Given the urgent need for policymakers in Europe and other advanced economies to tackle current debt challenges, there is a frantic scramble for suitable policy tools that will help resolve the Greek conundrum.
One policy tool – a form of debt restructuring known as ‘financial repression’ that focuses on establishing a tighter relationship between government and the financial industry by setting caps on interest rates and regulating cross-border money flows – has largely been overlooked. The Petersen Insitute’s Carmen Reinhart recently delivered a DEC Lecture on this mechanism.
Prof Reinhart pointed out that post-WWII public debts were reduced partially through steady growth, but more importantly, through financial repression. Reinhart believes the time maybe ripe for using this mechanism to take on current debt challenges (although policymakers today might prefer the more benign-sounding term, ‘prudential regulation’). This policy approach may also help emerging markets in managing hot money inflows, inflation and overheating risks.
Following the lecture, Prof. Reinhart sat down for a brief interview where she discussed debt in the US, the prospects for debt restructuring in Greece, Portugal and Ireland, and the risk of emerging economies declaring victory too soon.
Watch the full interview here.
Also see a discussion on 'The Liquidation of Government Debt' with M. Belen Sbrancia.