Before we wrap up for today, a quick mention about the latest working paper published by Reinhart and Rogoff. The sovereign debt gurus found that public debt overhang episodes are associated with growth over one percent lower than during other periods which is not necessarily new news but the paper examines the duration of these average debt overhangs.
Among the 26 episodes they’ve identified, 20 lasted more than a decade. Five of the six shorter episodes were immediately after WWI and II. Across all 26 cases, the average duration in years is about 23 years. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive. They find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. So our read on this new paper is that growth can stay lower for longer when faced with a huge debt overhang. If this is applicable to today’s macro world then the implications are huge. Only time will tell but this fits with our view.
Found the above on the Internet when searching for Jim Reid’s September 2010 report, ‘From the Golden to the Grey Age’. This is the link to the original ‘Early Morning Reid’ report of 2nd May 2012 from where the above has been excerpted.