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Michael Pettis Profile picture
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28 Jun, 5 tweets, 2 min read
1/5
 Very interesting article by Avinash Persaud (@AvinashPersau15) on a mechanism that automatically extends debt payments for some period of time in case of a crisis that makes debt servicing impossible or difficult for a sovereign borrower:

ft.com/content/7e1c92…
2/5
 "Under this style of clause, when an independent organisation declares that a natural disaster has occurred, debt service is immediately suspended for two years, with the payments added back at the end of the term of the loan or bond."

global.oup.com/academic/produ…
3/5
 I would favor partial debt forgiveness rather that what Persaud calls an NPV-neutral structure, but either way, poor countries with a limited safety margin should not be forced into financial distress that compounds their problems when adverse events beyond their...
4/5
 control make debt repayment impossible or extremely costly.

The irony of course is that such a restructuring mechanism – as long as it is objective and neutral – actually benefits creditors as much as borrowers because when a country is forced to go through a difficult...
5/5
 restructuring, financial distress costs undermine the borrower's debt-servicing capacity and so leave creditors worse off over the long run. A speedy bankruptcy process benefits sovereign borrowers and creditors as much as it benefits private borrowers and creditors.

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More from @michaelxpettis

Michael Pettis Profile picture
1 Jul
1/11
I don't think this is correct: "A successful rollout of the digital renminbi, which will be firmly under the control of the PBoC, is likely to make the Communist party more comfortable with relaxing controls because...

ft.com/content/efa3ec… via @FinancialTimes
2/11
the authorities will have full visibility over two-way flows."

You cannot simultaneously ease restrictions on capital flows and tighten them. If digital RMB is a better medium of exchange than non-digital RMB, it must be because of lower transaction costs and...
3/11
fewer restrictions on trading and settling. These easier conditions won't matter much to fundamental investment flows and will matter only a little to trade-related flows, but they will have a huge positive impact on speculative flows and flight capital, and they will...
Read 11 tweets
Michael Pettis Profile picture
30 Jun
1/4
 Yes, you're right, but this goes against the very important point Keynes made at Bretton Woods. A global trading regime in which imbalances are resolved by contracting demand in the deficit countries rather than by expanding demand in...
2/4
 the surplus countries means a global economy with less growth, more debt, and in which adjustment costs are disproportionately borne by those with lower incomes (in both the surplus and the deficit countries).
3/4
 The fact that surplus countries can force most of the cost onto deficit countries doesn't mean that deficit countries should (or can) imitate the surplus countries by lowering their own wages to match the wages (relative to productivity) of the surplus countries.
Read 4 tweets
Michael Pettis Profile picture
29 Jun
1/7
 "Through the mid-2000s, the U.S. was the main locomotive for global growth, until China’s explosive expansion provided a second, and often leading, driver of the world’s economy."

A confused part of what is otherwise a good article.

wsj.com/articles/ameri… via @WSJ
2/7
 A country's arithmetical share of global growth is not the same as its contribution to global growth. Beijing itself recognizes that domestic demand in China is weak because of the way domestic income is distributed, and countries...
3/7
 whose weak domestic demand powers large trade surpluses are not engines of global growth. They reduce global growth because their trade surpluses represent the exporting abroad of their domestic demand deficiencies.
Read 7 tweets
Michael Pettis Profile picture
27 Jun
1/11
In the second part of his important speech, Zhou Chengjun, the PBoC’s head of research, argues that “an international currency’s exchange rate arises from the large number of transactions conducted by currency holders around the world.

caixinglobal.com/2021-06-25/why…
2/11
It is not decided by the central bank that issues the currency. Aside from that issuance, the central bank has no decision-making power.” He goes on to conclude that “we have no choice but to acknowledge that in the context of RMB internationalization, we can’t control...
3/11
its exchange rate, and the PBOC would ultimately relinquish any hopes of determining its exchange rate.”

This is an important point in a heated debate within China about the extent to which Beijing will allow international considerations to trump domestic ones.
Read 12 tweets
Michael Pettis Profile picture
26 Jun
1/8
 From a very feisty 1933 FDR letter: “A financial element in the largest centers has owned the Government since the days of Andrew Jackson. The country is going through a repetition of Jackson’s fight with the Bank of the United States – only on a bigger and broader basis.”
2/8
 Although the account by Feis of the events of that time is not always disinterested, he does a great job of showing just how politically complex financial policymaking can be. What really strikes me is the intellectual dissonance between FDR and his financial advisors.
3/8
 While FDR wasn’t always sure about what he wanted when it came to US monetary policy, he had a pretty clear vision of what he didn’t want, and for him stabilizing the value of the USD dollar in international markets was simply not nearly as important as managing...
Read 10 tweets
Michael Pettis Profile picture
26 Jun
1/4
 Consumer spending accounted for 54.3% of China's GDP last year, compared with an average of 53.4% between 2011 and 2019, according to the NDRC. This compares to 70-80% typical of developed economies.

global.chinadaily.com.cn/a/202106/25/WS…
2/4
 In a recent speech Zhi Shuping said that Beijing will continue to focus on ensuring the recovery of consumption. More efforts are needed to boost the purchasing power of consumers, he said, and to improve consumption policies and the overall consumption environment.
3/4
 Local policymakers have made a big show of Improving consumption polices and the consumption environment, whatever that means, but in fact these things don't matter much except to reapportion spending. They don't have much impact on rebalancing spending.
Read 4 tweets

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