Transcript | 1. lecture: How to get rid of debts? (Ľudovít Ódor) - University for modern Slovakia

Welcome. My name is Ľudo Ódor and we are going to meet at this webpage over the following weeks and discuss the manner in which public finance can be put back on a sound footing so that it would not need recovery again. It is a current issue in many countries all over the world and I am therefore glad that we will have the opportunity to discuss it within this interesting project.

We begin with an identifiable milestone. Developed OECD countries reached a 100 this year. However, they are definitely not going to celebrate, for the number is an indicator marking debt within the gross domestic product.  Simply saying, they would have to produce for the period of one year for free in order to get rid of their debts completely. This represents a new record-breaking situation in peaceful times. Bad news does not end here. The developed countries anticipate lower economic growth in the aftermath period of the crisis. There is less free capital for funding investments and banks have become quite careful while providing credits.  Notwithstanding, massive ageing of population with its negative impact mainly on expenditures for pensions, health care and care for the elderly should not be forgotten. To give an example, in Slovakia one elderly person of post-productive age is covered by 6 persons, whereas in several decades this number will go down to just 1.5. Demographic forecasts note this is substantially the worst development within the European Union. To sum it up, not only is our starting position towards lower debts noticeably inconvenient, but we will need to handle strong headwind as well. 

How can the world hence tackle the problem of high-debts? There are in principle three possible ways. The first one is the simplest – when the creditors ask for their money back, show them a simple gesture that is absolutely clear worldwide. To put it in another words, we talk about a situation of partial or full bankruptcy. However, I should not use the word bankruptcy in connection with states in Europe; therefore we will talk about restructuralization of debts. The advantage of such procedure is that the immediate negative impacts on population are really moderate. It is not necessary to endorse tough measure packages in form of raising taxes or significant cuts within investments, pensions or social allowances. The disadvantage is that it will be crucial to administer the economy in a balanced way over the following decades because only very few will be willing to grant loan to such a country.

Second option within the alternatives of lowering debts is represented by money issuance. It is not the amount of debt that matters, if I have money printer in the cellar, for it is not a problem to add one or two zeros to the value on banknotes. Naturally, the outcome of such action would be rise in prices, hence hyperinflation. It seems a nice solution from the outside, however, has a disastrous impact upon citizens who will lose all their savings within a short period of time. Still, a more moderate option may be offered – raising the inflation objectives of central banks. For instance, some representatives of International Monetary Fund have openly discussed the possibility of keeping the growth in prices not at a value under 2% but under 4%. I would personally doubt the benefits of this procedure based on the problems it bears within. To manipulate with inflationary expectations is like playing with fire. If people start doubting future inflation, we can easily find ourselves stranded in inflationary spiral. Claims to higher salaries will be stronger, which will consequently reflect in inflationary expectations and the circle will arrive at a dead end.   

The third possibility on how to overcome debts is to lower the deficit of public finance in a trustworthy manner and keep it at that level. The part of the sentence where we talk about sustainability is less problematic – the level has to be maintained so that financial markets would really believe that such times, when life of the current generation was lead in a way that would put burden upon future generations, have passed. The most suitable option is - if together with decreasing deficit, the structure of economy is changed for the benefit of higher growth. There is nothing more effective in the battle against deficits than a high and healthy economic growth. Also investors are more likely to trust in the sustainability of consolidation if they see that the country performs structure reforms correctly.   

I do not doubt the fact that we will see all three strategies being put into action up to a certain level in the near future. Countries like Greece would have a debt over 150% of GDP even if lowering deficit would be successful. It is very hard to proceed with such a burden over one’s shoulders; therefore, in my opinion, restructuralization of debt is just a question of time. Countries that are less developed will take the direction of higher inflation. On the other hand, however, the risk of inflation is present also in developed countries. For example this also covers the USA, where the Federal Reserve has recently increased free capital on the accounts of financial sector immensely. Anyway, the vast majority of countries will choose the third option in order to lower debts. We will focus mainly on the manner of public finance consolidation within these lectures. The reasons for such choice lie on the one hand in its up-to-date nature for Slovakia, as well as in the fact that it represents the best of the above options.

First of all during our lectures we will have a closer look at the way how to decrease deficit of public finance, hence how to consolidate it; later on we will discuss also the way how to maintain the already achieved lower deficit.