Carmen Reinhart has been studying the impact of debt on
economies since taking her first job as an economist at Bear
Stearns Cos. in 1982, just as the Latin debt crisis was
unfolding. She gained further experience in subsequent stints
as an economist at the International Monetary Fund. Reinhart
collaborated with former IMF chief economist Kenneth Rogoff to
publish the 2009 business best-seller This Time Is Different:
Eight Centuries of Financial Folly, which shows how the U.S.
subprime crisis fits an established pattern of debt crises
extending back some 800 years and why recovery is likely to be
prolonged and painful. She recently spoke with IIs
International Editor, Tom Buerkle.
1 Greece is in the hot seat. Can the country repay
its debt without a rescheduling?
It might not be impossible, but its certainly
improbable. Greece has two major problems: It has lost
competitiveness within the euro zone, and it has a debt
overhang problem. Fiscal austerity, which includes sizable cuts
in government wages, is tailor-made for repairing the
competitiveness problem, but its a deflationary policy
that makes the debt overhang worse. Debt-to-GDP is going to
just keep looking worse. Greece cant inflate the
denominator; its going to have to deal with the
numerator. Thats where the restructuring comes in.
Haircuts of between 20 and 50 percent are not unheard of.
2 Does the European Union bailout package strengthen
or weaken the euro area?
If its a first step to greater fiscal unity, it
strengthens it but right now there is so much
overarching concern about political unity. We thought wed
put currency risk to bed with the euro, but it is coming back
with a vengeance. I dont think its a big plus,
other than to buy time.
3 What does the European crisis say about the U.S.?
Could the bond vigilantes turn on the Treasury
What it should say to the U.S. and what its actually
doing are different. We should be saying, Ah ha!
Adverse debt dynamics sooner or later come back to bite you.
What is actually happening is that its buying us time to
dawdle. The euro was the only serious contender to the U.S.
dollar as a reserve currency. That expectation is quickly
dismantled. So it has prolonged the life of a more benign
attitude toward U.S. Treasuries, yet its also postponing
the day of reckoning.
4 How do debt issues affect the balance of power
between advanced economies and emerging markets?
The emerging markets are at a crossroads. Theres a lot
of search for yield going on, and emerging markets are
attracting capital like magnets.
If they manage it well if they dont fall into
the temptation of borrowing too much when markets are tripping
over themselves to lend to them then they are well
poised to continue growth. If they behave as they often have
and believe that this time is different and that theyre
really going to be able to borrow without consequences, then
all bets are off.
5 Why is it so hard to recover from debt crises, and
what does that say about economic recovery today?
Our key finding is that growth rates are about 1 percentage
point lower in periods of high debt. One percent doesnt
sound like a lot, but if you have a population thats
growing at 1 percent a year, 2 percent growth rather than 1
percent means your income per capita is going up, not
stagnating. So it actually makes a big difference.
U.S. real estate peaked in the first quarter of 2006. This
is our fourth year here. If you look at private debt in the
U.S., we havent had these kinds of levels since the
roaring 20s. The deleveraging episode after that lasted
over a decade.