Debt useful but dangerous - analyst

Nov 01 2012 13:33

Johannesburg - Developing economies must treat debt with caution because - while useful - it is dangerous, an SA Reserve Bank conference heard on Thursday.

"Debt is a fixed obligation which, if you cannot meet the commitments, it gives rise to very costly consequences," chief economist at Citi Group, Willem Buiter, said at a discussion on monetary policy and economic growth.

Buiter said developing nations had to manage their sovereign, bank and household debt cautiously as they tried to get out of the current global economic crisis.

"Be extremely cautious that you don't take more than you can service. Try to issue liabilities that involve an element of risk sharing between the creditor and the debtor," he said.

"As for international contracts, be very careful that you treat the business cycle symmetrically. If you stimulate and borrow when the economy goes down then you must tighten... when the economy grows."

He said governments of developing nations needed to be innovative in borrowing contracts they devised to grow their infrastructure.

"Give, for instance, a 50% equity stake in some infrastructure project so that you share the risks as well as the returns. There you don't have the bankruptcy threats and the default threats which come with debt contracts."

Buiter urged South Africans and the rest of the continent to "wear helmets for the rest of the decade".

"The world is going to be a very dangerous place for the next 10 years, with advanced economies still needing about a decade, if you count the US and Japan, to get out of the debt problem that they got into," he said.

"So there is going to be a fallout for developing economies like South Africa."

The conference is held every second year to discuss monetary policy issues and obstacles to economic growth.

sarb  |  debt



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