World Bank Chief Economist Reinhart on the COVID Crisis

“Many Businesses Are In Sectors That Arent't Going To Recover”

In an interview, Carmen Reinhart, the World Bank’s chief economist, discusses why she considers rapid economic recovery to be an illusion and how the right debt-spending policies can help in the fight against growing poverty.

Von Isabell Hülsen und Benjamin Bidder

Carmen Reinhart Foto: Martha Stewart / Courtesy Harvard Kennedy School

The economist Carmen Reinhart, originally from Havana, Cuba, has served as vice president of the World Bank in Washington since June. The 65-year-old dedicated her academic career to the study of economic crises and sovereign debt. In 2009, she published the best-selling book "This Time Is Different: Eight Centuries of Financial Folly” together with Kenneth Rogoff. 

The book describes how investors, central bankers and politicians often overlook the warning signs of a severe recession because they believe they can’t be compared to earlier ones.

DER SPIEGEL: Ms. Reinhart, in March 2020, you warned: This time is truly different. 

Why were you so sure so early on?

Reinhart: Because this crash did not start with the financial excesses that normally predate financial crises. It did not start over housing bubbles or households and firms becoming overleveraged. Some of those problems were in the background, but the crisis wasn’t triggered by them. 

Historical comparisons of pandemics are not terribly useful either. The first thing I did when the COVID-19 pandemic hit was to look at the 1918 influenza. Real gross domestic product (GDP) in the United States went up like 9 percent, and we were in the midst of World War I. What kind of useful comparison does that serve?

DER SPIEGEL: If this crisis is so different, what does that mean for the speed of recovery?

Reinhart: The longer the lockdowns, the uncertainties, the more damage done to the balance sheets of governments, households and firms. That is where this crisis begins to compare to historical ones. The issue of financial fragility and bankruptcies becomes much more compelling. 

People who lose their jobs and do not quickly regain employment will have difficulty servicing their debts. Many businesses are in sectors like entertainment, restaurants and retail that are not going to recover.

DER SPIEGEL: We’re heading toward a long recession?

Reinhart: Historically, in the last 160 years, the average time it took to really recover - meaning you get back to the pre-crisis level of income per capita – is eight years. Some countries will recover quicker, and some will take longer. After the financial crisis of 2008/2009, Germany recovered the quickest. 

German banks were exposed to subprime papers, but Germany didn’t have the kind of housing bubble and overleveraged households we saw in the U.S., the United Kingdom, Spain and Ireland. This time, too, the poorest countries are going to have the longest road back.

"The most recent World Bank report on poverty and shared prosperity shows the first spike in global poverty in over 20 years."

DER SPIEGEL: In Germany and in the eurozone, the early indicators are pointing to a V-shaped recovery: The downturn has been followed by a sharp upswing.

Reinhart: It may look like a V-shape, but that’s rebound, not recovery. After a major collapse in the first half of the year, industrial production, GDP, some of the employment numbers and retail sales are going to look V-shaped. However, when you start comparing on a per-capita income basis, full recovery takes much longer. And that is the crucial point: In Greece, per capita income today is still below what it was 13 years ago.

DER SPIEGEL: Many countries have countered the crisis with an enormous amount of debt. Will they run out of firepower?

Reinhart: Advanced economies have a lot more firepower than emerging economies, because they are able to borrow more cheaply, and certainly compared to many low-income countries that have no access to private capital markets. For those governments that (in contrast to Germany) entered the crisis with vulnerable finances, the risk of debt defaults increased importantly. 

Also within countries, this crisis is very regressive, and it is hitting the weakest the hardest. The most recent World Bank report on poverty and shared prosperity shows the first spike in global poverty in over 20 years.

DER SPIEGEL: What countries could default?

Reinhart: About half of the 73 low-income countries are either already in debt distress or quickly approaching it. The most recent entry of what is likely to be a default is Zambia. We already had Lebanon, Argentina and Ecuador, as well as lingering problems in Venezuela and Suriname.

"The quicker you can clean the balance sheet for banks, the quicker the banks can start moving toward new lending."

DER SPIEGEL: So far, this hasn’t caused a financial crisis in advanced economies.

Reinhart: In the "low for long era” (of low interest rates), we have a search for yield that drove investors in advanced economies to lend more to emerging markets. It would be misleading to think that there are no repercussions for the advanced economies. There are many countries in the frontier market space that have borrowed from private investors and issued bonds. 

Five years ago, they were deemed as very successful, now they are indeed vulnerable. It is no secret that of the BRICS-states, only the C is left, China. Brazil has had mounting vulnerabilities and difficulties in containing the COVID pandemic. India’s fiscal space is shrinking. You have South Africa and Turkey, major emerging markets, that are much more vulnerable than they were only a year ago.

DER SPIEGEL: How big is the risk of a global financial crisis?

Reinhart: People think that financial crises are always the most extreme drama, the Lehman (Brothers) moments. I'm not talking about them. I'm talking about a period of high non-performing loans that require more recapitalization from governments that also make institutions very leery about new lending, so that we'll have a credit crunch. 

That environment can occur without drama and can last a long time. Europe is a testimony to that: Post 2008/2009, European banks were very hesitant (in the granting of loans).

DER SPIEGEL: Are there indications this is happening again?

Reinhart: Right now, we’re in a state of suspension. So many countries have either directly by government decree or through the initiative of the banks given grace periods to firms and households. But that will eventually be over, and that is a source of concern when I look at the next year. Credit is an engine of growth. If banks tighten their lending standards, and households and firms are in demand for credit, this is a headwind for recovery.

Poverty in Buenos Aires: "This crisis is very regressive." Foto: Paula Acunzo / ZUMA WIRE / imago images

DER SPIEGEL: What should be done?

Reinhart: The key lesson in terms of policy for countries is: The earlier you tackle the restructuring of private debt, the earlier you start the recognition of non-performing loans, the need for write-offs, the quicker you can clean the balance sheet for banks, and the quicker the banks can start moving toward new lending.

DER SPIEGEL: You have called for a debt moratorium for the world’s poorest countries. Why should lending nations, which are under financial pressure themselves, agree to that?

Reinhart: What we have at the moment are temporary moratoria through the Debt Service Suspension Initiative (DSSI) for low income countries, which the G-20 launched in May and just extended for six months. We expected that the private sector would follow this effort, but that didn’t happen. To say that this has been disappointing is an understatement.

DER SPIEGEL: But what about lasting measures like write-offs?

Reinhart: Most creditors want to be paid 100 cents per lent euro. That has always been the case. The path to debt restructuring historically has always been a long and painful one. We’ve generally gotten there through a process of elimination of all other alternatives that didn’t work. Avoiding such a scenario would spare the lowest income countries a lot of misery. Along that path, social and human conditions deteriorate markedly.

"When you’re fighting a war, you first have to win it."

DER SPIEGEL: In Germany, the prevailing view is that debt is bad, and that not paying it back is sacrilege.

Reinhart: We hope for the sake of the poorest countries that creditors, irrespective of their philosophy, become much more practical in recognizing that some of those debts cannot be repaid at full value. This is not about these countries going out on a spending spree. There is an urgency here for the poorest countries in a health emergency with great social needs, and revenues have collapsed.

DER SPIEGEL: Nevertheless, you argue that more debt is the right treatment for this crisis.

Reinhart: I never said that. I don’t have a benign view of debt. What I said is: We’re fighting a war. And when you’re fighting a war, you first have to win it and then worry about how you’re going to pay back the debt. Unfortunately, this is not a moment with a whole list of wonderful alternatives. There are no silver bullets.

DER SPIEGEL: Many developing countries borrowed from China. The volume of this "hidden debt” is often unknown. Will Beijing use the loans as leverage to enforce political goals?

Reinhart: Let me not speculate about China’s motivation. But let me be very clear about the risk of such a lack of transparency: How can the International Monetary Fund (IMF), the World Bank or governments do meaningful debt sustainability exercises if you don’t know how high their debt is? 

It can also lead to a mispricing of risk. What if investors find out that there is a lot more debt than what their numbers showed? 

What happens when they find out that China's loans have priority because they had to put up collateral? A lot of China’s lending is collateralized. 

Ultimately, it’s a question for the public at large in these countries. 

They have to know how their resources are being used.  

ECB to gobble up more debt next year than governments can sell

Eurozone countries will be able to finance yawning deficits without investor contributions

Tommy Stubbington in London and Martin Arnold in Frankfurt 

Projections by Citigroup underscore how the European Central Bank is propping up demand for bonds across the eurozone © Ronald Wittek/EPA-EFE/Shutterstock

Investors will not have to contribute a single euro to finance the vast budget deficits of eurozone governments next year, according to analysts who forecast that the European Central Bank will buy a greater quantity of debt than all the new bonds hitting the market.

Draft budget plans published by EU member states earlier this month showed that deficits are expected to remain sky high even as economies rebound from the effects of the Covid-19 pandemic.

But, according to calculations by Citigroup, ECB purchases will more than cover the extra cash that governments need in 2021 — even if the central bank does not scale up its €1.35tn emergency bond-buying programme by another €500bn in December as is widely expected. Christine Lagarde, the ECB’s president, hinted at a policy-setting meeting on Thursday that further stimulus is on the way.

The projections underscore how the ECB is propping up demand for bonds across the currency bloc, despite a flood of new issuance, pushing borrowing costs for member states close to all-time lows.

Erik Nielsen, chief economist at UniCredit, said the ECB had made it “very clear” that it intends to buy as many bonds as needed to prevent monetary conditions from tightening for all eurozone governments. 

“The thing with the debt is that as long as it sits on the central bank’s balance sheet, it doesn’t cost anything,” he said, referring to the way that much of the interest paid to the ECB by governments is returned to national treasuries via dividends from their own central banks.

Citi is expecting bond sales of €1.2tn next year, down just slightly from the record total pencilled in for 2020.

Maturing bonds and interest payments will then reduce the net new issuance to €405bn. The ECB is expected under its current plan to buy €460bn on the secondary market where the bonds trade, which means investors are actually getting back a total of €55bn. That figure rises to €343bn if the bond-buying programme is expanded.

“The ECB is swallowing up all the supply,” said Iain Stealey, international chief investment officer for fixed income at JPMorgan Asset Management. 

“The size of their programmes outweighs anything to do with fundamentals. It’s a completely technically-driven market now.”

ECB buying will be most supportive for Italian bonds next year, outstripping the net supply of debt by €38bn, according to Citi strategist Puja Sawant. 

Eurozone members will collectively run a deficit of just under €700bn, or 6 per cent of GDP, in 2021, down from 8.9 per cent this year, according to a Financial Times analysis of the draft budgets.

But governments will not need to raise that full figure from bond markets, because they will receive some funding from the EU itself.

Brussels plans to massively scale up its own borrowing efforts to help fund member states’ response to the crisis, and started the process this month with a heavily-oversubscribed bond sale.

China’s Strengthening Currency Is Increasingly Outside Beijing’s Control

Allowing more foreigners to buy the country’s bonds means strong inflows of capital to China, but that also means abdicating some control of the country’s financial conditions or currency

By Mike Bird

The People’s Bank of China appears to be trying to rein in a strengthening yuan, but there’s less it can do these days. / PHOTO: ROMAN PILIPEY/SHUTTERSTOCK

The Chinese yuan has strengthened this year, and the country’s central bank seems to be trying to slow the rise. But having ceded a portion of the currency’s control to international markets, there’s less they can do this time around.

The People’s Bank of China has suspended the so-called countercyclical factor of its daily fix of the yuan, a tweak which helps it prop up the currency when desired. It has also lowered reserve requirements on currency forwards. It’s not the first time the central bank has done either, but the moves are a demonstration of efforts to keep the currency’s rise in check.

Strong demand overseas for Chinese goods has raised the country’s trade surplus sharply in 2020. The currency has strengthened by almost 7% against the dollar since its May low, and now trades at around 6.72 to the greenback. The country’s admission to major bond- and equity-market indexes has also boosted portfolio flows from international investors.

Foreign investors have bought around 370 billion yuan, equivalent to $55 billion, in Chinese government bonds on a net basis this year according to China Central Depository & Clearing Co. data, increasing their share of ownership marginally as government issuance surged. 

That’s still a little slower than the burst of buying at the same point in 2018, at the peak of foreign purchases.

For a developing economy with fewer capital controls, the response to a currency strengthening beyond the levels the government wanted could be relatively simple. The central bank could cut interest rates, or at least allow the prices of the bonds to rally, bringing market yields down.

That is an awkward option for Chinese authorities, with the central government nervous of unleashing the sort of corporate credit boom it did in the aftermath of the financial crisis in 2008-10, or fueling the continuing surge in household debt centered on the real-estate market.

Major capital inflows are the sort of problem many developing economies wouldn’t mind having, and indexation-related flows will likely be less flighty than the hot-money flows Beijing has feared since the time of the Asian financial crisis. But allowing them cedes some control of a country’s financial conditions to international markets.

The fact that the economy is now classed as an emerging market for the purposes of many bond and equity investors internationally will put pressures—both upward and downward—that other emerging markets are very familiar with.

Another factor of close interest is what happens in the U.S. election next week. It’s impossible to tell exactly how much a less combative trade policy would be worth to the yuan, but market moves last year suggested a close link between the exchange rate and sentiment around China-U.S. commercial relations.

Whichever way the vote goes, China’s acceptance of greater inflows into its assets means abdicating some level of control of the yuan. As holdings rise further, Beijing may find it more difficult to keep the control of the exchange rate that it has previously exercised.

How hotels are trying to attract remote workers

Luxury with your laptop

The busy worker looks at the clock on her laptop and discovers that it is nearly 1pm. 

Time for lunch. So she picks up the phone and asks to speak to room service. A hot meal appears 20 minutes later; no need to bother with the cooking or washing up.

If that vision appeals, you could be a potential customer for one of the many hotel groups that are trying to induce people to rent a room for use as an office. The idea makes a certain amount of sense. Hotel rooms are short of guests during the pandemic; some workers may find it too difficult (or boring) to sit at the kitchen table every day.

The big chains are rushing to test out the size of this market. Hilton has launched a new service called Workspaces in America, Britain and Canada which gives workers the chance to use the gym or swimming pool (where available) and complimentary bicycle hire. The Wyndham chain is offering worker packages at hotels in California, Florida and South Carolina.

Hotels have long made good money out of the business market, catering for business travellers, conferences and team get-togethers. They have also recognised that they need a good Wi-Fi signal to appeal to laptop-toting businesspeople. But renting rooms by the day has traditionally been aimed at a rather different slice of the market from the solitary desk jockey.

Bartleby wrote part of this column in Sofitel St James, a luxury hotel in the heart of London’s West End. This certainly would be an excellent bolthole, for those who can afford it—£299 ($388) a day, with breakfast, lunch and a cocktail available for another £50. 

Your columnist’s suite offered a lounge with a desk, printer and shredder, plus a four-seater table, two comfy chairs and a sofa. Nice little touches included extra pens, sellotape, scissors and a stapler. All the staff wore masks and kept a safe distance. The place was extremely quiet, which aided concentration.

Nice as these facilities were, they would almost certainly be beyond the budget of an ordinary worker who might be looking to escape the builders or the children during school holidays. A cheaper Sofitel option is available at £199 but that would still require a company’s expense policy to be incredibly generous. 

If you are fully employed, you can probably retreat to the office for no extra cost. And if you are a freelance worker, you may simply head for the nearest coffee shop, where seating, subject to social distancing, can be obtained for the price of a few cappuccinos.

Another option for British workers is the traditional pub, with some trying to drum up business by offering “hot-desking” packages. One hostelry in Warrington, a town in the north-west of England, is offering a £12 daily package with a meal, unlimited coffee and an internet connection. (Whether a pub would be a great place to concentrate is another matter; an open-plan office looks like a Trappist monastery by comparison.)

Few Britons live far from a pub. By contrast, though Bartleby enjoyed the luxurious accommodation, his visit to St James’s required a lengthy trip. For many workers, the absence of the daily commute has been one of the big bonuses of lockdown. 

So hotel rooms are most likely to appeal to workers if they are a short distance away, meaning that they need to be in the suburbs rather than the city centres. Suburban hotels will also be a lot cheaper. Hilton offers a work package in a Hampton hotel in west London at a bargain £45 a day.

Even then, the market is likely to be a niche product. Being at home allows workers to have all their chosen comforts (books, snacks, favourite tea) to hand. They will be there if delivery or maintenance men come to call. 

And sitting alone in a hotel room, good as it may be for concentration, is more likely to increase a sense of isolation than being in the more familiar surroundings of one’s own house.

Still, on occasion a bit of isolation might be welcome, just as authors retreat to a cabin to finish their manuscripts. Workers who have a big project to finish might relish a hotel break, especially if their office does not have the covid-19 protocols in place to ease their fears. Hotels might also be a good place to conduct job interviews, provided that companies respect government social-distancing rules.

For humble drones like Bartleby, however, home will continue to be the office of choice, even if it means doing the washing up. Indeed, time to stop writing and fill the kettle.