Two More IMF Papers See Savings Tax And Fiscal Austerity Coming

It was only two months ago when we wrote about the IMF Considering A Super Savings Tax Of 10% in the Eurozone in one of their research papers. The most important conclusion from the researchers: “The tax rates needed to bring down public debt to precrisis levels, moreover, are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth.”

As we finally arrive in the magic year 2014, in which almost every economic and business cycle is trending down, it seems that the idea of a debt reduction through savings confiscation is gaining traction. If it would have been true that the debt crisis was contained (like our political leaders try to make us believe, for instance the European Council President just a week ago), then there is a huge divergence with what the IMF research lab is producing. In December alone, two working papers appeared in which debt restructuring is mentioned as the most likely way to reduce the untenable debt burden.

One working paper comes from Reinhart and Rogoff. Their research concludes by saying:

“The endgame to the global financial crisis is likely to require some combination of financial repression (an opaque tax on savers), outright restructuring of public and private debt, conversions, somewhat higher inflation, and a variety of capital controls under the umbrella of macroprudential regulation. Although austerity in varying degrees is necessary, in many cases it is not sufficient to cope with the sheer magnitude of public and private debt overhangs.”

They don’t see signs of economic growth to save us from the debt crisis. Austerity measures to reduce the debt burden are very likely. This is how they see austerity playing out in Europe:

“The size of the problem suggests that restructurings will be needed, particularly, for example, in the periphery of Europe, far beyond anything discussed in public to this point. Of course, mutualization of euro country debt effectively uses northern country taxpayer resources to bail out the periphery and reduces the need for restructuring. But the size of the overall problem is such that mutualization could potentially result in continuing slow growth or even recession in the core countries, magnifying their own already challenging sustainability problems for debt and old-age benefit programs.”

It is not exactly a feel-good therapy, but at least the authors are speaking out the truth. They went back in time and analyzed previous debt restructurings in comparable periods with excessive government debts (mainly around the world wars). Their analysis shows that several types of debt restructurings have been implemented even if conditions were not as bad they are today (in terms of scale of the debts).

The full document is available here:


In another working paper focusing on the situation in Europe (especially the Southern countries “GIIPS”), the authors look at the debt reallocation from the private to the public sector and conclude that public debt purchases by the private sector reduce growth and welfare, and may lead to self-fulfilling crises. Without going into much detail, the most important part is related to the policies to address this issue. The authors write:

The goal of policy should be to get the economy out of the crowding-out region. An immediate way of doing this is to eliminate the source of creditor discrimination: this might be hard to do in practice, though, because it requires a credible commitment to treat all creditors equally. A more realistic alternative is to exert a …fiscal effort to reduce the debt burden. This ‘austerity’ policy reduces consumption in the short run, as taxes are raised, but it eventually boosts growth by eliminating the crowding-out effect. It is interesting to note that there can be threshold effects associated with this policy. In order for the policy to raise investment and restore growth, debt must be reduced below the level of current domestic holdings. Otherwise austerity reduces current consumption but has no expansionary effects. Thus, the model suggests that there are nonlinear bene…ts to austerity programs like the ones adopted in GIIPS.

The full document is available here:


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