44 something like that if it was on the table,

48:45 they would comply,

48:47 but if it,

48:48 if it's left to the,

48:49 if they are left to their own device,

48:51 they're never gonna be able to argue that they should do any form of relief,

48:55 and they will sort of claim that fiduciary duty will prevent them from doing that,

48:58 etc.

48:59 even if they understand perfectly.

49:01 That it will improve the situation of the afflicted countries

49:04 in a way that would also be beneficial to their bottom line.

49:08 I think there is a role for

49:10 the global community whether it's the G20,

49:11 the IFIs,

49:12 etc.

49:13 and really taking the mantle here

49:15 and,

49:15 and,

49:16 and taking the leadership and saying we need to do this,

49:18 we need to impose this.

49:20 we need to move in that direction and

49:21 that's something that I think the private sector

49:24 secretly or maybe not

49:25 secretly

49:26 will not,

49:26 will not necessarily oppose.

49:27 It has to be coming,

49:28 it has to be coming from,

49:31 from the,

49:31 the,

49:32 the,

49:32 you know,

49:32 the authorities here.

49:33 it can't be left to the self-organization

49:36 and,

49:36 and,

49:36 and again,

49:37 this is not gonna solve.

49:39 this is not a substitute for a sovereign debt restructuring mechanism.

49:42 This is not gonna solve

49:44 deep,

49:44 severe,

49:45 solvency issues that

49:47 some countries are bound to experience with this crisis.

49:50 This is,

49:50 this is going to happen.

49:51 There's some countries are gonna have severe debt restructuring,

49:55 but precisely as you,

49:56 as you argued in a state of deep uncertainty where we don't know.

49:59 Maybe,

49:59 who knows?

50:00 Suppose a virus comes along,

50:01 suppose it can be distributed,

50:02 etc.

50:02 etc.

50:03 Think about the

50:04 good scenario.

50:05 We don't want to push countries

50:06 into restructuring when they don't need to.

50:09 And so alleviating measures that provide liquidity in the short term

50:12 are very much needed,

50:14 I think,

50:15 in order to preserve the option that the,

50:17 the good scenario could be the right scenario.

50:23 Very much along the lines of our,

50:24 our work actually trying to come up with options and proposals as to

50:29 what could work,

50:31 and of course,

50:31 working with Carmen and,

50:33 and Jeremy also.

50:35 Carmen,

50:36 what lessons do we learn from history in terms of dealing with solvency issues?

50:41 What are,

50:42 what are possible options that you think uh can be considered?

50:47 Well,

50:48 let me start also with,

50:49 you know,

50:49 a very brief

50:51 lesson from history.

50:52 I think

50:53 here Olivia is absolutely right that

50:56 we were,

50:56 when this happened,

50:57 we were looking

50:58 for a wave of defaults.

51:01 But I would also highlight that

51:04 Paul Volcker started tightening

51:06 in October of '79

51:08 and 1980 was a year of also crashing commodity prices.

51:15 And things were bad in 1980.

51:17 They were worse in 1981,

51:19 but it wasn't really till August of 198982.

51:23 that Mexico,

51:25 defaulted and the domino effect took over.

51:29 so what I'm saying very concretely

51:32 is that,

51:34 you know,

51:36 Creditors don't want to see defaults.

51:38 They want to get paid.

51:40 Countries don't want to default because the default is very disruptive.

51:43 So we're gonna be in a period.

51:47 Both sides,

51:48 I think

51:49 we're,

51:49 we're

51:50 trying to

51:51 uh uh

51:53 stretch the limits,

51:54 see if this goes away.

51:59 Chaya,

51:59 your question of what can IFIs do,

52:02 and this also

52:03 uh goes back to,

52:05 remarks that,

52:06 you know,

52:07 this wonderful discussion,

52:09 you know,

52:10 has,

52:11 has already raised.

52:14 I agree with Hunxin that there,

52:16 the fiscal needs

52:17 are not gonna go away,

52:19 that the need to,

52:22 finance

52:23 deficits given the implosion in revenues that we're seeing

52:27 because of the implosion in economic activity

52:29 is not gonna go away.

52:32 IFIs,

52:33 unlike the Federal Reserve,

52:34 do have finite resources.

52:38 I think the issue of,

52:40 you know,

52:40 very much

52:42 of looking

52:43 outside the box,

52:46 to see in,

52:47 in ways to help,

52:49 I think

52:51 is going to be necessary because

52:53 the capacity to do

52:55 what the Fed is doing for US corporates.

52:59 or for US subsovereigns.

53:01 That kind of firepower just is not there

53:04 in the IFIs collectively.

53:07 I'd like to focus.

53:09 Chaya,

53:09 going back to the issue of race,

53:11 what can IFIs do?

53:13 There is one thing that can be done.

53:15 This doesn't

53:17 Avoid the crisis,

53:18 but it

53:19 may help resolve it

53:21 quicker.

53:23 and I want to touch on the issue of transparency

53:27 because

53:27 right now,

53:28 I think

53:29 there is a very legitimate,

53:33 given everything that's happened,

53:34 a very legitimate

53:36 question mark on what is an insolvency problem

53:40 what,

53:40 you know,

53:41 and what is a liquid illiquidity problem.

53:44 sorting out in liquidity and insolvency in,

53:46 in an environment like this is very difficult,

53:48 and that also applies,

53:50 Chaya,

53:50 to the issue that you raised

53:51 about the financial sector.

53:53 You know,

53:53 right now,

53:54 I think the focal point of all this discussion,

53:58 has primarily been focused on,

54:01 on issues of sovereign indebtedness.

54:04 But I think there is another layer out there

54:08 and,

54:08 and,

54:09 and he and I will disagree with you on whether we graduated

54:13 from uh original sin.

54:15 I think you're absolutely right that central governments went a long way to,

54:20 that graduation point,

54:22 but I would make two observations.

54:24 That graduation point started

54:26 having big setbacks around 2014,

54:29 and number two,

54:30 that the private sector did not.

54:33 And so the issue of contingent liabilities

54:36 as the next shoe to drop,

54:38 so to speak,

54:40 in uh aggravating

54:43 what is already a frail,

54:46 sovereign situation is a very real one.

54:49 I would

54:50 remind everyone that Ireland's,

54:53 public debt,

54:55 prior to the global financial crisis was below 30% of its GDP.

55:00 And we knew that it ended in 3 digits,

55:04 a 3-digit,

55:06 debt to GDP ratio within a year and a half,

55:09 approximately.

55:11 I think

55:12 one issue,

55:13 to be brief,

55:14 that I'd like to focus on is the issue of transparency.

55:18 And this is not

55:19 a code word.

55:20 It is,

55:21 you know,

55:21 how can you do meaningful

55:24 debt sustainability

55:25 until you really get an encompassing picture.

55:30 the,

55:30 the,

55:31 the,

55:31 you know,

55:32 the extent

55:33 of debt,

55:34 whether it

55:37 State-owned enterprises

55:39 and the,

55:40 and the ones we know best,

55:42 which is,

55:43 of course,

55:43 the central government.

55:45 I think

55:46 also another factor regarding transparency

55:50 that I am concerned with is

55:52 in that effort to avoid or to delay a default,

55:56 there is what

55:57 is often referred to as gambling for resurrection,

56:00 right,

56:00 in which

56:01 you take

56:02 uh Uh,

56:03 riskier measures.

56:04 You,

56:06 get into debt contracts that

56:09 are,

56:10 you know,

56:10 more detrimental in many ways,

56:13 both

56:14 in maturity,

56:16 in yield,

56:17 in collateral,

56:18 in a variety of issues

56:20 that,

56:20 and,

56:21 I think to move on to my final point,

56:24 which is

56:26 IFIs do have

56:29 uh a much more,

56:30 you know,

56:30 much more limited firepower than the Federal Reserve,

56:35 we should be

56:36 preparing and doing,

56:38 doing,

56:38 using this time to really

56:41 try to get at,

56:43 those,

56:45 sorting out.

56:47 The insolvency from the illiquidity problems.

56:52 and I think,

56:53 you know,

56:54 debt transparency at

56:57 at an encompassing level,

56:59 is going to be something to facilitate that because

57:03 if you look at history,

57:06 and now even talking about the post-war,

57:09 forget pre-World World War II.

57:11 Post-war,

57:12 your average

57:14 number of years

57:15 from the initial default

57:18 to the final debt crisis resolution is 77 years,

57:22 and your average number of debt restructurings

57:26 over that period is

57:28 Between 2 and 3

57:30 That's a long road.

57:33 if at a minimum,

57:34 if we can't avoid heading down that road,

57:37 if we can make that dark road

57:39 shorter,

57:40 I think that would be an accomplishment.

57:43 It's

57:44 limited in scope perhaps,

57:45 but,

57:46 you know,

57:47 I think

57:48 shortening that time span is very critical

57:51 to restoring growth.

57:55 Very much,

57:56 very much,

57:57 very much so,

57:58 and,

57:59 we have,

58:00 joined forces,

58:01 of course,

58:02 and we have been publishing as much as possible information on

58:06 The debt uh of uh

58:08 public and publicly guaranteed debt of countries.

58:11 So this is in our website,

58:13 both in terms of the,

58:14 the debt suspension initiative,

58:16 but much more broadly,

58:18 really trying to do our part to increase transparency

58:22 as much as,

58:23 as possible.

58:23 Jeremy,

58:24 what do you think,

58:26 what do you think should be done in terms of um available financial and

58:31 legal instruments to,

58:33 both preserve or

58:34 rebuild solvency?

58:39 when it comes to preserving,

58:41 I think

58:42 What,

58:43 what comes to my mind there is

58:45 essentially the type of phenomenon that Pierre Olivier's proposal responds to,

58:51 right?

58:52 so there could be

58:54 another

58:56 More persistent,

58:58 more damaging,

58:59 sudden stop.

59:01 that would have fire sale qualities,

59:04 so it could actually undermine

59:07 the solvency and

59:09 If that were the case,

59:11 we may need stronger instruments to deal with it

59:15 than,

59:15 for example,

59:16 the DSSI that the Debt Service Suspension Initiative.

59:21 that,

59:23 took a voluntary approach to the private sector that has not

59:26 had much,

59:27 impact.

59:28 And so we may

59:30 have to switch to an involuntary approach and that then,

59:33 I think the first

59:35 paper that everyone should read is indeed the

59:38 uh Bolton and Al.

59:39 paper that Perry is,

59:40 is part of because it,

59:42 it has a very smart way of

59:44 combining involuntariness with

59:48 an approach that would not do.

59:51 In my interpretation,

59:52 and this is personal,

59:54 damage to the longer-term financial relations between

59:58 The data countries and the,

59:59 and the,

59:59 and the private sector.

1:00:00 So this is

1:00:02 Effectively where,

1:00:03 where I would go.

1:00:04 Then there's the issue of rebuilding,

1:00:05 and so if we are talking about rebuilding solvency,

1:00:08 I think we are in the world of,

1:00:10 of deep

1:00:11 debt restructuring,

1:00:12 and so do we have the financial and

1:00:14 legal instruments to do that?

1:00:17 I think that with respect to bond exchanges,

1:00:20 we are,

1:00:21 we are actually

1:00:22 pretty OK.

1:00:23 I don't see that as the main,

1:00:26 as the main threat,

1:00:28 you know,

1:00:28 that is because

1:00:30 after the

1:00:31 SDRMG uh

1:00:33 didn't get enough support.

1:00:35 There was quite an aggressive,

1:00:37 policy agenda

1:00:39 supported by market associations to

1:00:42 make contractual improvements,

1:00:43 to make,

1:00:44 debt crisis,

1:00:46 with respect to bonds easier to resolve,

1:00:48 so we do have so-called enhanced CAC

1:00:51 in about half of the stock

1:00:53 of emerging market bonds right now,

1:00:56 and we particularly have them in the

1:00:57 frontier economies because those are the ones that

1:01:00 came to the table most recently and so they,

1:01:02 they incorporated them.

1:01:04 in addition,

1:01:05 I think that,

1:01:09 credit enhancements can in,

1:01:11 in some circumstances help,

1:01:14 reduce free riding,

1:01:15 so I know the World Bank is,

1:01:17 is working,

1:01:18 on this,

1:01:18 so this is enhancements like

1:01:20 Brady bond type solutions in the context of a deep restructuring,

1:01:24 so it's not a giveaway to the,

1:01:26 to the private sector.

1:01:28 And then finally,

1:01:29 a tricky issue which is not really about free riding,

1:01:32 but it's more about how you

1:01:37 Agreement on capacity to repay in a situation where

1:01:42 As for reasons that Anne emphasized,

1:01:47 Uncertainty on,

1:01:49 on the long-term,

1:01:50 term impact of the crisis is still very high,

1:01:53 so that,

1:01:53 that might be a fundamental,

1:01:55 problem,

1:01:55 right,

1:01:56 to getting consensus around the restructuring offer.

1:01:59 So that,

1:01:59 that is,

1:02:00 I think,

1:02:00 sort of one of the most difficult areas,

1:02:02 so we,

1:02:02 we have a very glib answer to that,

1:02:05 which is you go for a very deep,

1:02:07 restructuring and then you offer value recovery instruments,

1:02:09 so you can

1:02:11 uh offer some upside to investors,

1:02:12 but they,

1:02:13 they haven't really worked in,

1:02:14 in price.

1:02:15 There seem to be information problems.

1:02:17 So this is an area which I personally struggle with and which we,

1:02:21 we are thinking about,

1:02:23 at the fund as well.

1:02:24 so there's this era of bond exchanges,

1:02:26 which doesn't look too bad.

1:02:28 the really difficult one I think is

1:02:30 uh coordination between bondholders and non,

1:02:33 non-bond forms of lending,

1:02:36 you know,

1:02:37 banks,

1:02:38 commodity traders,

1:02:39 and so forth,

1:02:41 this is,

1:02:41 I think,

1:02:42 where the

1:02:44 having had an SDRM,

1:02:45 which we're not pursuing at the fund,

1:02:47 would have helped,

1:02:49 and what,

1:02:50 what can we do in the absence of that?

1:02:52 I think there are probably some coordination options where we can,

1:02:56 as the official sector,

1:02:57 particularly as IFI's,

1:02:58 nudge,

1:03:00 private creditors to come from different asset classes to come to the,

1:03:03 to the table.

1:03:05 and then one should not forget there are legal

1:03:07 instruments both at the international and international level that,

1:03:10 that can be used.

1:03:11 They are just

1:03:12 quite intrusive,

1:03:13 right?

1:03:13 So there is

1:03:14 the possibility of effectively

1:03:17 making enforcement more difficult of existing contracts

1:03:22 the major jurisdictions agree to do that.

1:03:24 They can do that informally,

1:03:26 it would have to,

1:03:28 take place through changes in laws.

1:03:31 or they can try as another idea that is part

1:03:34 of Pure Olivier's paper to declare a state of emergency

1:03:37 with the hope that this will influence the court.

1:03:39 So there's,

1:03:40 there's an array of,

1:03:41 of options there,

1:03:42 but this is really

1:03:43 kind of,

1:03:44 untested,

1:03:45 territory,

1:03:46 the main,

1:03:47 limiting factor there,

1:03:48 I think,

1:03:49 is political

1:03:50 consensus.

1:03:51 So they,

1:03:51 they require

1:03:52 basically consensus among the major jurisdictions issuing sovereign bonds.

1:03:57 to be more intrusive and we are,

1:03:59 we are certainly not at that point

1:04:02 uh where it will be forthcoming.

1:04:06 do you have any thoughts as to how to incentivize private private institutions?

1:04:11 And I'm going to also build in some of the questions from the floor.

1:04:16 so perhaps,

1:04:16 I mean,

1:04:17 this is not going to incentivize,

1:04:19 capital flow.

1:04:20 Measures.

1:04:20 So there's a question about in terms of

1:04:23 inflows and outflows.

1:04:24 We've done a lot of work on this,

1:04:25 so if you can address that,

1:04:27 as well as the role of central banks in strengthening international coordination

1:04:33 during the next phase of the crisis.

1:04:35 So over to you.

1:04:37 So those are good,

1:04:39 those are good questions,

1:04:40 and I think,

1:04:41 I was actually planning to,

1:04:42 to tie in those elements.

1:04:46 you and I will be at the G20 meetings,

1:04:48 later this week,

1:04:50 where,

1:04:51 all the issues of,

1:04:53 the debt service suspension initiative and other,

1:04:56 restructuring initiatives will be discussed.

1:05:01 restructuring issue,

1:05:03 you know,

1:05:03 will eventually have to be

1:05:05 resolved,

1:05:07 both for the private sector borrowers as well as for the official borrowers.

1:05:12 I wonder though,

1:05:13 whether it's more urgent to think about,

1:05:16 in the short term,

1:05:18 the liquidity aspects as well,

1:05:20 because,

1:05:20 you know,

1:05:20 there will come a time.

1:05:23 When uh we will need to resolve the borrowers,

1:05:25 both the private sector and in the official sector.

1:05:29 But going back to the earlier discussion,

1:05:31 the big elephant in the room is fiscal space.

1:05:34 We need additional fiscal space right now.

1:05:37 Debt restructuring

1:05:38 um is best done during quiet times when,

1:05:41 you know,

1:05:42 we have,

1:05:43 you know,

1:05:43 we have gone past the liquidity stage when we need additional funding.

1:05:48 And uh if we believe that the course of the pandemic is such that,

1:05:53 much more fiscal

1:05:55 resources will be needed,

1:05:58 I think it's the additional borrowing

1:06:00 that's really going to be core,

1:06:03 I think,

1:06:05 as commented earlier,

1:06:06 it's absolutely crucial to take account of the FX dimension.

1:06:10 Though,

1:06:11 Carmen rightly points out that,

1:06:13 while sovereigns have borrowed in local currency,

1:06:17 private sector borrowers,

1:06:18 the private,

1:06:19 especially the,

1:06:21 the corporate sector,

1:06:22 has borrowed,

1:06:24 in US dollars primarily.

1:06:29 at the BIS,

1:06:31 you know,

1:06:31 we've been looking at the issue,

1:06:34 of trade financing as well.

1:06:35 And I gave a,

1:06:36 a paper at the Summer Institute,

1:06:39 with Valentino Bruno on this topic,

1:06:40 where,

1:06:41 we find that,

1:06:43 trade financing,

1:06:44 is also primarily in,

1:06:47 in US dollars.

1:06:48 so FX financing is very important.

1:06:50 FX financing is also particularly important in another respect,

1:06:53 in that

1:06:56 Even though you have borrowed uh in local currency,

1:07:00 the investors.

1:07:02 if they come in on an unhedged basis,

1:07:04 holding naked currency exposure.

1:07:07 And what we find time and again is that when risk appetite dwindles.

1:07:14 this is the first asset class that they will actually sell.

1:07:17 so when,

1:07:18 when conditions tighten,

1:07:20 when risk constraints bind,

1:07:23 local currency government bonds,

1:07:24 emerging market governments will be the first asset

1:07:27 class that they will actually sell out of.

1:07:29 So I think,

1:07:30 you know,

1:07:30 one task,

1:07:31 that uh the official sector and the IFI certainly

1:07:35 that need to bear in mind is

1:07:37 how can we,

1:07:40 How can we help the emerging markets at this point

1:07:42 and uh both low and middle-income countries at this point,

1:07:46 to tide over the short-term

1:07:48 crisis?

1:07:48 I think the resolution

1:07:50 is very important,

1:07:51 but I sense that,

1:07:53 you know,

1:07:53 that's something that will become more important

1:07:56 over time.

1:07:58 In the short term,

1:07:59 I think,

1:07:59 finding additional financing is going to be,

1:08:02 is going to be absolutely key.

1:08:03 And I think,

1:08:05 tapping the private market for this,

1:08:06 I think is going to be absolutely crucial.

1:08:08 I don't think we can do it without tapping the private markets.

1:08:11 And so,

1:08:11 I think there are various ways that we can,

1:08:14 we can help,

1:08:15 developing countries tap the private market.

1:08:18 So one way would be to make sure that uh uh everyone,

1:08:22 you know,

1:08:22 the emerging markets,

1:08:23 developing countries have enough.

1:08:26 affects liquidity.

1:08:28 So that,

1:08:29 as the capital outflows happen,

1:08:31 you can intervene to cushion the depreciation.

1:08:34 And by cushioning the depreciation,

1:08:36 what you do is

1:08:37 you actually,

1:08:39 slow the,

1:08:40 the pace of the outflows,

1:08:42 because what you're doing is,

1:08:43 you're actually dampening,

1:08:45 the amplification of the gains and losses that come from the exchange rate moves.

1:08:49 And so it's,

1:08:50 it's going to bind,

1:08:51 the risk constraints of the private,

1:08:53 global investors less.

1:08:56 The other aspect,

1:08:58 that's going to be important is the,

1:09:00 is the monetary policy response.

1:09:02 paradoxically,

1:09:03 when you lower,

1:09:04 when you loosen monetary policy,

1:09:07 And you lower the short-term rate,

1:09:09 what you're doing is you're,

1:09:11 you're steepening the yield curve.

1:09:14 And what you're doing is by steepening the yield curve,

1:09:16 you're actually lowering the cost of hedging.

1:09:18 So if uh the foreign investors come in

1:09:21 on an unhedged basis,

1:09:22 and they do it because uh that's the convention,

1:09:25 they don't hedge typically when they go in.

1:09:28 But they

1:09:29 do typically hedge when they invest in other advanced economy government bonds.

1:09:33 So if you

1:09:35 have a Euro investor,

1:09:36 bond investor investing in US Treasuries,

1:09:39 they would typically do it through a swap.

1:09:42 acquire the dollars in a swap,

1:09:44 and then

1:09:46 uh invest on a hedge basis.

1:09:48 How can you encourage greater hedging behavior,

1:09:51 ex ante hedging behavior

1:09:53 in emerging market government bonds?

1:09:54 you lower the cost of hedging.

1:09:57 And uh uh if you,

1:09:58 and typically investors,

1:10:00 they roll over short-term swaps rather than uh engage for the full term of the,

1:10:06 of the bond.

1:10:07 So if you steepen the yield curve,

1:10:09 what you're actually doing is also to lower the cost of hedging,

1:10:12 and you're actually incentivizing

1:10:14 investors to come in on a hedge basis.

1:10:16 So I think there are various ways,

1:10:18 so the IFIs have a role

1:10:20 in helping with dollar liquidity.

1:10:23 The central banks have a role,

1:10:25 in using monetary policy in a way that cushions domestic activity as

1:10:29 well as to lower the cost of hedging for foreign investors.

1:10:32 And of course,

1:10:33 you know,

1:10:33 the the solvency issue will eventually have to be

1:10:37 will eventually have to be addressed.

1:10:40 but let's not forget the importance of the short-term liquidity issue,

1:10:43 and I think this is probably a big theme that we'll see going forward.

1:10:51 very much,

1:10:51 very much agreed.

1:10:53 I'd like to come back to Ann,

1:10:55 because you mentioned the SDRM,

1:10:59 Jeremy mentioned it,

1:11:00 although he qualified very quickly that this is not being thought at the fund.

1:11:04 So I just wanted to ask,

1:11:07 if you think there's a need for a new debt restructuring framework,

1:11:11 and it now,

1:11:12 is it,

1:11:12 is it now a good,

1:11:13 is now the time to think of a mechanism or what else,

1:11:17 what else are our options?

1:11:20 of course it's my opinion that for quite some time

1:11:23 the world has been in need of a good

1:11:25 sovereign debt restructuring mechanism.

1:11:28 On the other hand,

1:11:29 whenever the world gets one,

1:11:30 it's going to take a couple of years to get there,

1:11:32 and I don't think that we can

1:11:34 have much hope for it to do anything

1:11:36 about the current crisis,

1:11:38 even if the current crisis lasts 3 or 4 years.

1:11:41 The trouble is that when there's Crisis.

1:11:43 Nobody has enough incentive to do it.

1:11:45 And when there is a crisis,

1:11:46 everybody says,

1:11:46 oh yes,

1:11:46 you're going to help X where x could be Zimbabwe or Venezuela or whatever.

1:11:50 And meanwhile then the creditors don't like it at that point,

1:11:53 even though they might have gained from it if they had it in advance.

1:11:56 So I'm not really sure what the answer is as to how to get there.

1:12:00 It may very well be that it's going to take some kind of another.

1:12:05 Uncoordinated chaotic effort

1:12:07 as things come up this time before the

1:12:10 people of the world,

1:12:11 both in the public and the financial

1:12:14 sector,

1:12:15 recognize that it would be in everybody's interest to have such a mechanism,

1:12:18 as to what help it will give within the next,

1:12:21 within the foreseeable future,

1:12:23 I think we have more hope for a vaccine than we do for that over the next 2 years.

1:12:33 I think uh

1:12:34 I'm afraid you are right.

1:12:35 Um and

1:12:37 um I just um I want to talk about um

1:12:41 maybe looking forward.

1:12:44 We have,

1:12:45 we have talked about,

1:12:46 we have actually a publication,

1:12:47 um Global waves of debt,

1:12:49 which shows that we had the first wave in the 70s and 80s uh

1:12:54 in Latin America in low-income countries.

1:12:56 Then the second wave in the 1990s,

1:12:59 which ended with the East Asian crisis and its aftermath,

1:13:03 and then a third wave in the 2000s that ended with the global financial crisis.

1:13:07 And in 2019,

1:13:09 we said,

1:13:10 this is the crest of 1/4 wave of a global rapid debt buildup and,

1:13:15 and actually,

1:13:16 this is,

1:13:17 I don't know if I can show it,

1:13:18 but this is the,

1:13:18 the title.

1:13:19 of the book,

1:13:20 and the cover page of the book,

1:13:22 and you know,

1:13:23 looks now in 2020,

1:13:26 this what looked like a big wave now looks like a

1:13:28 tsunami with all the results of the stimulus and plunging growth.

1:13:33 So the question is,

1:13:34 how do we put incentives for

1:13:38 avoiding these types of huge waves that really,

1:13:41 as Carmen.

1:13:42 That brings a lot of um

1:13:44 uh losses in terms of output,

1:13:47 potential output even.

1:13:49 So I'm going to turn to Carmen and then

1:13:51 each of you in terms of

1:13:54 how should debt markets look going forward?

1:13:56 What can be done now,

1:13:58 or in the near future

1:14:00 uh to have

1:14:02 better,

1:14:03 better results for uh countries.

1:14:06 Carmen,

1:14:06 over to you first.

1:14:11 can you hear me?

1:14:18 in a very self-serving way,

1:14:20 would like to start with this time it's different,

1:14:22 right?

1:14:24 I think these waves are actually important.

1:14:27 I mean,

1:14:28 I think the

1:14:29 financial

1:14:33 interaction is,

1:14:35 it's really important.

1:14:38 you know,

1:14:38 you set the seeds

1:14:40 of crises,

1:14:43 often during upturns or outright booms.

1:14:47 that is when the optimism.

1:14:50 And this is,

1:14:51 I'm not talking about a distant past.

1:14:53 I mean,

1:14:54 what we opened on today,

1:14:57 the disconnect issue.

1:15:00 is very much

1:15:03 the view that the bad shock is temporary,

1:15:05 right?

1:15:06 You're looking beyond,

1:15:07 you know,

1:15:07 you're,

1:15:08 you're,

1:15:09 the numbers look really

1:15:10 atrocious at the moment,

1:15:12 it's gonna be better and,

1:15:15 on the borrower side,

1:15:18 you know,

1:15:19 I hear policymakers congratulating themselves

1:15:23 on the fact that their auctions are oversubscribed.

1:15:27 and on the creditor side,

1:15:30 you know,

1:15:31 the yields are very attractive

1:15:34 in a zero,

1:15:36 zero% interest rate,

1:15:39 environment.

1:15:43 in terms of financial architecture,

1:15:46 I don't think band-aids

1:15:48 are going to do

1:15:50 uh the trick.

1:15:52 you know,

1:15:52 and there are better ways of obviously of managing capital flows during,

1:15:56 especially managing capital flow

1:15:59 inflow booms,

1:16:00 which is

1:16:01 far from the problem,

1:16:03 earlier this year.

1:16:05 I think at the global financial architecture,

1:16:08 the period where we had

1:16:12 comparative.

1:16:14 stability and take it with a grain of salt.

1:16:17 We had fewer banking crises,

1:16:19 we had fewer of these capital flow cycles,

1:16:22 and relatively calmer period in terms of debt restructurings

1:16:28 you know,

1:16:29 from the end of World War II

1:16:33 the uh

1:16:35 1970s,

1:16:36 roughly a period that was characterized

1:16:40 Very broad brush umbrella of

1:16:44 quote-unquote,

1:16:44 financial repression.

1:16:45 You had capital controls.

1:16:47 In other,

1:16:47 in other

1:16:49 words,

1:16:50 capital mobility,

1:16:51 which we haven't said the word capital controls in all this discussion,

1:16:56 were the norm.

1:16:59 rattle off

1:17:00 reams of,

1:17:01 of papers,

1:17:04 highlighting the distortionary effects that,

1:17:07 you know,

1:17:08 growth,

1:17:09 growth issues associated with controls,

1:17:11 but the fact is that was a period of

1:17:13 comparative stability.

1:17:15 However,

1:17:15 I would say that

1:17:17 human nature,

1:17:19 And the booms and the busts and treating good shocks as permanent

1:17:23 and bad shocks as temporary,

1:17:25 which is what we're seeing now.

1:17:29 you know,

1:17:29 in the market sentiment,

1:17:32 is has been with us,

1:17:35 from as far as the eye can see,

1:17:38 I'm not

1:17:39 wildly optimistic that without

1:17:42 that overarching

1:17:45 Architectural change,

1:17:47 and World War II facilitated that,

1:17:49 Maybe COVID will too,

1:17:51 I don't know.

1:17:52 But uh without that overarching change,

1:17:55 this boom-bust

1:17:57 goes back through at least the whole of the 19th century

1:18:01 and most of the post-1970s period until we are where we are today.

1:18:11 I'm gonna ask uh gentleman to come in.

1:18:18 you can think about what could change structurally,

1:18:21 to avoid these boom-bust cycles,

1:18:23 and you can think about what policies should do

1:18:27 while the structure

1:18:29 Continues to be bad,

1:18:30 right?

1:18:32 when you think about what to do structurally,

1:18:34 there are essentially two types of answers.

1:18:38 is to say,

1:18:40 we need to change the structure of capital flows

1:18:43 in ways that

1:18:46 Make them more sticky,

1:18:47 less likely to reverse,

1:18:50 make them,

1:18:51 share more risk.

1:18:53 so this is effectively,

1:18:55 you know,

1:18:55 the agenda

1:18:57 that has to do with promoting,

1:19:00 equity-like instruments,

1:19:02 GDP-linked bonds,

1:19:04 commodity-linked bonds,

1:19:08 Value recovery instruments in,

1:19:09 in debt crises,

1:19:18 so the um,

1:19:22 the emphasis of,

1:19:23 of course,

1:19:24 which is a,

1:19:25 a point that,

1:19:27 that culminate,

1:19:28 at the beginning.

1:19:30 so this is one class of answers.

1:19:33 Another class of answers is to say,

1:19:36 at the end of the day,

1:19:37 if your

1:19:38 financial markets are deep enough,

1:19:41 you will not have to worry,

1:19:43 right?

1:19:45 advanced economies

1:19:47 do not have the same type of problems with volatile

1:19:50 capital flows that,

1:19:52 emerging markets do,

1:19:53 and it was not because Germany started issuing lots of GDP bonds.

1:19:58 And so,

1:19:59 much of our attention,

1:20:00 I think,

1:20:00 is economists working on

1:20:03 The emerging markets

1:20:05 has been on the first class,

1:20:07 let's do struct,

1:20:08 let's promote structural changes.

1:20:10 in my sense is that we have been relatively unsuccessful,

1:20:14 right?

1:20:14 We have not been able to convince either policymakers or

1:20:18 financial markets to do,

1:20:19 move very hard in this uh area.

1:20:21 I'm not saying we should stop trying,

1:20:24 but I'm,

1:20:24 I'm saying that

1:20:25 probably

1:20:27 The application of

1:20:30 some of these innovations is narrower than we initially thought,

1:20:34 and so ultimately,

1:20:35 you know,

1:20:36 the real,

1:20:37 the long-term holy grail is financial development in a broader sense,

1:20:42 and so that is probably the agenda that I would be pushing and of course,

1:20:45 we are doing that,

1:20:46 right?

1:20:46 We are doing it.

1:20:46 So it has to do with the

1:20:48 development of domestic capital markets,

1:20:53 mindful of the fact that while one is developing anything,

1:20:57 it's likely to backfire in some form,

1:20:59 right?

1:21:00 you're always gonna start in a shallow way and then you're gonna get into trouble.

1:21:04 And so that,

1:21:04 that brings me to the second point,

1:21:06 you know,

1:21:06 while things are imperfect,

1:21:08 what can one do?

1:21:09 And I think here,

1:21:10 you know,

1:21:11 there is probably some scope

1:21:17 more proactive in preventing these boom-bust cycles on the side of

1:21:22 uh emerging markets,

1:21:24 right?

1:21:24 So we have this

1:21:25 research agenda going on to the fund called the

1:21:27 Integrated Policy Framework that is probably going to be

1:21:31 used to

1:21:32 Reform what we call the institutional view of the IMF on capital flow measures and

1:21:38 the direction which,

1:21:39 which is going to quote

1:21:41 a sentence from a blog by Geeta Gopinath and Tobias Ardan,

1:21:45 which was published two days ago,

1:21:48 I quote,

1:21:49 to prevent excessive volatility over time,

1:21:51 prudential capital flow inflow measures can mitigate overborrowing in

1:21:55 good times and excessive deleveraging in bad times.

1:21:58 So there you go,

1:21:59 you know,

1:22:00 this is at this point the private view of

1:22:02 two heads of departments,

1:22:03 but I think the fund is probably gonna move in that direction.

1:22:10 It's like the capital um countercyclical buffers,

1:22:13 right?

1:22:14 In some sense.

1:22:15 Pierre Olivier,

1:22:16 any thoughts?

1:22:20 just a few remark I think,

1:22:22 I think,

1:22:23 first,

1:22:24 the sort of the dichotomy that

1:22:26 Yeoin,

1:22:28 pointed out,

1:22:28 which is,

1:22:29 you know,

1:22:29 you could go to one extreme which is

1:22:31 you try to implement the sort of the full risk sharing

1:22:34 arrangement with the menu of,

1:22:36 financial instruments and the depth of financial markets and the

1:22:40 institutional capacity that goes with all of that and the governance

1:22:44 and then you're sort of in a good position.

1:22:47 you know,

1:22:47 markets are gonna be helping and are gonna be absorbing

1:22:51 losses when they need to be absorbed and they're gonna

1:22:53 be spreading the risks when they need to be spread.

1:22:56 and there's this other view which is,

1:22:58 you know,

1:22:58 it's a form of,

1:23:00 financial autarchy.

1:23:01 Let's limit the extent to which we can be subjected to the shocks that are affecting

1:23:05 the world and could buffet our economy and then maybe we're better off if we,

1:23:09 if we try to stand on our own.

1:23:11 I think,

1:23:12 you know,

1:23:12 I want to borrow from Stan Fisher's,

1:23:14 comment he made once about,

1:23:17 optimal exchange regimes,

1:23:18 you know,

1:23:18 do you want to float or do you want to have a fixed exchange rate,

1:23:21 and Stan when he was,

1:23:22 I think

1:23:22 Deputy managing director of the fund

1:23:25 you know,

1:23:25 whichever regime you,

1:23:27 you adopt,

1:23:28 at some point you wish you had adopted the other one.

1:23:31 and I think that's also true when we think about,

1:23:33 about,

1:23:34 capital flow regimes and,

1:23:36 and in,

1:23:36 in a sense that

1:23:38 we understand that

1:23:40 the world in which we try to build the perfect rate sharing.

1:23:44 A kind of arrangement doesn't always work the way it's supposed to work.

1:23:48 It becomes amplifier instead of,

1:23:50 absorbing losses.

1:23:52 in fact,

1:23:52 when you look sort of more systematically and

1:23:54 try to find evidence that financial integration has been

1:23:58 a powerful

1:24:00 engine of,

1:24:01 of growth and development,

1:24:03 it's certainly true at the domestic level.

1:24:05 There is very,

1:24:06 convincing evidence,

1:24:07 empirical evidence that's true at the domestic level,

1:24:09 but international financial integration,

1:24:11 there is much less evidence.

1:24:13 Of that,

1:24:14 compared to,

1:24:15 for instance,

1:24:16 trade integration and other things.

1:24:18 but we live in a world in which there is financial integration.

1:24:21 We're not gonna roll back that clock,

1:24:24 and financial integration is needed to achieve some forms of trade integration.

1:24:28 I mean,

1:24:29 you know,

1:24:29 there's a famous saying that,

1:24:31 global supply chains are,

1:24:32 you know,

1:24:32 payment chains in reverse and,

1:24:34 and that's,

1:24:34 that's true.

1:24:35 It sort of comes with

1:24:36 financial contracts and it comes with linkages.

1:24:40 we have to take into account and one doesn't go

1:24:42 without the other.

1:24:43 I think we,

1:24:44 we are not in one of these extreme views,

1:24:46 neither is desirable,

1:24:47 neither is,

1:24:48 is a good representation of the world.

1:24:50 We're in this sort of middle of the ground

1:24:52 where we have to have an incremental approach.

1:24:55 We have to think about the instruments and how they work and how they operate,

1:24:57 and I think this

1:24:58 integrated framework that Jeroin alluded to is,

1:25:01 is the right way forward.

1:25:03 it's sort of dealing with the uh

1:25:05 Harburger problem of having enough instruments to deal

1:25:07 with enough uh objectives that we want,

1:25:09 we want to target.

1:25:11 and within that,

1:25:13 within that,

1:25:14 incremental world,

1:25:15 we'll still go through,

1:25:16 I think,

1:25:17 cycles

1:25:18 because human nature,

1:25:19 you know,

1:25:19 Carmen alluded to that human nature is human nature is and periods of relative,

1:25:24 you know,

1:25:24 lull and,

1:25:25 and calm on financial markets will lead financial regulators

1:25:29 and Markets to become more complacent and to relax things

1:25:32 and to see how far we can go until we get some retrenchment

1:25:36 and then at some point we might overreact in the other direction.

1:25:38 So I think within that space,

1:25:40 I don't see any major

1:25:42 evolution,

1:25:43 but designing and understanding better

1:25:46 which kind of instruments work when.

1:25:49 is actually first order and so I think

1:25:51 the view of,

1:25:52 you know,

1:25:52 trying to understand whether you have deep

1:25:54 financial markets or shallow financial markets,

1:25:56 whether your monetary policy transmits well or not,

1:25:58 what kind of,

1:25:59 currency invoicing you have and therefore,

1:26:01 you know,

1:26:03 going back to you,

1:26:04 the kind of,

1:26:05 the kind of exposure you have.

1:26:07 To affects risk

1:26:08 coming through,

1:26:09 what the firms are doing,

1:26:10 what the banks are doing,

1:26:11 what the,

1:26:13 what kind of trade credit you have all of this is needed and,

1:26:16 and we're sort of in that phase,

1:26:18 but I don't see,

1:26:18 I don't see any major sort of uh intellectual,

1:26:22 direction that we could go and,

1:26:23 and somehow would offer a different perspective on this.

1:26:27 very good.

1:26:28 So this was a really excellent,

1:26:30 excellent discussion.

1:26:32 We are running out of time.

1:26:34 I'm just gonna quickly wrap up.

1:26:36 I'm not going to summarize because they were really

1:26:38 great ideas and uh I took uh fully at heart what uh Ann mentioned,

1:26:44 which is this is just starting in

1:26:45 emerging market countries and developing economies.

1:26:49 And it's really

1:26:50 um critical that we address.

1:26:52 These issues as soon as just now actually,

1:26:56 so there is a need for huge

1:26:58 collaboration internationally

1:27:01 and supporting countries.

1:27:03 I remember

1:27:04 in '91,

1:27:06 the global recession,

1:27:07 there was a huge credit crunch in the US.

1:27:09 That's the year I actually started at the IMF.

1:27:12 Then we had the exchange rate mechanism crisis in '92,

1:27:16 and many recessions in European countries.

1:27:18 The Nordic banking crisis and,

1:27:20 there were different episodes,

1:27:22 you can '98,

1:27:24 and so on and so forth.

1:27:26 And each time

1:27:27 after a one year kind of calm period,

1:27:30 we done,

1:27:31 we then got the,

1:27:32 the big blow.

1:27:34 key concern is uh

1:27:36 that uh hopefully

1:27:39 this uh time when it looks like things are

1:27:42 relatively calm,

1:27:43 we don't end up With

1:27:44 a major wave again as as in the previous 3 waves,

1:27:49 and I think there is a

1:27:51 huge need for international collaboration

1:27:54 as well as

1:27:56 debt transparency,

1:27:58 as Carmen said,

1:27:59 debt restructuring transparency so that

1:28:02 if we get hit,

1:28:03 that we can actually

1:28:05 hopefully reduce the time and

1:28:08 reduce the pain that goes.

1:28:10 with this,

1:28:11 difficult episodes.

1:28:13 So I'd like to thank,

1:28:15 everyone,

1:28:15 for participating and listening.

1:28:18 This was,

1:28:19 really,

1:28:19 a great discussion.

1:28:20 I hope,

1:28:21 I wish we had more time,

1:28:24 thank,

1:28:25 thanks again and,

1:28:26 looking forward to continued discussion.

1:28:29 Thank you.

1:28:30 Thank you.

1:28:31 Thank you.

1:28:32 Thank you.

1:28:33 Thanks,

1:28:33 everyone.

1:28:34 Thank you.

1:28:35 Thanks,

1:28:35 everyone.

1:28:37 Hi everybody.

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transcript

Thanks for joining us in this discussion. I'm Jay La Pazar Volo. I'm the vice president of Equitable Growth Finance and Institutions at the World Bank Group, and I'm really looking forward to a substantive discussion on channeling capital flows to developing countries and the role of IFIs. I'm Joined by great experts uh today and um really, look, I'm going to introduce them uh with their current positions in a few minutes as I give them the floor. Their impressive bios are included on the event web page and I'm not going to go through that because then we wouldn't have enough time. So let's begin with the latest developments and trends in private capital flows. Uh, prior to the COVID-19 pandemic, global economy was already fragile. In 2019, the global growth registered its lowest rate since the 2008 financial crisis. Last year was also the lowest point for economic growth in emerging markets and developing economies since 2009. The pandemic plunged the world economy into the deepest, its deepest recession actually since the Second World War, with more than 90% of countries will face per capita income losses, a larger fraction than in any recession in the past 150 years. Emerging market and developing economies will experience their first output contraction by about 2.5% in at least the past 60 years. As we discussed in our recently published Global Economic Prospects report, the GEP, we expect at best a partial recovery in 2021 and uh lingering damage beyond next year. Like previous uh deep recessions, if not more so, the current one is likely to leave lasting scars on the global economy. Yet if you look at financial markets, they seem to be looking through this year's distress. We see, we saw a historic flight to safety in March, but since April, global financial markets have rebounded sharply. Capital flows to emerging markets and developing economies have largely resumed even for. Some of the higher risk borrowers. In part, this is due to the unprecedented policy support by all major central banks, even emerging markets and developing economies have been engaging in quantitative easing policies and also proactively lowered policy rates. Yet as with COVID, there's a lot of uncertainty and it's not clear how long this relatively benign financial conditions will continue. So, I'm gonna turn to Anne Kruger um and ask her, how do you see the development in private capital flows since COVID? Is there a disconnect between economic fundamentals and financial markets? I'm gonna ask each, uh, colleague about this, as many of you know, and Kruger is currently the senior research professor at Johns Hopkins University and senior fellow at Stanford, and also my former boss at the IMF. Anne, what are your views, please? Thank you very much. I want to step back just a minute because it seems to me that we've got some problems here and they need to be sorted out just a bit. Let me start with the developing countries and their situation, and the first thing to be said, I think, is that the different ones are in very different shape. Some were in reasonable, were in reasonable macro balance and had relatively stable macro before the onset of COVID, but many did not. Many were already fiscally stretched, and some, of course, and I have Argentina in mind in this case, were already in trouble, and others are either in trouble or getting into trouble very quickly. And I think And because of this, it's very hard to talk about capital flows because I think a few of the countries, namely those whose macro is satisfactory and who in addition do not have heavy overloads of debt already, may be able to access public and private capital enough so that for other purposes they're OK, but there are many other developing countries. Which aren't, and there is some, I think, concern there because when they have the overstretched macro, as some do, then the problem is one that they need to have, needed to have some adjustment even before the COVID virus came, and that makes it very tough to expect that there could be much done in private capital flows on that account. Uh, I could spend a lot of time on this, but of course we don't have it, so I won't. Uh, but it seems to me that we have to really think about 4 different needs that developing countries have, and different ones are in different situations. Almost all of them have negative impact from the onset of the worldwide recession that came on with the COVID virus. I think there's no doubt about that. But secondly, many needed to get imported supplies and equipment for medical purposes in addition to, or on top of the other things they needed to do. Thirdly, they need to get the public public health system better for a whole variety of reasons, and I'll come back to that in a minute. But 4th, I'm going to argue that we cannot just rely. On private or public, for that matter, capital flows to those countries to solve these problems for reasons that I'll come to after I've gone through it. Now the problem with the public health system, the difference they get bit by country, but in almost all of them there are serious problems that are worse than those in industrial countries for a variety of reasons. Many of them either cannot lock down or cannot enforce lockdown for the simple reason that people live too much on top of each other. Or because they basically cannot do social distancing. It's reported that some of the most densely crowded areas in India, in the cities, are areas where the alley is 6 ft wide and where people have to walk down it even to get their water supply every day. In that circumstance, there's no hope that social distancing will work and without water they can't stay in their units. So that basically that problem or that attack on the problem of COVID in the short run is absolutely out. And social distancing, this can't happen when you've got 10 and 12 to a room or when you've got alleys 6 ft wide and when the wage earner has to walk down the alley to get his daily wage, which is paid daily or whatever, the result of which is, of course, that the usual, or not the usual, but the ones that the advanced countries have adopted to try and halt the spread of the coronavirus cannot work. So what has to happen, of course, is that other means have to be found in most of these countries. They can try as much as they can. And some areas may be able to reduce the spread by way of social distancing or others, but not very much. So in fact there's got to be other things going on now. The first is they have to develop more competence than they have in contact tracing and testing. Because they simply cannot do that enough if they wait too long, because once the COVID virus has exploded, as it will, then they're going to be beyond the point where even good contact tracing could handle it. So the real question is, can you get that stuff started soon with tests and what have you? And then then then that becomes immediately a need for supplies, personal protective equipment, testing procedures, and medical personnel. Even for contact tracing, you have to have trained people, and that's very difficult to do, especially once the virus has spread. But even in countries like the United States, what was a good public health system is overstretched on this one, and even that's going to be a problem in those countries. But for all of that, the more important problem it seems to me, and the overriding one, is that for all of the things that I just mentioned, and all of the personal protective equipment, masks, testing equipment, testing supplies, all kinds of medical equipment, there is a worldwide shortage, and the risk is that all countries are going to start trying to look for money and then they are all going to start bidding up the prices of all those things. And of course if that happens it will be the rich. Countries that went out. So it seems to me that we cannot talk about a private capital flow solving the problem, for that problem at least, because with that private capital flow you would just be contributing to the excess demand for what in the short run at least is a relatively limited supply of various kinds of necessary goods. And if everybody's competing against each other for them, the developing countries will almost certainly lose out. It seems to me that yes, there can be things done with debt forgiveness or debt. A stay on debt service payments and that might work and we can talk about that if you're interested, but the trouble with that is that does not increase the supply of those goods and we, I think we need to have an international mechanism probably or it would have been best through the WHO, but I'm not sure that's possible now, where an agreement could be reached along the lines of the G20 where medical supplies could be allocated, not necessarily on the basis of price but rather having supplies allocated to the countries on the basis of need. Let me just finish because you didn't want me to talk very long by saying that the really long term solution is of course the vaccine. We don't know when it will be available, but there seems to be some optimism that it will be available not too late into the start of next year. Even then, developing countries are going to need to develop their capacity for distributing and administering the vaccine and getting their peoples to accept it. And it seems to me that much more. needs to be paid to finding ways to increase the competence in the sorts of things that their own people will be able to do once we have a vaccine available and to in the meanwhile do what can be done to keep a lid on the surge as best possible. I know that's not a very optimistic outlook, but I'm afraid that's the outlook there is. I'll stop there. Thank you. Thank you, and very insightful. Our health global practice has been working. Very hard on this, including also uh procurement colleagues trying to come up with mechanisms to help countries uh to uh reach these um important uh supplies. I'm gonna go to Carmen Reinhardt. Carmen is our chief economist as of July 1 this year. She has worked on crisis for most of her career, and it's great to have her at the World Bank Group. So, Carmen, what are your thoughts? What do you think? You need to, yeah, OK. I can no, OK. Um, can you hear me? Not, you mute, you have to mute. No, I'm afraid. Can you hear me? Uh, I'm afraid that, uh, I'm not going to be that much more uplifting than, than, uh, the, uh, landscape that you set out and that Anne, uh, has elaborated on. I think there are two questions that I'd like to address. One is The issue and raised, which is, will capital flows, will a resumption of public or private capital flows resolve the problem? And the second question, which is a big open question is, will those capital flows materialize? And if they do materialize, what kind of capital flows are we really talking about? Uh, I am very much in line, Shaya, with your comments about the disconnect. At present, you know, you have side by side, what are deteriorating economic fundamentals in, uh, That can be said pretty much across the board in varying degrees, whether it's advanced economies, middle income or low income, especially low income, uh, but Yet the markets are willing um to uh lend, and we've seen from the very uh You know, Extreme, uh, sudden stop that we saw earlier this year, we've seen some recovery. I think, uh, my, my view on the recovery is that it's, it is indeed importantly driven by the ample liquidity in financial, notably the, in the US. It is very much a search for yield, uh, and a search for yield with a very short horizon. So, you know, the idea, which is a perennial in, in this, in this. strand of discussion. The search for yield has, you know, very short horizons and um I think one has to ask the question, uh, which is what kind of capital flows, uh, would really revive growth, uh, in the, uh, developing and emerging markets. Now, often the connection Between capital flows and growth, uh, on a more sustained and the key element being sustained is associated with foreign direct investment. Now, in this environment of exceptional, and I reiterate exceptional uncertainty, uh, I don't think, um, we're poised to see over the very short run, uh, any kind of significant increases. In fixed investment, in long-term investment, and whether it's at the domestic level in the United States or other advanced economies or cross-border. Um, so I think what we're seeing is a revival in, uh, commercial flows and the type of portfolio flows and bank flows. Those two types of flows are notoriously Unstable. That is very subject, very prone to sudden stops, and uh the usual Macroeconomic and financial disruptions that are associated with those sudden stops. So I very much are on the same page as Ann that a lot of the problems we're seeing, particularly the, the, the what is likely to be a sustained period of subpar growth and, and only gradual recovery, um, whether Indeed, yes, finance is needed at the moment, you know, governments across the board are facing massive revenue shortfalls, uh, but I'm less confident that the kind of flows that we're seeing or the, the recovery uh is going to facilitate that over the long haul and I am very concerned uh with the possibility of an abrupt reversal. So I, I would like to, uh, move on to the issue of, of what could be done, uh, to ensure that at least some flows. Uh, are of a more, no, I, I hate to use the term permanent, but are more, more sustainable and more directed towards uh enhancing productive capacity and I think Uh, you know, the IFI, the, the World Bank included with its, it's, it's longer-term view, uh, and longer-term projects is, is very instrumental. I think the IMF has done a spectacular job in trying to fill in that big hole, uh, in the, in the revenue collapse that, that, uh, countries are, are, you know. Facing pretty much across the board and then it is across the board because if you're a commodity producer, you haven't just had a COVID crisis, you're also having a commodity price uh uh implosion which historically has been associated with, uh, commodity price collapses or associated with spikes in, uh, the incidence of sovereign defaults, new defaults, uh, so. I will not be concluding on a much more of an upbeat note, I think, uh, and we can discuss this later, but I think the risk of a new spike in sovereign defaults is there because of the growth collapse, because the fact that we have a tendency to recover, to, to, to confuse, rebound. With recovery and in some things like capital flows, like private capital flows, we're seeing a modest rebound, but rebound is different from, from recovery in that it could be sharp, but it's not likely to be sustained. Uh, and I will, uh, stop on that, uh, note. Thank you. Thank you, Carmen. Hyun, um, Hyun Xin is currently the economic advisor and head of research at the BIS and a great expert on these issues. Also a longtime colleague. Huyun, what do you think? Do you agree? Or are you more optimistic? Well, let me see. Um, I think it's been, um, Um, let me, let me focus on another area which, uh, where you can judge whether, you know, this is any more optimistic or not, um. But, uh, the, the pandemic is really, uh, um, It's really unusual in, in being, uh, 3 sharks rolled into one, Uh, it's a, it's a health crisis, first of all, um, it is a pandemic after all. Um, then we had this very sharp period of, uh, of an economic, um, sudden stop, uh, partly driven by the lockdowns, but also partly, uh, by the changes in behavior. Um, but much more relevant for this panel is the, uh, episode that we saw in March. We saw a very, uh, sharp, but relatively short-lived, um, Uh, stress to, to the financial system. Um, and capital flows, uh, um, uh, so a very sharp reversal. Um. For about 2 or 3 weeks from the beginning of, uh, from the middle of March to, to early April. And I think this is a very important, uh, you know, backdrop for us because Um, Uh, where I'm headed is to talk about fiscal space, uh, because I think fiscal space is probably going to be the overriding theme for the global economy and for the, you know, for the foreseeable future. Um, And the reason I say that is, uh, you know, when we went into the crisis in, in March, the hope was that this was going to be, you know, because this was a A, uh, pandemic, um, induced, um, economic downturn that, uh, once we shut down, we see the first wave, uh, um, uh, through, and then we're over that hump that we could somehow emerge, uh, from Suspended animation, uh, we can just stop the clock and then re-emerge, yeah. Um, and during that period, uh, one of the really welcome surprises was how well, um, the fiscal authorities stepped up. Um, and the fiscal response has been really, uh, really very unprecedented. And this is, um, uh, the reason why I say it's a welcome surprise is because one of the enduring themes. Since the, the, the great financial crisis has been how central banks, um, are the only game in town, uh, central banks are the grown-ups in the room, and somehow, you know, central banks are bearing the, the burden of, uh, of sustaining activity. Uh, this time around that, that, that was not the case. Um, the fiscal authorities stepped up in a big way, and the numbers are really very telling. In the advanced economies, the fiscal packages were. Were very large, uh, so budgetary measures are of the order of 10% of GDP. Um, and then on top of that, we have the guarantees, um, and, and the funding, the lending schemes, which is another 12% of GDP. So right there you have 22% of GDP. Announced within a space of a few weeks in the spring. Um, the scale is much more modest, um, in the developing world. Uh, for the emerging markets, the large emerging markets, it's of the order of 3% of GDP in terms of budgetary measures, and only around 2.5% of GDP in terms of funding and guarantees. And I'll come to that because I think this is a very, very important, uh, uh, distinction and, and it's, it's useful to ask why. But the important point is that these um uh initial fiscal injections were meant to tide us over a very brief period of disruption. So, you know, while we were hunkered down, while we were in lockdown, this was a way to put um uh businesses on life support so that they don't need to, you know, that we can somehow preserve the fabric of the economic relationships. So that once we emerge from the crisis, we can then um restart the economy uh without having done permanent damage. So these were meant to be very temporary. And um um everything was predicated on uh the, uh the pandemic um being a short-lived shock. Uh, but what we see is that, uh, and, and so the course of the global economy depends very much on the course of the pandemic itself. If we have a second wave, If the first wave lingers, if, uh, the virus lingers somewhere in the world, um, and given the epidemiology and given the, the seasonal nature of these things, it's gonna, uh, flare up, uh, somewhere again. And I suppose, you know, in that less optimistic scenario, uh, even the really very large fiscal packages are not going to be enough. We'll need to dip in again. The reason why the emerging markets have been much more modest is because uh they have, I mean, uh, a, um, a tautology is to say they didn't spend because they have less fiscal space. So what does that mean? Uh, so, um, you know, in particular, well, you either, uh, you can either, uh, finance, um, you can either, uh, mobilize resources by, um, uh, issuing government bonds, or you can use monetary finance, uh, financing of some sort. And we know that monetary financing doesn't normally end well, um, in, in emerging markets. Um, and so the local currency, government bond markets, um, you know, have played a very important role. Um, very, um, encouraging development in the last 20 years since the 1990s emerging market crises has been that the emerging market governments at least, have well and truly graduated from original sin. Um, around 90% of central government borrowing, um, Uh, in the emerging markets, in the, in the bond market at least, um, it's a local currency. And um I think uh to say that there is limited fiscal space is also uh to say that there is limited appetite for investors in the local currency bond market to absorb additional sales. One thing which has been very encouraging uh this time around, uh, compared to last, uh, previous crisis is that the central bank response, um, in those emerging markets that actually suffered the, the 1990s emerging market crisis has departed from the previous playbook in, I think, a very encouraging way and that normally when you have very sharp uh capital outflows, you see monetary policy being tightened. Um, uh, this time around, what we saw was that emerging markets central banks actually loosened monetary policy. They cut rates, and many of them intervened in the bond market to actually, uh, restore, you know, market functioning. It's not quite QE, but, uh, so the scale was very small, but this was actually a new, um, development, which I think was a, uh, was a very salutary one for us. So I think there are some encouraging signs. But, um, Going forward, we're going to need a lot more fiscal space. And depending on the course of the pandemic. Um, the scale of, of that, uh, fiscal need is, is going to be, um, you know, it's going to put, it, it could actually even, uh, outstrip the, the already very, um, uh, aggressive spending that we've seen so far. So, um, Fiscal space, I think is going to be the, the overriding theme, and uh I'm sure that Jeremin will also, you know, mention this in his, in his intervention. So let me stop there. Thanks, thanks, hun. Y, we actually have a publicly available database um on cross-country fiscal space, which includes multiple measures of uh fiscal space update them twice a year, and it's very true that fiscal space was limited before the crisis and is much more constrained now. And uh we, and together with the IMF, we called for debt service suspension for the poorest countries because of this exactly uh limited fiscal resources to deal with the critical health and economic spending, the health spending that Anne was also mentioning, and so far, 40 countries have participated and this amounts to a fiscal space of about 8.7 billion for the period May to December. So, and a key component of this is that an investment transparency. There will be a discussion at the G20 this weekend, but also in October to see if this should be suspended. Perhaps we can come to that later. I'm going to go to Pierre Olivier, um, and now Pierre Olivier Goinches is a professor of economics at Berkeley and uh another very impressive expert. So, what, what are your thoughts, uh, Pierre Olivier? Um, thank you for, thank you for having me, and I apologize if there's a little bit of background noise. Uh, I'm, I'm outside. This is where I have the best, uh, Wi Fi reception, but it comes with uh a little bit of noise. Um, well, I, I think a lot of, um, very, very good, very salient points have been, have been made by Anne Carmen and, and Jun. Um, let me sort of, um, uh, present things maybe in a slightly different, uh, a slightly different light, uh, although, uh, on the whole, I'm not gonna disagree at all with the, with the general, uh, message here. Uh, the, the first point I want to make is when we look at developing countries, um, there is of course tremendous heterogeneity, but, uh, the, the shock, the economic shock is, is, is huge. I mean the, the, the latest, uh, uh, real projections tell us we have a swing from You know, of about 6% percentage points in, in growth between 2019, 2020. It's, it's, it's a tremendous blow. Um, it may in fact be bigger than the health, uh, shock, at least at this stage in, in the pandemic and again with enormous variation across countries, but, uh, but the economic, uh, uh, impact has been, has been first and foremost. Um, now the playbook of, of advanced economies that Uh, Yon has, has summarized has been to sort of throw everything at, at, at the problem, uh, in particular on the fiscal side, but also with liquidity measures and, and support measures that I'll come back to. Uh, and, and immediately when, when this started around March or April, um, many people realized this is gonna be something that many developing economies and emerging economies are we're gonna have trouble, uh, following. Um, fiscal revenues, uh, were bound to collapse with the economic downturn. Fiscal expenditures, uh, were bound to grow, uh, if only because of the need to address the health issues, but also to support the economy. Uh, and so this would have to come from somewhere and if this is precisely happening at a time when, uh, advanced economies are, uh, uh, drawing from the market and running fiscal deficits are at the unprecedented levels, the expectation would be that Uh, this would put tremendous strain on, on, on emerging market economies and, and, and many, many economists, and I among, among them were expecting that there would be a tsunami of, of, uh, of defaults that would be coming very shortly after, after, uh, the onset of, uh, the COVID pandemic, and, and the surprise here is that it started that way but it didn't, it didn't happen. Uh, and by and large, uh, a lot of countries have, uh, been, uh, able to avoid, uh, uh, you know, defaulting on, on their external debt, and I'm gonna leave out Argentina as a special case here, um. And, and even I've been able to access the markets. And so I think, I think this, this, uh, uh, tension between what I think a number of us on, on this, uh, on this panel and, and, and more broadly, uh, would have expected, uh, was about to happen and, and what did actually unfold. It's, it's, it's, it's interesting sort of pause and, and go back and ask ourselves, uh, uh, what, what happened. And so, obviously, Um, the, the, a key factor, I think has been the sort of extremely ultra loose, uh, monetary policy from the advanced, uh, um, uh, the advanced countries and the Fed and the ECB and the Bank of Japan, Bank of New England and all, all of these, uh, central banks have been playing a very important role. And, and it's very clear that if you think that, um, The, the COVID-19 crisis is gonna be temporary. If you think that a vaccine is gonna be available within, uh, uh, say 18 months or, or, or 2 years, uh, even if you have terrible numbers for one year or two when you're discounting things at close to 0, 0% interest rates and with relatively mild risk premium, that has a very, very limited impact on the, on the NPV. So if, if you have that sort of calculation in the back of your mind, it's not too surprising. That you come up with the view that market access maybe was maintained, you could do the same calculation in fact for uh stock markets in advanced economies and ask yourself why is the, you know, stock market in the US or in other, uh other countries so elevated when we have terrible numbers coming from the, the labor market or business failures every day. And again, it's the same kind of calculation. If you think that it's temporary, even if the news are atrocious but it's a short amount of time, then it's not too surprising that the present value is not affected. But you have to realize that this is sort of a very optimistic scenario and, and somehow, uh, I think, and I will agree with, with Carmen on this, I think that the markets are, are really not necessarily pricing, pricing things right. Now why would that be the case? Well, 11 view would be that somehow Um, there's been a sense in which they've been able to convince emerging market economies, uh, and developing countries that maintaining market access is, is something that is extremely important for their future and that somehow these countries should bend backwards and make sure that the payments to, uh, uh, private cap, you know, private investors have to continue, and I think that's some of that has been, has been going on. There's been a tremendous amount of, uh, uh, PR activity going in that direction. And, and, and I think that, uh, uh, you know, it, it begs the question of where uh these countries if I, if I go back to the fiscal capacity that Jun was talking about. If the payments are made to private, private investors, where is that coming from? It has to be coming from something else and it can be coming from basically two places. One is that those countries are not deploying fiscal policy at a sufficient scale in their own economy either to help people who are sick or uh infected by the virus or, or supporting the domestic economy. Uh, or somehow it's rechanneling some of the help they're receiving through other means, whether for instance it's for, uh, uh, official, official, uh, uh, uh, assistance, uh, that is going, sort of going back out and, and supporting private capital. I think some of that is definitely, is definitely going on and, and, and we have to keep that. We have You have to keep that in mind. So when I think about, when I think about all this, I think the markets are, are still sort of have a rosy view about the future in terms of how quickly, uh, things could rebound. There is mounting evidence that especially in, in, I mean in any country, but especially in developing and, and, and emerging market economies. The, the blow to the economy that is happening right now could affect potential growth for more than just 1 or 2 years, but maybe, uh, uh, you know, 10 years out. People are talking about a lost decade just like there was a lost decade for Latin America and, and that doesn't require necessarily that there's a suspension of payments or there's an outright default. It's just the damage to the economic fabric that's gonna be, that is already underway, and I think, I think that is somehow perhaps not quite sufficiently. Um, and, and, and, and so the, the reassessment of the risk, I think, is, is gonna be coming, gonna be coming especially for countries where, um, I, we'll come to that in the second part of the, of this panel, I'm sure, but, uh, where the amount of involvement of, uh, official assistance and official flows is just not on the scale that is sufficient. To somehow ensure private, private capital flows and so at, at some point down the line, I fully expect that the issues that were raised early on but somehow surprisingly were not, were not realized and that, that was sort of a good news in a sense. We'd rather not be in a wave of, of sovereign defaults right now. Um, those issues have not been, uh, uh, solved. They've just been postponed and they are still looming very, very large, uh, over us in my view, and I'll stop here. Yeah, thank you. Thank you, Pierre Olivier, very much, um, issues that we have been, um. Uh, discussing among ourselves as well, of course, including with uh Jeromin. Jeremin Zettelmeyer is Deputy Director of Strategy Policy and Review department at the IMF and another longtime colleague. The issue of uh bringing the private sector to many of these initiatives have been very much on top of our minds. Over to you, Jeremin, what are your thoughts? Thanks. So, so I'm, I'm afraid this looks like it's gonna be one of these awful panels where everyone basically uh agrees, and so at this point, it's very difficult to say anything original at this point. So what, what I thought were edgy remarks on my side now read more like a summary of what is said. So, but maybe there's some value to that with, with my own little spit. So I want to make basically two points. Uh, so one is uplifting and the other one is, is the opposite. So the, the uplifting point is that this has really not been your typical emerging market crisis. So, EMs have been hit by multiple severe shocks, including a brief sudden stop in capital flows in March, like you said, but subsequently, Something extraordinary has happened, which we really have not seen in many emerging market crises, which is that external finance has started to act as a shock absorber rather than as an amplifier. So that sort of defies past regularities. And why is this the case? Well, because of the Fed, OK? So emerging markets were really lucky that this is a global shock. It's not just an emerging market shock, so the advanced countries get to react to in a massive way, and those spillovers help emerging markets. It doesn't mean sort of that the old laws of emerging market crisis no longer apply, it just means that you have to have this. Very massive sideshow from an emerging market perspective, which is the advanced markets and that has helped them. Now, it has had an enormous beneficial effect though, and so if anything, I think this has been uh not played out enough, which is that given continued access to debt finance, Uh, macro policy reactions in EMs have in fact looked a lot like policy reactions in advanced economies. So Juan pointed this out for, for monetary policy, it's also true for, for fiscal policy. Now, it's, it's true that we haven't had um fiscal expansions of the same scale as an advanced country, so there has been less fiscal space, but there has been some fiscal space and I would put the difference between A's and EMs as maybe not being quite as dramatic as Hun put it. So if you, if you look, say, at cyclically adjusted primary balance projections over the year, the difference is not, it's not like a factor of 4 or 5, it's more like a factor of, of 2, or so in the ability to respond, uh, processing. So, so this is sort of the, the, the first point. Um, then the, the second point is, has also been made, which is essentially a variation of the old say that, you know, uh, past performance is not a guide to future success, right? So, we should not derive too much comfort from the fact that the crisis has been so unusual and that private flows. have played a very benign role on net for the next phase of the crisis, for all the reasons that have been stated by, by Carmen and, and Huhne and particularly by Pierre Olivier, and so here's another little rundown. So, first of all, favorable financial conditions are super fragile. They do depend on central bank actions in, in advanced economies. Uh, so, you know, one possible scenario, for example, is that advanced economies start recovering. Before EMs do, and then you could get a temper tantrum, uh, type, uh, effect. Now, the US for, for better or worse, doesn't seem to be on that track, so we will have very easy financial conditions for a, for a long time precisely because, uh, you know, the, the crisis, uh, uh, health level is not being fully dealt with, uh, but, uh, in principle, you could get a reversal. Then the, the other uh obvious argument is that even at unchanged financial conditions, so everything staying super easy, the room for extra market borrowing is much lower now following the first round of fiscal responses. So simply having a low Interest rate, doesn't help you forever, right? You're gonna hit your debt ceilings at one point or the other, and this is the point that Jayla made about fiscal space, uh, running out. And then the third and most serious point is that, you know, as this crisis persists, we are going to, uh, you know, the, just the availability of finance is, is going to, you know, play less and less of a role because solvency problems are gonna come, uh, to the forefront in an increasing, uh, uh, way. And, and so how can we deal with all of this? So now maybe stepping a bit, a bit into sort of the, the policymaker or IFI, uh, uh, uh, role. So, so, you know, the first two, namely making up for a reversal in financial conditions or, uh, helping. Uh, uh, countries deal with emerging market, developing countries deal with lack of fiscal space, sort of that is in a sense classic IFI territory, right? That's what we're good at, and, and we still do have firepower and, you know, we're just getting going, you know, the World Bank and the IMF, they're gonna be there for you, and so, you know, we have some optimism on this. On number 3, you know, the solvency problems, of course, this is where we, we kind of run out of tools, right? Because the, I mean, they are defined as essentially the type of problems that cannot be addressed through a combination of fiscal adjustment and, and, uh, and extra finance, and so we're gonna need debt restructuring. Uh, and so then the question is, is the financial architecture set up to, to do that? And the answer, which I'm not supposed to give now because we have another round in the discussion, is it depends on the depth of the problem. And here, frankly, I still don't know how bad it's going to get, right? Because my initial instinct was exactly like Pierre Olivier, that, you know, we are back to the 80s. This is gonna be like a systemic debt crisis in 5 minutes, but it wasn't, it wasn't. You know, it was surprisingly, there was a surprising amount of resilience. We do have quite a lot of deep debt problems we're dealing with, but it hasn't been sort of this big wave of defaults, and the question is, you know, is it yet or can we get through with, with, without it, and if we do get more, how do we address it? Yeah, this is exactly the point uh that would be really great to discuss now, because as you say, um, this crisis is different from many other crises that at least I've seen in the last 30 years that I've been working because usually you come to a crisis, you kind of know what wreck you inherit. You design a strategy, good or bad, and, and you deal with it. Here, it's very difficult to know what is liquidity, what is solvency? Who is going to be viable? It all depends on, like what many of you said, how long this crisis goes on, but it also depends on, you know, people's expectations, behavior changes, consumer preferences, and all. So it's very difficult to know exactly what is it, how much of this is a liquidity problem and, and. Who or what has a, as a solvency issue. And, you know, firms that appear illiquid or countries that appear illiquid may become insolvent after all, after a while, depending on how widespread the bankruptcies are and, and, you know, the banks came to this crisis with buffers, but, you know, banks' balance sheet will be impacted and I'm sure we'll hear from um from Hernandez. Because especially in the MDEs, we don't have insolvency regimes. These are very weak, so, you know, this could trigger potential financial market stress and it becomes very difficult to disentangle. So I guess the question is This has started as a health crisis. It turned into an economic crisis. We have to do whatever we can to make sure that this doesn't turn into a financial crisis, but inevitably I think it will be the case in some countries, so. The question is, what can we, what can we do and what can the international community do? Jeremy, you started talking about this. Perhaps I could turn to Anne who has held very important positions both at the fund and the bank and ask the question. You know, how can the international community help mobilize private capital flows, and if these are not enough, what can the international community do to close these um financing gaps as you mentioned uh earlier as well? And you want me to go ahead on that, please. Hm? You want me to go ahead on that? Yes, please. Oh, OK. Well, let me, let me react to two things. First, it seems to me, at least in my judgment, that most of the other panelists are Downplaying a little bit at least the fact that in most of the developing countries, the COVID virus has not as yet had the impact on economic activity that it's likely to have. I tried to stress what isn't there, but what isn't there by way of ability to cope with a thing in the short run, I think means that we are going to see more countries with more difficulties quite quickly, and that that is going to feed over into. Economic activity in the countries affected with or without capital flows, with or without anything else, simply because we are going to see a large number of very sick people before things turn around. The sooner the vaccine comes, the better. The sooner other things come, the better it can be mitigated, but it seems to me that in the short run it's not, I don't think we're going to see very much private capital almost. No matter what, in most of the countries, because indeed we're going to see the COVID virus getting worse, and they're going to be seeing how difficult it is to cope with it in those circumstances. So the first part of my answer would be that. The second part of the answer would be, of course, we already have the initiative on the standstill on debt servicing for the least developed countries, and that clearly could be of some help. There could be more of that. How do you get it? The private side, I have no idea. As you know, I earlier on thought that we needed to get an international sovereign debt restructuring mechanism, but quite clearly the private sector thought it could handle it quite well. But now that we are in the midst of this, I'm not at all sure they will continue thinking so. And yet without it, to see a clear cut way to handle what I think is going to be forthcoming is going to be very, very difficult. You've mentioned Argentina. But India doesn't look that far off some kinds of problems. Turkey doesn't look that far off some kinds of problems. Zimbabwe is already there, so are several African countries, not to mention Lebanon. When two or three of these have difficulty quickly and they make the headlines, it's very likely that others will follow, I think, in the same kind of pattern as happened in 1998. So I worry a great deal about this, but in terms of what can be done. I think the main thing is to address as best one can the problem of getting the supplies and the personnel and other things going to at least reduce to the extent possible the impact of the COVID virus on economic activity. It's big and it's going to get bigger, and there's going to be less than developing countries can do about it than in the US and even here, the lesson seems to be that if you let up too soon and the surge starts growing again. Uh, economic activity is going to falter, uh, almost no matter what else you do. Let me stop there. Thank you, and yeah, fully agreed. We do see developing economies starting to show some of them are actually um in very difficult situation, on, on the health front. Um, I, I, on the role of debt service moratoriums, uh. Olivier, you've written on this. You have a proposal out. What do you think the role of this in easing liquidity pressure? How effective are these or any other types of options in bringing in the private sector in particular? Well, I, you know, as, as, uh, I was arguing earlier and as many people have mentioned as well, uh, you know, the, the, um, the need to secure or sort of stronger or more financing from the private sector hasn't, hasn't arisen yet, um, and, but it doesn't mean that it will not, and, and I worry tremendously that we're gonna get into a phase where a number of countries will find it increasingly difficult. Uh, to secure additional financing or to roll over existing, uh, financing, and that could be because, as, as Yomi mentioned, it could be because the, some of the advanced economies are sort of moving ahead and, and somehow capital flows responding to that, uh, redirect helps. Uh, it could be for a variety of reasons. It could be because the pandemic become more severe in that part of the world as, as I just, uh, uh, just mentioned. And, and so we have to be ready for that. And the, and the problem that I see is that it's, it's very complicated in the kind of uh sort of international bond financing world that we live in. It's, it's, it's, it's incredibly complicated to organize, uh, to organize, uh, some form of relief from, uh, from private creditors. So, in, in, in some, in some, some of the writings I've, I've, I've done with uh uh Patrick Bolton and uh uh and Lee Bouchai, Mu Gulati and uh uh and, and, and, and, uh, and others, we tried to come up with a way in which there would be some form of uh uh standstill for uh uh interest payments and, and, uh, uh, and principles due over a, uh, a short period of time, maybe 2020, maybe it could be extended to 2021 and The, the, the, really the basic idea is that this would provide much needed relief. I mean, even if we think that markets have, have currently have access, that, that additional source of uh of funding would be, would be much needed in, in many of these countries. Uh, we, we came up with estimates that, you know, are imprecise but You know, they are significant. They are of the order of, you know, $800 billion or so for, for the affected countries. Um, and so, the, the, the, the, the issue there, I think, is, is one of coordination, is that when you, when you actually talk privately to some of the private investors. Um, they tell you that they would not necessarily oppose something like that if it was on the table, they would comply, but if it, if it's left to the, if they are left to their own device, they're never gonna be able to argue that they should do any form of relief, and they will sort of claim that fiduciary duty will prevent them from doing that, etc. even if they understand perfectly. That it will improve the situation of the afflicted countries in a way that would also be beneficial to their bottom line. So, I think there is a role for the global community whether it's the G20, the IFIs, etc. and really taking the mantle here and, and, and taking the leadership and saying we need to do this, we need to impose this. Uh, we need to move in that direction and that's something that I think the private sector secretly or maybe not secretly will not, will not necessarily oppose. It has to be coming, it has to be coming from, uh, uh, uh, from the, uh, the, the, you know, the authorities here. It, it can't be left to the self-organization and, and, and again, this is not gonna solve. Uh, this is not a substitute for a sovereign debt restructuring mechanism. This is not gonna solve deep, severe, uh, solvency issues that some countries are bound to experience with this crisis. This is, this is going to happen. There's some countries are gonna have severe debt restructuring, but precisely as you, as you argued in a state of deep uncertainty where we don't know. Maybe, who knows? Suppose a virus comes along, suppose it can be distributed, etc. etc. Think about the good scenario. We don't want to push countries into restructuring when they don't need to. And so alleviating measures that provide liquidity in the short term are very much needed, uh, I think, uh, in order to preserve the option that the, the good scenario could be the right scenario. Very much along the lines of our, our work actually trying to come up with options and proposals as to what could work, um, and of course, working with Carmen and, uh, and Jeremy also. Carmen, what lessons do we learn from history in terms of dealing with solvency issues? What are, what are possible options that you think uh can be considered? Well, uh, let me start also with, you know, a very brief lesson from history. I think here Olivia is absolutely right that we were, when this happened, we were looking for a wave of defaults. But I would also highlight that Paul Volcker started tightening in October of '79 and 1980 was a year of also crashing commodity prices. Um And things were bad in 1980. They were worse in 1981, but it wasn't really till August of 198982. Uh, that Mexico, uh, defaulted and the domino effect took over. Uh, so what I'm saying very concretely is that, uh, you know, Creditors don't want to see defaults. They want to get paid. Countries don't want to default because the default is very disruptive. So we're gonna be in a period. In Both sides, I think we're, we're trying to uh uh stretch the limits, see if this goes away. Um, and on Chaya, your question of what can IFIs do, and this also uh goes back to, uh, remarks that, you know, this wonderful discussion, you know, uh, has, has already raised. Um. I agree with Hunxin that there, the fiscal needs are not gonna go away, that the need to, to, to finance deficits given the implosion in revenues that we're seeing because of the implosion in economic activity is not gonna go away. And IFIs, unlike the Federal Reserve, do have finite resources. So, I, I think the issue of, you know, very much of looking outside the box, uh, to see in, in ways to help, um, I think is, is, is going to be necessary because the capacity to do what the Fed is doing for US corporates. Uh, or for US subsovereigns. That kind of firepower just is not there in the IFIs collectively. I'd like to focus. Uh, Chaya, going back to the issue of race, what can IFIs do? There is one thing that can be done. This doesn't Avoid the crisis, but it may help resolve it quicker. Uh, and I want to touch on the issue of transparency because right now, I think there is a very legitimate, uh, given everything that's happened, a very legitimate question mark on what is an insolvency problem and what, you know, and what is a liquid illiquidity problem. Uh, sorting out in liquidity and insolvency in, in an environment like this is very difficult, and that also applies, Chaya, to the issue that you raised about the financial sector. You know, right now, I think the focal point of all this discussion, uh, has primarily been focused on, on issues of sovereign indebtedness. But I think there is another layer out there and, and, and he and I will disagree with you on whether we graduated from uh original sin. I think you're absolutely right that central governments went a long way to, to that graduation point, but I would make two observations. That graduation point started having big setbacks around 2014, and number two, that the private sector did not. And so the issue of contingent liabilities as the next shoe to drop, so to speak, in, in uh aggravating what is already a frail, uh, sovereign situation is a very real one. I would remind everyone that Ireland's, uh, public debt, uh, prior to the global financial crisis was below 30% of its GDP. And we knew that it ended in 3 digits, uh, a 3-digit, uh, debt to GDP ratio within a year and a half, uh, approximately. So I think one issue, to be brief, that I'd like to focus on is the issue of transparency. And this is not a code word. It is, you know, how can you do meaningful debt sustainability until you really get an encompassing picture. Of the, the, the, you know, the extent of debt, whether it State-owned enterprises and the, and the ones we know best, which is, is, of course, the central government. Uh, I think also another factor regarding transparency that I am concerned with is in that effort to avoid or to delay a default, there is what is often referred to as gambling for resurrection, right, in which you take uh Uh, riskier measures. You, uh, get into debt contracts that are, you know, more detrimental in many ways, uh, both in maturity, in, in yield, in collateral, in a variety of issues that, and, and I think to move on to my final point, which is if IFIs do have uh a much more, you know, much more limited firepower than the Federal Reserve, uh, we should be preparing and doing, doing, using this time to really try to get at, uh, those, uh, sorting out. The insolvency from the illiquidity problems. Um, and I think, you know, uh, debt transparency at an, at an encompassing level, uh, is going to be something to facilitate that because if you look at history, Uh, and now even talking about the post-war, forget pre-World World War II. Post-war, your average number of years from the initial default to the final debt crisis resolution is 77 years, and your average number of debt restructurings over that period is Between 2 and 3 That's a long road. So, if at a minimum, if we can't avoid heading down that road, if we can make that dark road shorter, I think that would be an accomplishment. It's limited in scope perhaps, but, you know, I think shortening that time span is very critical to restoring growth. Very much, very much, uh, very much so, and, um, we have, uh, joined forces, of course, and we have been publishing as much as possible information on The debt uh of uh public and publicly guaranteed debt of countries. So this is in our website, both in terms of the, the debt suspension initiative, but much more broadly, so really trying to do our part to increase transparency as much as, as possible. Jeremy, what do you think, um, what do you think should be done in terms of um available financial and legal instruments to, uh, both preserve or rebuild solvency? OK, so, uh, when it comes to preserving, I think What, what comes to my mind there is essentially the type of phenomenon that Pierre Olivier's proposal responds to, right? So, uh, so there could be a, another More persistent, more damaging, sudden stop. Uh, that would have fire sale qualities, so it could actually undermine the solvency and If that were the case, we may need stronger instruments to deal with it than, for example, the DSSI that the Debt Service Suspension Initiative. Uh, that, um, uh, took a voluntary approach to the private sector that has not had much, uh, impact. And so we may have to switch to an involuntary approach and that then, I think the first paper that everyone should read is indeed the uh Bolton and Al. paper that Perry is, is part of because it, it has a very smart way of combining involuntariness with uh, a, an approach that would not do. In my interpretation, and this is personal, uh, damage to the longer-term financial relations between The data countries and the, and the, and the private sector. So this is Effectively where, where I would go. Then there's the issue of rebuilding, and so if we are talking about rebuilding solvency, I think we are in the world of, of, of deep debt restructuring, and so do we have the financial and legal instruments to do that? Well, I think that with respect to bond exchanges, we are, we are actually pretty OK. So I, I don't see that as the main, uh, as the main threat, and, you know, that is because after the SDRMG uh didn't get enough support. There was quite an aggressive, um, policy agenda supported by market associations to make contractual improvements, to make, uh, debt crisis, uh, in, uh, with respect to bonds easier to resolve, so we do have so-called enhanced CAC in about half of the stock of emerging market bonds right now, and, and we particularly have them in the frontier economies because those are the ones that Uh, came to the table most recently and so they, they incorporated them. Uh, in addition, I think that, um, Uh, credit enhancements can in, in some circumstances help, uh, reduce free riding, so I know the World Bank is, is working, uh, on, on this, so this is enhancements like Brady bond type solutions in the context of a deep restructuring, so it's not a giveaway to the, to the private sector. And then finally, a, a tricky issue which is not really about free riding, but it's more about how you Get a Agreement on capacity to repay in a situation where As for reasons that Anne emphasized, the Uncertainty on, on, on the long-term, term impact of the crisis is still very high, uh, so that, that might be a fundamental, uh, uh, problem, right, to, to getting consensus around the restructuring offer. So that, that is, I think, sort of one of the most difficult areas, so we, we have a very glib answer to that, which is you go for a very deep, uh, uh, restructuring and then you offer value recovery instruments, so you can uh offer some upside to investors, but they, they haven't really worked in, in price. There seem to be information problems. So this is an area which I personally struggle with and which we, we are thinking about, um, at, at the fund as well. So, so there's this era of bond exchanges, which doesn't look too bad. Now, the, the, the really difficult one I think is uh coordination between bondholders and non, non-bond forms of lending, so, uh, you know, banks, uh, commodity traders, and, and so forth, and this is, I think, where the Uh, having had an SDRM, which we're not pursuing at the fund, uh, would have helped, uh, and what, what can we do in the absence of that? So I, I think there are probably some coordination options where we can, as the official sector, particularly as IFI's, nudge, uh, uh, private creditors to come from different asset classes to come to the, uh, to the table. And, and then one should not forget there are legal instruments both at the international and international level that, that can be used. They are just quite intrusive, right? So there is the possibility of effectively making enforcement more difficult of existing contracts if the major jurisdictions agree to do that. They can do that informally, it would have to, uh, take place through changes in laws. Uh, or they can try as another idea that is part of Pure Olivier's paper to declare a state of emergency with the hope that this will influence the court. So there's, there's an array of, uh, of options there, but this is really kind of, uh, untested, uh, territory, and the main, uh, limiting factor there, I think, is, is political consensus. So they, they require basically consensus among the major jurisdictions issuing sovereign bonds. And, uh, to be more intrusive and we are, we are certainly not at that point uh where it will be forthcoming. Yeah, yeah. Um, Juan, do you have any thoughts as to how to incentivize private private institutions? And I'm going to also build in some of the questions from the floor. Um, so perhaps, I mean, this is not going to incentivize, but, uh, capital flow. Measures. So there's a question about in terms of inflows and outflows. We've done a lot of work on this, so if you can address that, as well as the role of central banks in strengthening international coordination during the next phase of the crisis. So over to you. Yeah. So those are good, uh, those are good questions, and I think, uh, um, I was actually planning to, to tie in those elements. Um, uh, so J. Lo, you and I will be at the G20 meetings, uh, later this week, uh, where, um, all the issues of, um, Uh, the debt service suspension initiative and other, uh, restructuring initiatives will be discussed. Um. The restructuring issue, uh, you know, will eventually have to be resolved, um, uh, both for the private sector borrowers as well as for the official borrowers. Um, I wonder though, whether it's more urgent to think about, uh, in the short term, um, the liquidity aspects as well, because, you know, there will come a time. When uh we will need to resolve the borrowers, uh, both the private sector and in the official sector. But going back to the earlier discussion, uh, the big elephant in the room is fiscal space. We need additional fiscal space right now. Debt restructuring um is best done during quiet times when, uh, you know, we have, uh, you know, we have gone past the liquidity stage when we need additional funding. And uh if we believe that the course of the pandemic is such that, uh, much more fiscal resources will be needed, um. Um, I think it's the additional borrowing that's really going to be core, and, um, I think, uh, um, as commented earlier, it's absolutely crucial to take account of the FX dimension. Though, um, Carmen rightly points out that, uh, while sovereigns have borrowed in local currency, uh, private sector borrowers, the private, um, especially the, the corporate sector, um, has borrowed, uh, in, in US dollars primarily. And Um, at the BIS, uh, um, you know, we've been looking at the issue, um, with, of, of trade financing as well. And I gave a, a paper at the Summer Institute, uh, with Valentino Bruno on this topic, where, uh, we find that, uh, trade financing, uh, is also primarily in, in US dollars. So, so FX financing is very important. And FX financing is also particularly important in another respect, in that Even though you have borrowed uh in local currency, the investors. Uh, if they come in on an unhedged basis, uh, holding naked currency exposure. And what we find time and again is that when risk appetite dwindles. Uh, this is the first asset class that they will actually sell. Uh, so when, when conditions tighten, uh, when risk constraints bind, um, local currency government bonds, emerging market governments will be the first asset class that they will actually sell out of. So I think, uh, you know, one task, uh, that uh the official sector and the IFI certainly that need to bear in mind is how can we, um, How can we help the emerging markets at this point and uh both low and middle-income countries at this point, to tide over the short-term crisis? I think the resolution is very important, but I sense that, uh, you know, that's something that will become more important over time. In the short term, I think, uh, finding additional financing is going to be, uh, is going to be absolutely key. And I think, um, tapping the private market for this, I think is going to be absolutely crucial. I don't think we can do it without tapping the private markets. And so, I think there are various ways that we can, uh, we can help, uh, developing countries tap the private market. So one way would be to make sure that uh uh everyone, uh, that, you know, the emerging markets, developing countries have enough. Uh, affects liquidity. So that, uh, as the capital outflows happen, you can intervene to cushion the depreciation. And by cushioning the depreciation, what you do is you actually, um, uh, slow the, the pace of the outflows, because what you're doing is, uh, you're actually dampening, uh, the amplification of the gains and losses that come from the exchange rate moves. And so it's, it's going to bind, uh, the risk constraints of the private, uh, global investors less. The other aspect, uh, um, uh, that's going to be important is the, is the monetary policy response. Now, paradoxically, when you lower, when you loosen monetary policy, And you lower the short-term rate, what you're doing is you're, uh, you're steepening the yield curve. And what you're doing is by steepening the yield curve, you're actually lowering the cost of hedging. So if uh the foreign investors come in on an unhedged basis, and they do it because uh that's the convention, they, they don't hedge typically when they go in. But they do typically hedge when they invest in other advanced economy government bonds. So if you have a Euro investor, bond investor investing in US Treasuries, they would typically do it through a swap. They, they, um, acquire the dollars in a swap, and then uh invest on a hedge basis. How can you encourage greater hedging behavior, ex ante hedging behavior in emerging market government bonds? Well, you lower the cost of hedging. And uh uh if you, uh, and typically investors, they roll over short-term swaps rather than uh engage for the full term of the, um, of the bond. So if you steepen the yield curve, what you're actually doing is also to lower the cost of hedging, and you're actually incentivizing investors to come in on a hedge basis. So I think there are various ways, um, so the IFIs have a role in helping with dollar liquidity. The central banks have a role, uh, in using monetary policy in a way that cushions domestic activity as well as to lower the cost of hedging for foreign investors. And of course, you know, the the solvency issue will eventually have to be will eventually have to be addressed. Um, but let's not forget the importance of the short-term liquidity issue, and I think this is probably a big theme that we'll see going forward. Oh, very much, very much agreed. I, I, I'd like to come back to Ann, um, because you mentioned the SDRM, uh, Jeremy mentioned it, although he qualified very quickly that this is not being thought at the fund. So I just wanted to ask, uh, uh, Ann, if you think there's a need for a new debt restructuring framework, and it now, is it, is it now a good, is now the time to think of a mechanism or what else, what else are our options? Well, of course it's my opinion that for quite some time the world has been in need of a good sovereign debt restructuring mechanism. On the other hand, whenever the world gets one, it's going to take a couple of years to get there, and I don't think that we can have much hope for it to do anything about the current crisis, even if the current crisis lasts 3 or 4 years. The trouble is that when there's Crisis. Nobody has enough incentive to do it. And when there is a crisis, everybody says, oh yes, you're going to help X where x could be Zimbabwe or Venezuela or whatever. And meanwhile then the creditors don't like it at that point, even though they might have gained from it if they had it in advance. So I'm not really sure what the answer is as to how to get there. It may very well be that it's going to take some kind of another. Uncoordinated chaotic effort as things come up this time before the people of the world, both in the public and the financial sector, recognize that it would be in everybody's interest to have such a mechanism, but as to what help it will give within the next, within the foreseeable future, I think we have more hope for a vaccine than we do for that over the next 2 years. Yeah, I think uh I'm afraid you are right. Um and um I just um I want to talk about um maybe looking forward. We have, um, we have talked about, we have actually a publication, um Global waves of debt, um which shows that we had the first wave in the 70s and 80s uh in Latin America in low-income countries. Then the second wave in the 1990s, which ended with the East Asian crisis and its aftermath, and then a third wave in the 2000s that ended with the global financial crisis. And in 2019, we said, well, this is the crest of 1/4 wave of a global rapid debt buildup and, and actually, this is, I don't know if I can show it, but this is the, the title. of the book, and the cover page of the book, and you know, it looks now in 2020, this, this what looked like a big wave now looks like a tsunami with all the results of the stimulus and plunging growth. So the question is, how do we put incentives for avoiding these types of huge waves that really, as Carmen. That brings a lot of um uh losses in terms of output, potential output even. So I'm going to turn to Carmen and then each of you in terms of what, how should debt markets look going forward? What can be done now, uh, or in the near future uh to have better, uh, better results for uh countries. Carmen, over to you first. So, can you hear me? OK, so, uh, what I, I, in a very self-serving way, I would like to start with this time it's different, right? I think these waves are actually important. I mean, I think the financial slash human interaction is, is, it's really important. Um, you know, you set the seeds of crises, uh, often during upturns or outright booms. Um, that is when the optimism. And this is, I'm not talking about a distant past. I mean, what we opened on today, the, the, the disconnect issue. Um, is very much the view that the bad shock is temporary, right? You're looking beyond, you know, you're, you're, yes, the, the numbers look really atrocious at the moment, but it's gonna be better and, and on the borrower side, uh, you know, I hear policymakers congratulating themselves on the fact that their auctions are oversubscribed. Um, and on the creditor side, you know, the, the, the yields are very attractive in a, in a zero, zero% interest rate, uh, environment. So, It, in terms of financial architecture, I don't think band-aids are going to do uh the trick. Um, you know, and there are better ways of obviously of managing capital flows during, especially managing capital flow inflow booms, which is far from the problem, uh, earlier this year. Uh, but I think at the global financial architecture, the period where we had The comparative. Uh, stability and take it with a grain of salt. We had fewer banking crises, we had fewer of these capital flow cycles, and relatively calmer period in terms of debt restructurings was, you know, from the end of World War II and uh the uh 1970s, roughly a period that was characterized by Very broad brush umbrella of quote-unquote, financial repression. You had capital controls. In other, in other words, uh, capital mobility, which we haven't said the word capital controls in all this discussion, were the norm. Now, I can rattle off reams of, of papers, uh, highlighting the distortionary effects that, you know, growth, growth issues associated with controls, but the fact is that was a period of comparative stability. However, I would say that human nature, And the booms and the busts and treating good shocks as permanent and bad shocks as temporary, which is what we're seeing now. Uh, in, you know, in the market sentiment, um, is, is has been with us, uh, from as far as the eye can see, so I'm not wildly optimistic that without that overarching Architectural change, and World War II facilitated that, OK? Maybe COVID will too, I don't know. But uh without that overarching change, this boom-bust goes back through at least the whole of the 19th century and most of the post-1970s period until we are where we are today. Yeah, I'm gonna ask uh gentleman to come in. OK, so you can think about what could change structurally, uh, to avoid these boom-bust cycles, and you can think about what policies should do while the structure Continues to be bad, right? So, when you think about what to do structurally, there are essentially two types of answers. One, is to say, look, we need to change the structure of capital flows in ways that Make them more sticky, less likely to reverse, make them, uh, share more risk. Uh, so this is effectively, you know, the agenda that has to do with promoting, uh, equity-like instruments, GDP-linked bonds, uh, commodity-linked bonds, um, Value recovery instruments in, in debt crises, uh, also, um, uh, So, so, so the um, Um, the, the, the emphasis of, of course, FDI, which is a, a point that, um, Uh, that culminate, uh, at, at the beginning. Uh, so, so this is one class of answers. Another class of answers is to say, look, at, at the end of the day, if your financial markets are deep enough, Uh, you will not have to worry, right? So, uh, the advanced economies do not have the same type of problems with volatile capital flows that, uh, emerging markets do, and it was not because Germany started issuing lots of GDP bonds. And so, much of our attention, I think, is economists working on The emerging markets has been on the first class, let's do struct, let's promote structural changes. And in my sense is that we have been relatively unsuccessful, right? We have not been able to convince either policymakers or financial markets to do, move very hard in this uh area. Now, I'm not saying we should stop trying, but I'm, I'm saying that probably The application of some of these innovations is narrower than we initially thought, and, and so ultimately, you know, the, the real, the, the long-term holy grail is financial development in a broader sense, uh, and, and so that is probably the agenda that I would be pushing and of course, we are doing that, right? We are doing it. So it has to do with the development of domestic capital markets, uh, but Um, mindful of the fact that while one is developing anything, it's, it's likely to backfire in some form, right? So, you're always gonna start in a shallow way and then you're gonna get into trouble. And so that, that brings me to the second point, you know, while things are imperfect, what can one do? And I think here, you know, there is probably some scope for Being more proactive in preventing these boom-bust cycles on the side of uh emerging markets, right? So we have this research agenda going on to the fund called the Integrated Policy Framework that is probably going to be used to Reform what we call the institutional view of the IMF on capital flow measures and the direction which, which is going to quote a, a, a sentence from a blog by Geeta Gopinath and Tobias Ardan, which was published two days ago, is, I quote, to prevent excessive volatility over time, prudential capital flow inflow measures can mitigate overborrowing in good times and excessive deleveraging in bad times. So there you go, you know, this is at this point the private view of two heads of departments, but I think the fund is probably gonna move in that direction. It's like the capital um countercyclical buffers, right? In some sense. Pierre Olivier, any thoughts? Uh, just a few remark I think, I think, um, first, the, the sort of the dichotomy that Yeoin, uh, pointed out, which is, you know, you could go to one extreme which is you try to implement the sort of the full risk sharing arrangement with the menu of, uh, financial instruments and the depth of financial markets and the institutional capacity that goes with all of that and the governance and then you're sort of in a good position. And, you know, markets are gonna be helping and are gonna be absorbing losses when they need to be absorbed and they're gonna be spreading the risks when they need to be spread. Um, and there's this other view which is, you know, it's a form of, uh, uh, uh, financial autarchy. Let's limit the extent to which we can be subjected to the shocks that are affecting the world and could buffet our economy and then maybe we're better off if we, if we try to stand on our own. Um, I think, you know, I want to borrow from Stan Fisher's, uh, comment he made once about, uh, optimal exchange regimes, you know, do you want to float or do you want to have a fixed exchange rate, and, and Stan when he was, I think Deputy managing director of the fund said, well, you know, whichever regime you, you adopt, at some point you wish you had adopted the other one. And, and, and I think that's also true when we think about, about, uh, capital flow regimes and, and in, in a sense that we understand that um the world in which we try to build the perfect rate sharing. A kind of arrangement doesn't always work the way it's supposed to work. It becomes amplifier instead of, uh, absorbing losses. Uh, in fact, when you look sort of more systematically and try to find evidence that financial integration has been a, a powerful engine of, of growth and development, uh, it's certainly true at the domestic level. There is very, very, uh, uh, convincing evidence, empirical evidence that's true at the domestic level, but international financial integration, there is much less evidence. Of that, uh, compared to, for instance, trade integration and other things. But, but we live in a world in which there is financial integration. We're not gonna roll back that clock, um, and financial integration is needed to achieve some forms of trade integration. I mean, you, you know, there's a famous saying that, uh, global supply chains are, you know, payment chains in reverse and, and, and that's, that's true. It sort of comes with financial contracts and it comes with linkages. That, uh, we have to take into account and one doesn't go without the other. So, I think we, we are not in one of these extreme views, neither is desirable, neither is, is, is, is a good representation of the world. We're in this sort of middle of the ground where we have to have an incremental approach. We have to think about the instruments and how they work and how they operate, and I think this integrated framework that Jeroin alluded to is, is the right way forward. It, it's sort of dealing with the uh Harburger problem of having enough instruments to deal with enough uh objectives that we want, we want to target. Um, and within that, uh, within that, uh, incremental world, we'll still go through, I think, cycles because human nature, you know, Carmen alluded to that human nature is human nature is and periods of relative, uh, you know, lull and, and calm on financial markets will lead financial regulators and Markets to become more complacent and to relax things and to see how far we can go until we get some retrenchment and then at some point we might overreact in the other direction. So I think within that space, I don't see any major evolution, but designing and understanding better which kind of instruments work when. Uh, uh, is, is actually first order and so I think the view of, you know, trying to understand whether you have deep financial markets or shallow financial markets, whether your monetary policy transmits well or not, what kind of, uh, currency invoicing you have and therefore, you know, uh, uh, uh, uh, going back to you, the kind of, uh, uh, the kind of exposure you have. To affects risk coming through, uh, what the firms are doing, what the banks are doing, what the, uh, uh, uh, what kind of trade credit you have all of this is needed and, and we're sort of in that phase, but I don't see, I don't see any major sort of uh intellectual, uh, uh, direction that we could go and, and somehow would offer a different perspective on this. Yeah, very good. So this was a really excellent, excellent discussion. We are running out of time. So I'm just gonna quickly wrap up. I'm not going to summarize because they were really great ideas and uh I took uh fully at heart what uh Ann mentioned, which is this is just starting in emerging market countries and developing economies. And it's really um critical that we address. These issues as soon as just now actually, so there is a need for huge collaboration internationally and supporting countries. I, I remember in '91, the global recession, there was a huge credit crunch in the US. That's the year I actually started at the IMF. Then we had the exchange rate mechanism crisis in '92, and many recessions in European countries. The Nordic banking crisis and, and there were different episodes, you can '98, 2008, and so on and so forth. And each time after a one year kind of calm period, we done, we then got the, the big blow. So my key concern is uh that uh hopefully this uh time when it looks like things are relatively calm, we don't end up With a major wave again as as in the previous 3 waves, and I think there is a huge need for international collaboration as well as debt transparency, as Carmen said, debt restructuring transparency so that if we get hit, that we can actually hopefully reduce the time and reduce the pain that goes. Uh, with this, uh, difficult episodes. So I'd like to thank, uh, everyone, uh, for participating and listening. This was, uh, really, uh, a great discussion. I hope, I wish we had more time, but, uh, thank, thanks again and, um, looking forward to continued discussion. Thank you. Thank you. Thank you. Thank you. Thanks, everyone. Thank you. Thanks, everyone. Hi everybody.

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The COVID-19 pandemic has produced a sharp fall in capital flows to developing countries. Meanwhile, high levels of sovereign and corporate debt in many countries as well as mounting fiscal deficits have raised the need for even more external financing to combat the economic and human costs of the pandemic. On July 15, 2020, this panel of leaders from international financial institutions and well-known academics discussed ways that the international community can help mobilize private capital flows to developing countries.

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