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

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