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00:00Hello. Welcome back to the Bloomberg Best Global Conference and our thanks to our colleagues at Bloomberg Intelligence. I'm joined now by Carmen Reinhart the recently appointed chief economist at the World Bank. Of course a teacher of international finance at Kennedy School at Harvard and Tropical it's famous for being the co-author of This Time Is Different the best selling book on the financial crisis. Welcome Carmen . Thank you . I'd like to start with the cliched question of course is this time different. And if so what is the World Bank trying to achieve in getting the world back on track . Well so two very different questions. Is this time different . I think Simon we've spoken before you know that since . Fairly early in the process I've been highlighting the point that this indeed is different. This didn't originate in a financial access in the 2008 2009 and other varieties but it has morphed into a major crisis. And one of the things that I've highlighted that is very different is that the policy response the lockdowns the distancing the suspension of global travel of any shape or form is a very novel response to pandemics. Pandemics are all . I've likened the and this is relevant to the World Bank response. I've likened the crisis more to the thirties than to the global financial crisis of 2008 2009 and the reason for likening it more to the 30s. Despite the fact that the macro policy response across countries has been very different from what we saw in the thirties. But the reason of course making it more akin to the 30s is if this is truly a global financial crisis. 2008 2009 was a crisis. A banking financial crisis in 11 advanced economies. The emerging markets were hit in 2008 2009 but rebounded very sharply. China was growing double digits . Commodity markets were very strong. And this time of course if the advanced economies are seeing problems it actually pales in comparison to some of the problems and challenges that the developing countries and emerging markets are seeing because they don't have safety nets because they don't have the fiscal space to try to counter the effects of the lockdowns . And so you know the issue of how do you support countries in which revenue has collapsed. If you were rely on tourism. Tourism has collapsed. If you rely on commodities commodity price exports and volumes are down. So the World Bank and the IMF the multilateral community in general has been engaged in record lending both in terms of the volume of lending and in terms of the number of countries that have access that lending. And one very important feature that distinguishes this lending wave if you will by the multilateral is by the World Bank by the IMF is the speed with which it has been decided on moved upon and reached you know reached their destinations for countries to be unable to. To counter all the very many dimensions of the adverse shock they're facing. Because as I said this . You know this crisis the manifestations it has taken it's not just a health crisis in some regions in some areas of sub-Saharan Africa you're also facing food crises situations. In cases in the Caribbean which you have but overwhelming dependency on tourism . The situation is very different but nonetheless very acute. So there is a diversity of very serious problems. And so the response is up to the moment has been based on providing the speediest really . And what more can be done now that speedy relief has been put in place. What more can be done . Well on May 1st the G 20 also agreed to an initiative that would suspend debt servicing for the poorest countries. The ISE countries and the kind of savings potentially would be freed up resources and resources that were being used to service the debt to be used to support you know the support the anti coal bid response . And so far the participation is been predominantly an official one. That is to say despite very early efforts and and our president David Malpass has been making you know repeated repeated rounds to get the private sector on board . So far the participation on the suspension temporary suspension of of debt servicing has been limited to the official predators . But what more can be done. I think an important one is also some debt relief from the private creditors which has yet not been forthcoming. Now beyond that what can be done is is complicated right. Because you know what we've seen in in the U.S. what we've seen in Europe and in some of the major central banks. Is undertake you know unprecedented policy actions to provide liquidity to provide support to banks that have loans that have been compromised by the output collapse and the surge in unemployment to provide support to high yield corporates. Well you know the international community doesn't have that kind of firepower . You know the IMF or the World Bank have that can print dollars . You can't. You don't have the the ability to to act as forcefully as we've seen in the Federal Reserve. So I think going forward revisiting the issue of expanding the capacity of multi laterals to continue to provide assistance especially in a scenario where the co bid pandemic is not dealt with more definitively i.e. a vaccine a vaccine that is widely accessible globally in that eventuality you know that that's that's an issue that that's ahead of us . And what's at stake here if the private sector doesn't join the relief efforts that at the sovereign sector has is dire. Is that a challenge to the recovery eventually . So many things are at stake. There is the issue that again in the midst of what can be safely described as the worst global crisis we've had in at least at least you know almost a century almost a century that in that kind of environment countries are torn between diverting resources to debt servicing vs. using the resources to support social safety both in the medical front and also support lost incomes. So there's that enormous tension. But . There's also the the more lasting effects that . If the impact of the pandemic is made deeper by not having resources to cope with it the scars and lasting damage done to countries facing that situation is that much deeper and longer. So. So basically. What we're saying is you know that this in my view and I think markets are a little certainly more up have a more optimistic or upbeat tick that than I do this. This is not . I think there's a real danger of confusing rebound with recovery that we're we're seeing a lot of things rebound and that's taken as a sign that we're on the path to recovery. I think true recovery means you're at least as well off as you were before . The crisis started and I think we are a long way off that in the US and even much more so in the developing world in varying degrees. There's a lot of hair ingenuity when one talks about the developing world . But importantly what I'm what I'm saying is. Lack of resources now whether it's coming from you know in the form of of of . Suspending temporarily suspending that service or whether it's coming from access to new lending a lack of resources now could mean that the impacts of it are much longer live that the recovery is weaker it takes longer. And therefore you know I think it is it would be wise over the long haul for investors to take into account . That you know how long the damage lasts how deep it is. Also importantly is affected by the tools they have on hand these countries have on hand today . And what role of China. China obviously plays an outsized role in this than it did in previous decades. Important is it that China carries through on it as a member of the G 20. How confident are you that it will carry through on its commitments there and elsewhere on the debt relief front . It's extremely important . It's extremely important because if you look at the last 20 years I mean of the China's spectacular rise in global trade is well known well documented. But I think one area that has received far less attention is that over the last 20 years China became the biggest lender to developing countries especially in the low income spectrum . And so China is a bigger creditor than the rest of the 19 combined. So if you don't get China on board in that in DSA saying the suspension of payments . The relief would be infinitely smaller would be you know of much more limited of much more limited scope . To date you know the signaling and the movement has been towards having truly a G 20 initiative that is participation of the G 20 governments. So one scenario that one G you know the other G 19 countries would want to avoid is we're giving we're providing debt forgiveness and the ISE. But it's idea that it's debt forgiveness to be used for managing the crisis rather than for servicing either the debt of China or the debt of the private sector. Neither of those alternatives are are certainly what was in the minds of of the policymakers when they sat around and decided let's provide some debt relief. You don't want it. You wanted to have a impact towards the goals of crisis management . What is your overall forecast for the world economy now. Now you've inherited this this great job. Just before you joined the the World Bank was predicting a global contraction of 5.2 percent this year the worst performance in emerging market developing nations since 1960 . Is that the seeds being planted for a fuller recovery or are you concerned that that we're going to see a drawn out period of very sluggish growth worldwide. So first of all I think one one thing we have to have very very clear is the degree of uncertainty that surrounds any point estimate on anything. I mean earlier this year the World Trade Organization came out and said during 2020 global world trade would decline anywhere between 13 percent and 32 percent. That's a rather broadband and I think it's very indicative. This is not a criticism of them. It's very indicative of the degree of uncertainty that we have at the moment. And the degree of uncertainty is a very much of what we're seeing. And economic activity is driven by something I e the path of a culprit of which our capacity to predict whether. The first wave will take very long to overcome certainly in the US the persistence of the first wave is it's been significant. Secondly how that first wave circles the globe. It hasn't done so. Synchronicity we've seen the later outbreaks migrating to emerging markets like Brazil like Russia like India . Third we're not really sure whether we're going to get a second wave . We hope that the appropriate comparison is of course not the 1918 influenza which in fact started in March of 1918 but lasted until 1920 and in effect had three waves with the second wave being the deadliest of the three . So what I'm getting at is that . The degree of uncertainty in any economic forecast at the moment especially if try to figure out what what next year looks like is I think higher than I've ever seen it in my professional life . I am very skeptical. As I said of obese shape now a lot of things including GDP growth . Will look like v shapes . But if you look . Individuals incomes per capita income . I don't think you're gonna get anything like a bee shape to that . I think it will take us some years . To get back to our pre crisis level of income in work that I did with Ken Rogoff . Looking at the worst crises and I say crises because they did not involve pandemics but they involve the combination of a banking currency debt crisis getting out of those debt crises and getting back to the pre crisis level of income on average took about eight years. So you know that's . Perhaps we can do better and the US for example given its capacity to respond that it has as it has is continues to do I think the capacity to respond on the monetary and fiscal is not easy to replicate in other countries that the damage indeed will be with us for some time. So this is a long winded way of saying that even as the indicators snap back don't confuse rebound with recovery. I don't think the recovery is going to be forthcoming over the very near term . One one question from the audience how will Kobe 19 affect the terms for emerging market countries to refinance their maturing commercial sovereign debt over the short medium . OK. That's an excellent question. Let me say that one of the striking features is after of course you know that the panic and march and so on when when the liquidity crunch hit the hardest and the big element the surprise was very much with us . You know emerging markets saw a a reversal in capital flows in a matter of four weeks in a matter of four weeks. Around the late late March they saw a reversal in capital flows in which in the 2008 2009 crisis had taken a year to unwind . So . I think one element but we're not there now because you know that the very significant provision of liquidity by the Federal Reserve has changed the landscape for four for debt issuance for emerging markets. I think what is helping emerging markets at the moment is. As again once again we move into zero interest rates the search for yield is is usually alive and well however . I think . One has to keep in mind that. The longer the economic downturn lasts. I think the willingness on the part of investors to take more risk on the emerging market side will be mitigated by two factors emerging markets unlike corporates don't have a support network in terms of a facility by the Federal Reserve that purchases corporates. There is no such facility for purchases of debt . So that network of support is not there. Secondly the longer . This crisis last. The more of the real balance sheet damage that we will see in emerging markets . You know with debt ratios looking worse with government revenues impacted we're a longer haul and the synthesis of this we've seen already a record number of sovereign credit rating downgrades . And so . To make a long story short I think that while you know be ample liquidity the low rate environment you know continues to provide Iams with you know the law of of of high coupons. I think if as the crisis as the recovery process gets delayed I think the risk considerations are worsening for emerging markets. Asset class I think one has to of course there's enormous degree of differentiation. We can't really you know this is a generalization. But I think as I said the issue of the worsening credit ratings that ratio is drifting higher revenue shortfalls. And what are likely to be other forms of domestic financial fragilities emerging I think. I think EMS are going to be in very very tough spot going forward . Casting the net a bit wider to to fiscal issues he said recently in a newspaper interview that . You are a fiscal conservative but now wasn't the time to worry about that. Talk me through that. How how long does that period get to run and when do people start when the fiscal conservatives start to worry about some of the debts that have been run up . Look I think . I like and very much the current situation. To a wartime situation . During a war when you go into war you don't know if the war will last one year or two years or five years . But certainly while the war is raging priority wise . The concern is about winning the war rather than making very prudent decisions about that . And this situation unfortunately . Has thrown the global economy in a situation that is very similar to a war because you know . Issues of trying to . Jump start the economy prematurely . Can backfire if indeed we still have a global problem circulating or if we have a second wave and this is the point that I tried to highlight early on when you asked me about the forecasts and I said the key driver or the distinguishing feature any forecast always have standard errors. But the dispersion the uncertainty that we're facing now is very exceptional. And so as regards going back to the fiscal issue I can't tell you whether oh we're going to start worrying about that if we hit you know March of next year. And so March of next year's when we start where I can't say that because this is really about you know winning the war first . Which we haven't done yet . Carmen Reinhart thank you so much for your time today. Good luck with your new appointment at the World Bank .

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World Bank's Reinhart on Economic Effect of Pandemic

Carmen Reinhart, World Bank Vice President and Chief Economist, talks with Bloomberg’s Simon Kennedy at the Bloomberg Invest Global virtual summit about the near- and long-term economic effects of the global pandemic on the world’s most vulnerable populations. (Source: Bloomberg)

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