Free Trial

MNI INTERVIEW2: Rich Countries Should Lend SDRs,Blanchard Says

--Rich Countries Should Lend SDRs To EMs, Former IMF Economist Blanchard Says
--Expects Debt Restructuring, Default
By Luke Heighton
     FRANKFURT(MNI) - Rich countries should lend International Monetary Fund
Special Drawing Rights to developing countries facing insolvency in the
aftermath of the Covid-19 pandemic, the organisation's former chief economist
told MNI.
     "Does the IMF have the means to handle it? It could end up short of funds,"
Olivier Blanchard said in a phone interview May 21 in which he mentioned that he
was "quite sure that there is going to be an amount of debt restructuring and
default" among emerging markets.
     An emergency issuance of the IMF's international reserve assets, as called
for by some economists, might on its own fail to sufficiently assist countries
facing insolvency, he said, arguing for wealthier nations to take steps
themselves to aid those in need.
     "There has been a push for an increase in SDRs. It's not a great way of
doing it, because of the allocation of SDRs - they go to the countries which
don't need them, for the most part," Blanchard said. "But something which could
be done, and I hope is being explored, is some rich countries lending their SDRs
to some of the countries which are going to need it. Countries can do this on
their own, and it doesn't require the agreement of the U.S. -- a major plus."
     --LOW INFLATION
     The pandemic is likely to tip the world into a period of low inflation or
deflation, said Blanchard, now a senior fellow at the Peterson Institute for
International Economics. But in the longer term there is also a small risk that
some governments become overburdened by debt and establish "fiscal dominance"
over their central banks, pressuring them to keep interest rates too low and
leading to overheating and high inflation.
     "Debt would have to be much higher [To cause a debt crisis], given that
interest rates are still very, very low. Interest rates would have to increase a
lot - I don't see this as very likely," he said, but he added. "In the U.S. one
can think of a scenario in which Donald Trump is re-elected and puts a friend in
charge of the central bank. So there is some small probability that very high
debt will lead to monetisation and inflation. The probability is small, but not
zero."
     The U.S. dollar is also likely to preserve its status as the leading
reserve currency after the crisis, said Blanchard, even though "the U.S. is not
going to come out of this crisis on top on many fronts."
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: MMUFE$,M$E$$$,M$U$$$,MC$$$$,MT$$$$,MX$$$$,MFU$$$,MGU$$$]

To read the full story

Close

Why MNI

MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.