The IMF’s Research Department convened a September 14 conference of leading economists to look at some of these issues. The papers presented at the conference and a collection of IMF analyses on the topic will appear in a book to be published next year.
“Financial crises are damaging and contagious, prompting calls for swift policy responses when they happen and justifying much effort to avoid them,” said IMF First Deputy Managing Director David Lipton in opening the session.
“The IMF has been engaged actively in understanding the causes, consequences, and best resolution policies of financial crises. The IMF’s recent work on credit booms and banking crises echo the findings of these academics on the role of rapid credit expansion in predicting crises,” he said.
Keynote speaker Carmen Reinhart, of Harvard University, sounded a somber note. The current crisis that began with the unraveling of the subprime U.S. mortgage market in 2007 is far from over and is on a scale that has not been seen in advanced economies since the 1930s and World War II debt defaults. As a result, she said, it is increasingly likely that there will be debt restructurings and conversions to ease repayment in some of the stressed economies in Europe.
Reinhart—who with co-author and fellow Harvard professor Kenneth Rogoff surveyed eight centuries of financial crises in their book This Time Is Different—reminded that while in recent decades these so-called credit events have been the domain of emerging market borrowers, prior to 1940 advanced economies were involved in many such restructurings and conversions of high-yield, short-term debt to low-yield, long-term debt.
Debts have grown substantially in advanced economies and are of such a scale in some countries that is difficult to see how in some cases austerity measures alone will suffice in reducing the debt to levels countries can afford. Already central government debt as a percentage of GDP exceeds 90 percent for advanced economies as a whole.
Moreover, she said, debt is much bigger than meets the eye. Private debt can quickly become public, as in Ireland and Spain where neither government had debt issues until their economies were overwhelmed by the problems of their overextended banking sectors...