BM: What is the appetite at the IMF for coming to the rescue?
KR: The IMF at this point is all-in on trying to find a debt moratorium, recognizing there’s going to be restructuring in a lot of places. But I don’t think the U.S. is by any means all-in, and a lot of the contracts of the private sector are governed under U.S. law. And if the U.S. government is not in, if China’s not in, it’s not really enough. But it’s far easier to go the route of the G-20. If the G-20 says it’s in the global interest that debt moratoria be widely respected by all creditors for the next year, then that carries a lot of force, even in U.S. courts. But if they don’t say that, and every country’s left on its own to work something out, I think we get back to my Covid-19 hospital analogy where the system just gets overwhelmed.
BM: What about the debts in the major economies, given they have been run up so aggressively?
KR: It’s not a free lunch, but there was no choice. This is like war. There is no debate that they should be doing all they can to try to maintain political and social cohesion, to maintain economies. But what lies at the other end? I go back to my Wizard of Oz analogy. The financial markets think there’s no chance interest rates will go up. There is no chance inflation will go up. If they’re right, and if another shoe doesn’t drop, it’ll be fine. But we could have costs from this. We’re talking about economies shrinking by 25% to 30%. And those [declines] are just staggering compared to the debt burden costs, whatever they are. So certainly we would strongly endorse doing what governments are doing. But selling it as a free lunch, that’s stupefyingly naive.
CR: I actually wanted to go back to the Italy issue. If you look back to 2008-09, nearly everybody had a banking crisis. But a couple of years later, the focus had moved from the banking problem to the debt problem. And it was the peripheral Europe debt problem with Portugal, Ireland, Iceland—most notoriously Greece—having the largest, by a huge margin, IMF programs in history. I would point out that Greece, Ireland, and Portugal combined are a little over a third of Italian GDP. And if there’s a shakeout that involves concerns about Italy’s growth, then we could have a transition again from the focus on the Covid-19 crisis this time to a debt crisis. But Italy, as I said, is on a different scale than the peripheral countries that got into the biggest trouble in the last crisis. It potentially also envelops Spain. So I think that if you were to ask me about an advanced economy debt issue, I think that is where it is most at the forefront.
KR: We argued at the time that the right recipe was to involve writedowns of the southern European debts. And I think that would have been cheap money in terms of restoring growth in the euro zone and would have [been] paid back. And we may be at that same juncture in another couple of years where you’re looking at just staggering austerity in Spain and Italy on top of a period of staggering hardship. Advanced countries have done this all the time—finding some sort of debt restructuring or writedown to give them fiscal space again, to support growth again. If the euro zone doesn’t find a way to deal with this, maybe eurobonds might be in the picture to try to indirectly provide support. Again, we’re going to see huge forces pulling apart the euro zone.
BM: What about China, which also has leverage challenges?
CR: Chinese growth has always been very outward-looking, very propelled by export-led growth. You’ve also had much of its double-digit growth come from incredible fixed investment. So I think the settling point for Chinese growth is going to be well below 6%. I’m not saying they’re not going to have a rebound after the more than 20% crash at the beginning of this year. But I’m saying that then your settling point is going to be lower than 6%. And part of the story is debt. It’s hard to say in China what is public and what is private, but corporates in China levered up significantly, expecting that they were going to continue to grow at double digits forever. That hasn’t materialized. There’s overcapacity in a lot of industries.
China came into this with inflation running over 5% because of the huge spike in pork prices. So I think initially that the PBOC [People’s Bank of China] has been somewhat constrained initially in doing their usual big credit stimulus by uncertainty over their inflation. I think that’s changing because of the collapse in oil price. So I do think we are going to see more stimulus from China.
KR: There will be a pretty sustained growth slowdown in China. We were on track for that anyway. But who can they export to? The rest of the world is going to be in recession. I think if they can average 1% growth the next two, three years, then that will look good. That’s not a bad prediction for China. And let’s remember, their population dynamic is completely changing. So 3% growth in that, with that Europeanizing of their population dynamics, would not be bad at all. But there’s a big-picture question about their huge centralization, which is clearly an advantage in dealing with the national crisis but maybe doesn’t provide the flexibility over the long term to get the dynamism that at least you’ve got in the U.S. economy.