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1. The Invisible Leverage of the Top 1 Percent: Absentee Debtors and Their Hedge Funds

Author:
Stefano Sgambati
Publication Date:
01-2024
Content Type:
Working Paper
Institution:
City Political Economy Research Centre (CITYPERC), University of London
Abstract:
The existing literature on finance, debt and inequality depicts economic elites as a creditor class. According to a popular thesis, over the past four decades, the rich and ultra-rich households in the top 1 percent have experienced a saving glut (excess income), which they have invested in the debts of the poor and their governments. While it is undeniable that the rich have expanded their income share at the expenses of the poor, to refer to them as ‘creditors’ or ‘lenders’ is a misrepresentation of how they actually expand their wealth and income shares by financial means. For it conceals the fact that a great deal of their investments is leveraged, that is, carried out with borrowed money. This article shows that the debts generated by individuals and households in the top 1 percent easily surpass those of all other households and even exceed those of the most indebted states in the world. However, these debts are hard to estimate, and indeed they are not accounted for in statistics on household debt. This is because households in the top 1 percent do not borrow from banks, like normal households do, but they are instead absentee debtors who borrow through the hedge funds, private equity firms, personal investment trusts, and big banks of which they are dominant shareholders and ultimate beneficiaries. To gain an insight into their invisible leverage, the article looks at how much hedge funds borrow, and why their leverage matters.
Topic:
Debt, Political Economy, Inequality, Finance, Elites, Hedge Funds, and Leverage
Political Geography:
Global Focus

2. The Insurance Implications of Government Student Loan Repayment Schemes

Author:
Martin Gervais, Qian Liu, and Lance Lochner
Publication Date:
01-2023
Content Type:
Working Paper
Institution:
Centre for Human Capital and Productivity (CHCP), Western University
Abstract:
A large literature examines the extent to which consumption responds to idiosyncratic earnings shocks.1 This paper studies whether student loan repayments serve as a source of insurance, much like government tax and transfer programs.2 Indeed, this insurance mechanism is an explicit aim of formal income-contingent repayment schemes in many countries, where the efficient structure of contingencies depends on such market frictions as moral hazard, adverse selection, and costly income verification (Lochner and Monge-Naranjo, 2016). We use new administrative data that links detailed information on Canadian student loan recipients with their repayment and income histories from the Canada Student Loans Program (CSLP), income tax filings, and post-secondary schooling records to measure the extent to which student borrowers adjust loan repayments to insure against income variation.3 Several mechanisms are available for students to adjust loan repayments in response to income fluctuations: formal, like CSLP’s Repayment Assistance Plan (RAP); and informal, such as delinquency or default. Close to 30% of students are enrolled in RAP soon after graduation, although that fraction falls as incomes rise thereafter. ∗ Gervais: University of Georgia, Athens, mgervaisca@gmail.com. Liu: Brock University, St. Catharines, Canada, qliu@brocku.ca. Lochner: Western University, London, Canada, llochner@uwo.ca. We thank the Statistics Canada Research Data Centres at Western University and McMaster University. Lochner gratefully acknowledge support from the Social Sciences and Humanities Research Council of Canada. 1See, e.g., the survey by Meghir and Pistaferri (2011) and references therein. 2Brzozowski et al. (2010) show that the tax and transfer system in Canada is very effective at absorbing income movements. 3Lochner, Liu and Gervais (2021) document sizable transfers implicit in the CSLP through differences in repayment by expected post-school income. Within 5 years of graduation, nearly 10% of borrowers have defaulted on their debt. In addition, borrowers can make larger payments than required should they experience unexpectedly high income: 40% of borrowers have fully repaid their student debt within 5 years of graduation. Indeed, loan payments are shown to increase in income, more so in early years and for individuals with higher initial debt. More formally, we estimate that on average, an unexpected $1,000 change in yearover-year income is associated with a $30 change in loan payment: from a $50 change the year after graduation, declining to a $20 change 5 years after graduation. Loan repayments are also used to absorb income variation that is more permanent in nature: for borrowers whose income is consistently below or above expected income at graduation, the magnitude of average repayment adjustment is similar to the average yearly response.
Topic:
Debt, Education, Economy, Insurance, and Student Loans
Political Geography:
Canada and North America

3. The rising cost of European Union borrowing and what to do about it

Author:
Gregory Claeys and Conor McCaffrey
Publication Date:
05-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Debt issuance by the European Commission on behalf of the European Union has increased massively. Of the approximately €400 billion in outstanding EU debt as of May 2023, 85 percent has arisen from borrowing since 2020. Large-scale borrowing is expected to continue until 2026 to fund the remainder of NextGenerationEU, and concessional loans to support Ukraine. When these programmes were launched, interest rates were at historic lows – even negative for maturities below 10 years. However, interest rates rose sharply in 2022. Beyond the widespread rise in euro-denominated interest rates due to monetary tightening by the European Central Bank in response to the inflation surge, the EU has also faced a widening of the spread between its yields and those of major European issuers, including France and Germany. This widening is driven by a combination of market features, circumstantial factors and institutional features. The EU cannot affect the overall cyclical movement of interest rates and will have to learn to live with it, like sovereigns do. However, the European Commission should continue to try to narrow the spread with major European sovereigns by further developing the relevant market infrastructure and improving its issuance strategy. The Commission will not be able to do this alone. Institutional developments, including progress on the development of new own resources and a long-term substantial presence in the bond market, will be necessary to fully reap the benefits of EU borrowing. A large share of EU borrowing (around €421 billion in total by the end of 2026, in current prices) is intended to finance unprecedented non-repayable support: Recovery and Resilience Fund grants and additional funding for existing EU programmes under the EU budget. The interest costs associated with this part of the debt lie with the EU budget. Our estimates suggest that, because of the high current and expected levels of interest rates, this cost could be twice as high as what was initially estimated at the start of the EU’s 2021-27 budget cycle. As a result, because interest costs for the borrowing of the non-repayable support are accounted for under the EU budget’s ‘expenditure ceiling’, this will exert further pressure on the funding of important EU programmes, which are already affected by inflation. The EU should thus quickly review how interest costs are accounted for in its budget and financial framework.
Topic:
Debt, Budget, European Union, and European Commission
Political Geography:
Europe

4. China as an International Lender of Last Resort

Author:
Sebastian Horn, Bradley C. Parks, Carmen M. Reinhart, and Christoph Trebesch
Publication Date:
03-2023
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent.
Topic:
Debt, Emerging Markets, International Trade and Finance, Financial Crisis, Belt and Road Initiative (BRI), and Sovereign Debt
Political Geography:
Africa, China, and Asia

5. Istanbul Journal of Economics: Volume 73 Issue 2

Author:
Gökhan Karabulut
Publication Date:
12-2023
Content Type:
Journal Article
Journal:
Istanbul Journal of Economics
Institution:
Istanbul University Faculty of Economics
Abstract:
Istanbul Journal of Economics-İstanbul İktisat Dergisi is an open access, peer-reviewed, scholarly journal published two times a year in June and December. It has been an official publication of Istanbul University Faculty of Economics since 1939. The manuscripts submitted for publication in the journal must be scientific and original work in Turkish or English. Being one of the earliest peer-reviewed academic journals in Turkey in the area of economics, Istanbul Journal of Economics-İstanbul İktisat Dergisi aims to provide a forum for exploring issues in basicly economics and publish both disciplinary and multidisciplinary articles. Economics is the main scope of the journal. However, multidisciplinary and comparative approaches are encouraged as well and articles from various social science areas such as sociology of economics, history, social policy, international relations, financial studies are welcomed in this regard. The target group of the journal consists of academicians, researchers, professionals, students, related professional and academic bodies and institutions.
Topic:
Debt, Economics, Globalization, Tourism, Capitalism, Finance, Ethics, Economic Growth, Tax Systems, Macroeconomics, and Unemployment
Political Geography:
Turkey and Middle East

6. Towards a Sustainable Recovery for Lebanon’s Economy

Author:
Ricardo Hausmann, Ugo Panizza, Carmen Reinhart, Douglas Barrios, and Clement Brenot
Publication Date:
11-2023
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
Lebanon’s current economic crisis ranks among the worst in recent history. GDP has collapsed by 38% in real terms. The Lebanese lira, which was fixed to the dollar in 1997, has lost more than 98% of its value on the parallel market. The government has defaulted on its debt, and depositors are unable to access their funds held at commercial banks. Consolidated public sector debt, including both government debt and commercial banks’ claims on the Banque du Liban (BdL), represents more than seven times the current GDP. Public services delivery has crumbled. In short, the country is undergoing a debt crisis, a banking crisis, a currency crisis, and a growth collapse. Four years into the crisis, a resolution remains elusive, and each passing day increases the economic and social burdens faced by the population. Given the increasing cost of delaying a resolution, we propose a strategy for Lebanon’s economic recovery that addresses all the dimensions of the crisis while recognizing the need to rapidly kick-start the economic recovery.
Topic:
Debt, GDP, Economy, and Crisis Management
Political Geography:
Middle East and Lebanon

7. Strategies to future-proof Zambia: Debt relief and beyond

Author:
Vincent Obisie-Orlu
Publication Date:
07-2023
Content Type:
Policy Brief
Institution:
Good Governance Africa (GGA)
Abstract:
Debt relief negotiations are currently taking place, with Zambia expected to be the first country to receive debt relief under the newly created G20 Common Framework. However, the process faces challenges, with China and the United States trading accusations of impeding the process. Some of Zambia's creditors have also been unwilling to agree to write off some of the country's debt. Positively, innovative approaches to debt relief have been proposed that would support Zambia's net-zero ambitions and promote sustainable development, such as debt for nature swaps. The integration of Zambia into the European Union's Critical Minerals framework could further support and assist Zambia in attaining a deal. Without a deal, Zambia risks being plunged into further macroeconomic uncertainty at a time when the country needs investment to capitalise on opportunities presented by political stability and structurally higher prices for copper and other critical minerals with which Zambi a is endowed.
Topic:
Debt, Development, Natural Resources, Political stability, Mining, and Macroeconomics
Political Geography:
Africa and Zambia

8. Paying with Austerity: The Debt Crisis and Restructuring in Sri Lanka

Author:
C. P. Chandrasekhar, Jayati Ghosh, and Debamanyu Das
Publication Date:
12-2023
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
On April 12, 2022, Sri Lanka defaulted on external debt service commitments. Announcing the “pre-emptive default,” pending restructuring, the government also announced that it was suspending repayments due in 2022 on its external debt. By May, Sri Lanka was formally in default, becoming the first country in the Asia-Pacific region to default on debt in two decades. There were medium-term factors that underlay the crisis, not least of which was the chronic dependence on foreign finance, especially debt, to cover widening current account deficits that followed the IMF-inspired and dictated embrace of liberalization policies starting in the late 1970s. In recent years, following the global financial crisis and the end of the civil war in 2009, this dependence on external borrowings intensified. There was also a dramatic shift towards bilaterally, besides multilaterally, financed investment projects and increasing reliance on the bond market, partly to meet debt service commitments on accumulated debt. Given this vulnerability, a crisis was precipitated by a collapse in foreign exchange receipts during the Covid pandemic, due to falling exports, near-zero tourist arrivals and reduced remittances and the subsequent spike in the outflow of foreign exchange because of the speculation-induced rise in the prices of fuel and food. This paper details the events which culminated in the Sri Lankan debt crisis, assesses the appropriateness of the official, IMF-prescribed strategy of adjustment and debt restructuring, considers the experience with restructuring thus far, and explores alternatives that would have been, and could still be, less regressive and ensure sustainable development.
Topic:
Debt, Political Economy, Finance, Austerity, and Liberalization
Political Geography:
South Asia and Sri Lanka

9. Financial eschatology and the libidinal economy of leverage

Author:
Amin Samman and Stefano Sgambati
Publication Date:
01-2022
Content Type:
Working Paper
Institution:
City Political Economy Research Centre (CITYPERC), University of London
Abstract:
Apocalyptic thinking has a long religious and political tradition, but what place does it occupy within the temporal universe of contemporary capitalism? In this essay, we use the figure of the eschaton to draw out the loaded and ambiguous character of the future as it emerges through the condition of indebtedness. This entails a departure from political economy accounts of capitalist futurity, which stress the structural logic of financial speculation, in favour of an existential account that begins instead with the cosmology of money and debt. We argue that finance capital’s fixation on the future has produced a very specific form of apocalyptic imagination, characteristic of financial society and built on a libidinal economy of leverage. Rather than offering an ecstatic end to the global process of financialization, financial eschatologies bind the contemporary subject to debt and indebtedness to the very end: an endless apocalypse, premised on the ends of finance itself.
Topic:
Debt, Finance, Money, Eschatology, Futurity, Leverage, and Libidinal Economy
Political Geography:
Global Focus

10. Twelfth Annual N.T Wang Distinguished Lecture: China is Not a Donor

Author:
Deborah Bräutigam and Thomas J. Christensen
Publication Date:
02-2022
Content Type:
Video
Institution:
Weatherhead East Asian Institute, Columbia University
Abstract:
The nature of Chinese lending in risky countries remains poorly understood. Drawing on data on Chinese loans, creditors and contractors, and case studies of Chinese lending in Zambia, Kenya, Montenegro and Sri Lanka, this talk illustrates three areas in which misunderstandings create challenges. First, China is often portrayed as a monolithic, highly coordinated actor. Our research suggests instead that project finance from China can be highly fragmented, uncoordinated, and even chaotic. A second common fallacy is to assume all Chinese funding is “foreign aid” and then compare its terms or impact with funding offered by the World Bank, or bilateral donors. Our research suggests that Chinese foreign aid is a tiny fraction of all Chinese lending; the appropriate “apples to apples” comparisons will often be export credit agencies, private commercial banks, commodity traders, and even Eurobonds. Finally, some journalists, pundits and policymakers have promoted the idea that Chinese banks deliberately lend to risky countries to secure strategic assets. We question the evidence for “debt trap diplomacy” and suggest instead that China Eximbank suffers from “Tazara Syndrome” – a megaproject bias that can be traced back to the iconic African railway of the 1970s. This event is hosted by the Weatherhead East Asian Institute and the Jerome A. Chazen Institute for Global Business, and cosponsored by the China and the World Program at Columbia University.
Topic:
Debt, Diplomacy, Foreign Aid, Donors, and Loans
Political Geography:
China and Asia