پیشرفته مدیریت بدهی: حل بحران منطقه یورو از طریق ایجاد ارتباط مدیریت بدهی با سیاست های پولی و مالی

Unconventional approaches to suit unusual circumstances have become acceptable in monetary policy, a formerly highly conservative discipline. In this paper it is argued that unconventional approaches should also be considered in sovereign debt management, in order to contribute to resolving the eurozone sovereign debt crisis. First, the Troika crisis lending to indebted sovereign borrowers in the eurozone is reviewed and compared with standard IMF post-crisis lending. The main difference and shortcoming is the unsustainable character of the eurozone approach, due to the omission of demand stimulation components. To address this and other shortcomings, the features of an ideal alternative funding tool are identified. It would solve the funding problems of affected sovereigns, help stabilise the banking system, but most of all stimulate domestic demand and hence end the vicious downward spiral. It is found that this funding method can be implemented as part of enhanced public debt management by each nation’s debt management office.

There is a close link between the European sovereign debt crises and the banking sectors in the affected countries. Bank bail-outs have contributed to the fiscal problems (visibly in Ireland and Cyprus). Sovereign credit ratings and government bond valuations (and hence public funding costs) are affected by the state of the banking sector, since the sovereign is seen as the guarantor of the banking sector. In turn, since banks often own substantial home-country sovereign debt, the perception of public finances affects the stability of the banking sector (reflected in CDS rates, equity valuations and banks’ credit ratings). There are also close links between the situation in sovereign bond markets, debt management policy and fiscal policy on the one hand and the state of the banking system and monetary policy on the other: Basel regulations (since ‘Basel I’ of 1988 attaching a zero risk-weighting to government bonds issued by OECD member states, requiring no capital for banks to purchase such bonds; since ‘Basel II’ encouraging risk measurement methodologies that have resulted in a reduction of the capital cover of large banks), the increased reliance on credit rating agencies (whose rating behaviour tends to be lagging, enhancing pro-cyclicality), international accounting standards on marking to market of traded securities (increasing volatility, contagion and pro-cyclicality; thus government bond price changes immediately affect banks) and increased securitisation (thus expanding the impact of mark-to-market rules, since the latter apply to traded instruments); the design of banking systems as highly leveraged operations with a miniscule capital base (usually less than 10% of bank assets, so that a reduction in the value of bank assets, consisting mainly of bank loans and securities holdings, by less than 10% will render the banking system insolvent);2 the high degree of inter-bank cooperation needed for continued solvency (guaranteeing contagion of individual bank problems, rendering the inter-bank market systemically critical); the widespread reliance of finance ministries and debt management offices on technical advice from bond underwriters, who are interested parties, with incentivized to favour the issuance of traded instruments in public debt management;3 and the lack of coordination between different policy-makers. The aim of this contribution is to consider, in the light of these factors, the sustainability of the conventional approach to tackling sovereign debt crises in the European case, and to highlight the role of debt management – specifically the choice of funding instruments – in the propagation, but also resolution of the existing problems. On conventional public debt management, see Dornbusch and Draghi (1990). We consider how ‘unconventional’ or ‘enhanced’ debt management fares, compared to the conventional approach, with respect to sustainability and achieving desired overall goals. In the official joint guidelines of the IMF and the World Bank (2003), public debt management is defined as “the process of establishing and executing a strategy for managing the government’s debt in order to raise the required amount of funding, achieve its risk and cost objectives… Sovereign debt managers share fiscal and monetary policy advisors’ concerns that public sector indebtedness remains on a sustainable path....” (p.2). The IMF/World Bank report also highlights the close link of debt management with financial instability and crises: “A government’s debt portfolio is usually the largest financial portfolio in the country. It often contains complex and risky financial structures, and can generate substantial risk to the government’s balance sheet and to the country’s financial stability. …Poorly structured debt in terms of maturity, currency, or interest rate composition and large and unfunded contingent liabilities have been important factors in inducing or propagating economic crises in many countries throughout history. ... By reducing the risk that the government’s own portfolio management will become a source of instability for the private sector, prudent government debt management, along with sound policies for managing contingent liabilities, can make countries less susceptible to contagion and financial risk.” The recommendations and policy responses by international organisations such as the IMF, the World Bank and the Basel Committee on Banking Supervision (BCBS) have favoured the increased use of mark-to-market accounting, VaR-based risk management techniques, policies to broaden and deepen sovereign bond markets, greater securitisation, the use of unregulated derivatives, and reduced reliance on bank credit.4 Moreover, the official IMF and World Bank (2003) guidelines on public debt management include the following recommendations: “... debt managers should ensure that their policies and operations are consistent with the development of an efficient government securities market… “To the extent possible, debt issuance should use market-based mechanisms, including competitive auctions and syndications…Governments and central banks should promote the development of resilient secondary markets that can function effectively under a wide range of market conditions”(p. 8f). The IMF and World Bank guidelines encourage securitised debt strategies.5 No non-securitised alternative is discussed or has been debated in the literature. This contribution helps to fill this gap. Furthermore, despite the recognition by the IMF and World Bank of the close connection between the actions of the fiscal, debt management, monetary and financial regulatory authorities, the institutional design of public policy favoured by them has increased compartmentalisation, resulting in the creation of independent agencies, at arm’s length from the government and each other, but each dealing with particular aspects of closely related issues: a Treasury/finance ministry, an independent central bank, a debt management office and often also one (or several) separate financial regulator(s) (such as a Financial Services Authority in the UK). Governments have been advised to de-couple public debt management from fiscal policy considerations, which turn should be separated from monetary policy due to the widespread legal repositioning of central banks as independent principals (another IMF demand in client countries) (Marcussen, 2005). Debt management is supposed to be ‘delegated’ to a separate agency – in some countries not staffed by civil servants, but private sector employees.6 The benefits of explicit coordination have been neglected. The ‘sharing’ of each other’s goals was thought to be enough.7 Each branch of the executive contributes to (but does not necessarily coordinate with others) monetary, fiscal and regulatory policy. Since the financial crisis such division of competencies has been criticised, and in the UK this structure was abandoned in April 2013 with the abolition of the FSA. Enhanced Debt Management is public debt management that considers all funding options to seek cost-effective solutions, while taking systemic issues and the need for macroeconomic sustainability and establishing a degree of coordination between fiscal, debt management, regulatory and monetary policy into consideration. It suggests options of how to achieve the common goals of sustainable non-inflationary growth with sustainable government budgets and national debt. It is argued that this approach offers a viable and attractive solution to the current eurozone sovereign debt crisis.

The analysis indicates that Enhanced Debt Management (EDM) yields a number of significant advantages over traditional bond finance: 1. Bank loan contracts are not tradable and do not have to be marked to market. Speculative attacks on the debt are impossible. 2. During the crisis, untraded bank loan funding has remained significantly cheaper than traded bond finance for governments. It is surprising that debt management offices have not switched from bond issuance to borrowing from banks via loan contracts. Italy in 2012 could have saved E9.75 bn thanks to lower interest charges.24 3. With EDM, sovereign credit ratings are not needed (saving costs) and rating downgrades would be irrelevant, not affecting banks’ balance sheets or the government’s ability to borrow from banks. 4. Bank loans are available domestically and hence deliver a more stable debt structure, independent from borrowing from abroad. 5. When banks need to generate returns as reserves or capital buffers, a sustainable method is to allow them to earn these through growth, by lending to the government. 6. Bank credit creation for transactions that are part of GDP has been identified as the main determinant of nominal GDP growth.25 Hence an increase in bank credit is required to boost nominal GDP. By borrowing from banks, governments can pump-prime bank credit creation. This boosts nominal GDP growth and hence domestic demand, resulting in greater employment, lower expenditure on unemployment benefits, greater tax revenues and hence lower deficits and also larger GDP, lowing the deficit/GDP and debt/GDP ratios by lowering the numerator and increasing the denominator. 7. The bank loans are available from domestic banks without the need to request government assistance from the Troika, and thus avoid the intrusive conditionality, including structural supply-side reforms or cuts in welfare or education budgets. 8. The banks could create the required funds out of nothing by crediting the government’s accounts with them (as is usual banking practice; see Werner, 2005; Ryan-Collins et al., 2012). No capital is required for such bank lending to the sovereign according to the Basel rules. 9. The government would save the bond issuance fee, which may be small in percentages (0.4% in times of stability, but up to 2% during crises and for emerging markets; Nieto-Parra, 2009), but can be substantial in absolute amounts. 10. Finally, banks are able to utilise these non-tradable loans as sovereign collateral with the ECB to refinance themselves (ECB, 2011a, b). We conclude that Enhanced Debt Management is an attractive option to end the eurozone sovereign debt crisis. While such debt, in the form of bank loan contracts, is highly traditional, the institutional and debt management policy changes of the past twenty years or so have rendered it ‘unconventional’ today. Is Enhanced Debt Management proposing a ‘free lunch’? Sadly, there is no such thing. The banking crises, sovereign debt crises, recessions and high unemployment in the eurozone periphery countries are vivid reminders that this crisis has been highly costly and indeed must rank, in terms of the costs of the resource misallocation, among the most expensive economic dislocations in peacetime history. Instead, Enhanced Debt Management can only offer a method to end the ongoing and highly costly destruction of economic value and deadweight loss of potential output (not to mention human cost) due to underutilisation of resources (such as large-scale unemployment), and doing so in a way that is cheaper than alternative (and flawed) methods pursued by the Troika. The proposed measure is similar to the long-term refinancing operation (LTRO) announced by the ECB on 8 December 2011. This allowed banks to switch from securitised, traded funding instruments to OTC (over-the-counter) funding via direct loans from the ECB. Over E1trn in such 3-year loans at very favourable conditions were granted by the ECB as part of this programme. With this measure the ECB took the step of allowing banks to swap tradable securities for non-tradable loan contracts – with the ECB as counterparty. This reflects the recognition by the ECB that tradable securities are not always the most attractive or suitable form of funding and instead non-tradable debt in the form of direct loan contracts must be considered. Although the LTRO has ensured high bank liquidity, the funds have largely accumulated as unused excess reserves of the banks held at the ECB, and have not contributed to credit creation and hence monetary and GDP growth. The proposed measure would change this and constitutes a needed counterpart to the LTRO. According to the IMF/World Bank (2003) manual on public debt management, “The main objective of public debt management is to ensure that the government’s financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk” (p. 9). Given this main objective, it is difficult to see how the finance ministries and debt management offices, as well as the Troika have overlooked the fact that far cheaper public debt financing has been available for many of the crisis-affected countries than in the securitised bond markets. This cheaper funding (EDM) via bank credit would trigger an economic recovery, boosting tax revenues. The negative spiral would quickly be turned into a positive one. The humble switch in the funding technique of the public sector borrowing requirement – a debt management policy – turns out to be a powerful tool to solve a major international financial conundrum, by offering a stable pro-growth stimulation policy that however does not cost any extra money. Enhanced Debt Management would unite debt management, fiscal and monetary policies in order to achieve the goal of a recovery. There is also an historical precedent for this type of policy: the economics is the same as that of the system of short-term bills of trade issued by semi-public entities in the years from 1933 onwards in Germany, which were bought by the German banks, hence increasing bank credit creation. These are known as ‘Mefo Wechsel’, after one of the issuers, the Metallurgical Research Corporation. This method was introduced by Dr. Hjalmar Schacht, President of the Reichsbank, the German central bank, in 1933 (Werner, 2003). The method, which was called ‘silent funding’, was highly successful. In the 1930s the bills of trade were a preferable method (instead of direct loan contracts with banks), since banks did not have to mark securities to market, and credit rating agencies did not exist. The method suggested here, of direct loans by banks to governments, is a modern version more suitable to today’s regulatory and financial market environment.26