Podcast: Fix the global debt crisis before it's too late, warns World Bank's David Malpass

TRANSCRIPT: Fix the global debt crisis before it's too late, warns World Bank's David Malpass

David Malpass:

The world still has some 700, 800 million people that don't have electricity, and so that's unacceptable. I'm happy to see that there is now discussion within the G-7, within the G-20 of how to break out of that paralysis.

Ian Bremmer:

Hello, and welcome to the GZERO World Podcast. This is where you'll find extended versions of my interviews on public television. I'm Ian Bremer, and today we are talking about debt, lots and lots of debt, $300 trillion worth of debt. If global debt were divided equally among everyone on the planet, it would amount to $37,500 per person. That's like $75,000, a couple, 150,000 for a family of four. Why so much? Decades of low interest rates and cheap goods made money easy to borrow that in turn, ballooned debt globally. Then along came a pandemic which stalled growth, and a war in Ukraine that shot up food and energy prices.

Rich countries could more or less weather the storm by pumping trillions of stimulus dollars into their economies. Poor countries, well, they just kept borrowing money and now an estimated 60% of those nations are facing debt distress, some are close to default. What does that mean for the world? And how do we fix it before it's too late? In our final exit interview, I am talking to outgoing World Bank President David Malpass. Let's get to it.

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Ian Bremmer:

Dave Malpass, welcome back to the show.

David Malpass:

Nice to be on again.

Ian Bremmer:

A lot I want to talk about today, and the backdrop of course, is a dramatic increase in global debt. Layout quickly where we are.

David Malpass:

World growth is slowing, but the debt is going up and up. So we have developing countries that are in trouble on debt, advanced economies as well. So there's big debt challenges and maybe we can talk about both sides.

Ian Bremmer:

So many countries right now are either in direct debt risk distress or in severe risk of hitting that mark. Some 40% of the world's poorest people are in that category. Explain, just quickly, how we got to this point, because this is unusual.

David Malpass:

Well, there are cycles of debt through history, and so in this case, there was a wiping off of debt in the early 2000s, but then new debt came in to take its place with new creditors, China and private sector Euro bond creditors stepped in. And now the countries themselves are facing rising interest rates, less resources coming in from the world, so they're in a real bind. It's adding to fragility and the global system is not really up to trying to fix this problem. So it keeps going on and on year after year.

Ian Bremmer:

Because when we talk about the United States and people are saying, "Oh my God, the trajectory is horrible, and inflation, I can't handle the price of eggs, the price of gas." The fact is that this is, it's really nothing in the US compared to what that driver is forcing the experience of the world's poor.

David Malpass:

That's right. The US is able to run a really big fiscal deficit. A lot of the countries in the world can't do that at all, because there's no financing. What they have been doing, and it's dangerous, is drawing on their domestic banks. So when they lose access to bond markets, then they turn to their banks and say, "Give me some money. I'm the government, and I want to spend more money." So that's reaching its end.

So we have this real challenge right now that the repayments that are due at looking into 2024 and '25 are going way up for these countries. So they're stuck today, but it's going to be worse next year. So that's the urgency of getting progress on this. They need to reach agreement on how to do a debt restructuring and then actually carry it out, which has been the sticking point.

Ian Bremmer:

But if you're a Sri Lanka, where, I mean, 75% of your GDP is going just to service interest payments on debt, you've basically failed as an economy. I mean, if they were a private sector company, you'd just bankrupt them and take their assets. You can't do that for a country with tens of millions of people. What do you do in an environment where the economic model has simply failed?

David Malpass:

So there's no international bankruptcy process. So in the 1980s that meant the Latin Debt Crisis, and led to the Brady Bond solution to swap bank debt for bond debt. So it changed the nature of the debt and was a solution at that moment in time. At the end of the '90s, there was another wave of crisis and that was met by an actual write off of the debt for the poorest countries, and a recapitalization or capital flow to the World Bank and to the IMF in order to make up for their losses on that debt situation. So now we've got a whole new one with China and the bond markets as a big creditor, but no process. So we have to just keep pushing and pushing. The G-20 has these initiatives to try to get debt restructurings.

Ian Bremmer:

But there there's no formal process. But is there a general consensus understanding that this debt, a lot of it, just needs to get written off?

David Malpass:

No. And so that's part of the challenge. China hasn't reached the point of saying that there should be an actual reduction in net present value. So if you think of the time value of money, if I owe you money today and you say, "Well, owe me the same amount of money two years from now," you figure you've done me a favor, but I'm still going to have to pay that whole amount.

Ian Bremmer:

And you still have no capacity to pay it off, none.

David Malpass:

No capacity to do it.

Ian Bremmer:

None.

David Malpass:

I can't do it this year and I won't be able to do it two years from now.

Ian Bremmer:

So are the Chinese counting in part on the fact that they can squeeze the West to pay for some of that.

David Malpass:

Well, the World Bank puts a net flow into these countries. So there is the risk that some of that money then ends up paying creditors. And a practical thing going on now is what are called swap lines. So the Central Bank of China makes a swap with a country, a developing country. They don't call it a loan, but really it has the effect of a loan. It's a debt like instrument where there's an interest rate, a term of the maturity, and so that then gets paid off first within a debt restructuring.

So China's finding new ways, they're sometimes non-transparent, to leap over others within the capital structure of a debt restructuring. This is the kinds of things that are done in bankruptcy, but lawyers are onto it. But in this international context, there's not really a set way to go at this.

Ian Bremmer:

And those are economic efforts, but are there also political efforts? In other words, I, as a government, want you to continue to be indebted to me, even if I know you can't pay it, because I can then squeeze you for other, perhaps, non-transparent political outcomes, diplomatic outcomes. That, otherwise, if I had written off the debt, I would no longer have the ability to force you to do that.

David Malpass:

And this has gone on through history where governments gain advantage on others by lending them money and then requiring repayment. One added complexity of this one is the amounts are so large, there's no real process to how break through that. China's been more willing to lend into these situations. And as I mentioned, the innovations are coming from the creditors on how to keep the process going over and over again.

Ian Bremmer:

But what I see and what I hear from you as well is a consolidation of economic power in the hands of the wealthiest, a consolidation of political power in the hands of the wealthiest. What do you do? Is there any orientation or inclination to try to break that?

David Malpass:

It should be broken because it's not really working for the world. If you think about the fragility, the poorer countries are not catching up, and we really want a world where there's some kind of convergence, where the people in lower income levels actually get to grow faster. That's what creates stability. So we don't have a process to do that, and there doesn't seem to be very much interest in getting to that process.

If you think about what the advanced economies are doing, and justified by COVID or they used that as a rationalization, they spent huge, huge amounts of money. So now the national debts of the advanced economies are super high. Interest rates are going up. So much more of the world's capital is going just to pay off the debt of the advanced economies. That leaves less for everybody else.

And I think that's a grave concern. We have the global macro techniques that are being used that end up concentrating the debt at the top. The central banks are part of it as well. The lack of debt limits on the advanced economies. The US is going through that now, but it applies equally to Japan and to Europe of the government's able to spend money much more freely than anybody else within the economy.

Ian Bremmer:

Now you said what we should want is for the developing countries to converge with the West. Do the Americans actually really want that? Or is the revealed preference that Americans don't want that?

David Malpass:

This is that age-old debate of how do you raise the median income? I expressed it correctly. We want people at the bottom to have faster growth so they can catch up. That is a stabilizing force. So we can call it inequality or convergence. I like to use the phrase growth. We want fast growth in poorer countries, so that they can get ahead and stabilize and have fruitful lives with opportunity. So that, yes, is a goal of the World Bank, but I think it also very much is the goal of a value-based society worldwide.

Ian Bremmer:

Does that reduce in nature necessarily when America has more as a foreign policy driver ensuring and nearshoring and the desire to rebuild its own working and middle classes that to a degree they felt were hollowed out through globalization?

David Malpass:

I think we have to guard against isolationism. You have to look at your national interest and say, "What is going to be good for us?" So if you say, "Well, I only want to trade with my neighbors, who are friends," that's a grave narrowing of economic principles. There has to be some kind of global market in order to achieve efficiency. Then what you can say is, "Well, I don't want to depend on other countries," especially if they're authoritarian as is Russia and China.

So I think there is plenty of room in a logical world to say, "We don't want dependency, but we also want to have a vibrant global marketplace that is competitive." And the US needs to lead and be in the center of that, and initiate, be the starting point for a lot of this rethinking of the global system.

As I mentioned, the debt limit is one part of it. The US really needs a better debt limit. One that it doesn't threaten default. It instead allows some constraint on government spending. Fiscal discipline only makes sense, that's checks and balances, and we've seemed to have lost that in the advanced economies, with the debt to GDP ratios going through the roof. But it also applies to the monetary policies. We've moved from what was called monetarism, which was that central banks could achieve price stability through the money supply growth. Well, we're way away from that post monetarism-

Ian Bremmer:

Through the printing of-

David Malpass:

No, see, it's the expansion of balance sheets that is... So the US Federal Reserve now has $9 trillion of assets on its balance sheet that it's bought by borrowing money from the banking system. So it's a fundamental change in the way monetary policy is operating, where rather than setting the quantity of money, what you're doing is regulating how banks use money. It's much more intrusive, and I think does not allow nearly as much growth.

You also have this wholly new concept of central banks buying assets, in this case bonds. But in Japan's case, they have the authority to buy equities. And so that changes the fundamental character of global macro. We have to call it post monetarism, and I think it doesn't work well at all. It means that there's huge control of the global capital flows by the central banks.

Ian Bremmer:

By the central banks. And it also means an explosion of debt being held by the central banks. Now, I noticed in these conversations, very rarely do we talk about the assets of the sovereign actors. Where if we were talking about a corporation, we'd be talking about the debt on their books, but also the assets they happen to have. Do we see a level of asset base or increase of asset base among many of the developed countries that make us less concerned about the nature of the explosion of the debt?

David Malpass:

That's a huge question. What investments are being made by governments? And if they're crowding out the private sector, is it being done in a constructive way? I'm skeptical of the latter, but certainly involvement of a society can create innovation. We see that in the technology space, which is very important.

Ian Bremmer:

The CHIPS Act, for example.

David Malpass:

Well, the CHIPS Act can also be read as protectionism or industrial policy.

Ian Bremmer:

Sure, true enough.

David Malpass:

So we wonder, will we actually get more innovation out of that? And will it actually strengthen the us? There's a lot of pushback from other countries on both the IRA and the CHIPS Act, because it looks like the US is just taking care of itself. So I think that is open to discussion. People should be thinking about what's the best way to get growth started and strengthened in the US, but also globally. That is a global public good, because it stabilizes. If we could have more global growth, there'd be more to go around for everyone. And that should be a huge goal of, I think, public policy.

We're not getting it. Our growth forecast for 2023 for global growth is falling below 2%, and as you look into 2024 and '25, there's not much improvement. The investment levels in most of the world are negative. They're not putting in enough new money even to maintain the current capital stock.

Ian Bremmer:

And that's something that ideally you're saying you'd like to see less control of balance sheets by the central banks, more investment coming from the private sector, unlocking more productivity and growth, less protectionism, more global trends in investment.

David Malpass:

Exactly right. And this is critical to really rethink what we're doing on both monetary and fiscal policy. Do you really want to have a world where governments control the direction of capital flow and spend hugely in advance? So the government's basically borrowing the next generation's worth of capital and spending it now. And so that I think is not wise. You could say in COVID, wasn't there an emergency? Yes-

Ian Bremmer:

Sure.

David Malpass:

... but not to the extent that the continuation of spending stayed on. And at the same time, the central banks... the importance of this is not just the idea of it, but it's also the magnitude. The amounts that are being done are so big that they change the fundamental character of global markets. We need to get out of it. I mean, I really think we should question at its heart on the monetary policy side, whether central banks should be owning assets. They should own T-bills, short-term assets, as part of monetary policy.

But right now they've become the world's biggest investor and the biggest duration mismatch. They borrow overnight money and put it into long duration assets, which fundamentally changes the character of the world economy. And same on the spending side. The US doesn't have a workable debt limit, as we are seeing every day, and it's vital not to default.

Ian Bremmer:

I understand how you can make a strong argument for the private sector should be doing much more investing in the developed world, where if the money was available, they would be interested in doing such. When you talk about a lot of the developing countries you're talking about, with balance sheets that are truly underwater, with, I mean, risk that is just not going to be taken on by the private sector, you cannot fix the challenges of consolidation of wealth. You're not going to get the growth of the middle classes with a private sector fix. So how do you need to transform the World Bank, the IMF, and the orientation of public institutions to ensure that a private sector orientation to capital isn't a winner take all outcome?

David Malpass:

This is the right question. So the countries themselves have to have better policies. Take Nigeria, they're still heavily subsidizing fossil fuel usage within Nigeria. They run a dual exchange rate, a multiple exchange rate. So that means friends and family get a better price-

Ian Bremmer:

Correct.

David Malpass:

... than others for the dollars that do come into the country. That's just one and many countries are facing these very fundamental systemic problems that they're not fixing. I think we see over and over again, when a country, including weaker countries, put in stabilizing policies, the markets respond right away. They look ahead, they say, "Aha, you've come into my range of risk tolerance." And I think there are many developing countries that are near that point now. The reach for yield is still strong among global investors. They want to be able to invest in a variety of asset types, sectors, and geographic regions.

And so given the opportunity, they will. It's just that few of the countries are really putting in stable money, that's critical, fiscal discipline so that the government's not taking all the resources of the country. World Bank is working actively to try to help the countries find a way to have their private sectors be more effective, and be more attractive for capital inflows. We call it PCF, private capital facilitation.

Ian Bremmer:

So give me a couple of countries, significant countries that you think are close to, if they were to shift their policies, their economies would take off with massive inbound private investment.

David Malpass:

We're seeing inflows into Indonesia now. And if you think of India, they've been doing it with bank loans, less so with capital market loans. So we know in order for an economy to really get going, it has to have capital markets. That means bonds, that means non-bank financing for accounts receivable, for inventory, for short term financing, and very importantly for equity expansion. And so India is just one step away from that, and they could achieve that and then be growing 8%.

And so think if India went through the same kind of transformation that China did. Roll the clock back to 1993, China puts in a permanently strong and stable yuan. They have an active policy to say, "We want our currency to be strong and stable." That makes it competitive globally, which is a worry for the US. The US doesn't have a similar policy of stability for its currency. China does, so investors gravitate toward that.

And it started right away in China. They said, "We're going to have market-based pricing, strong and stable currency, and have some fiscal discipline." And India's a position to do that and could really advance quickly. And it is, now, but I think it can do better.

Now that gets into rule of law. How tolerant can you be of different groups within your country? I mean, there's a whole host of steps that need to be taken to make it work. But what I'm saying more is the idea, global markets are really receptive to new behavior and activity by countries. Look in Latin America, after decades of debt crisis, they were able to transform. It didn't last very long, but for a period of years, global markets really came into Latin America and modernized it and supported the people of the countries. They did it on their own, but with global market support.

Ian Bremmer:

But would you agree that, I mean, some of these things are also like structural, supercycle for commodities that made it a hell of a lot easier for Latin American countries to be more competitive and drive growth. I mean, presently coming off of the pandemic and with high inflation rates, I mean, a lot of these developing countries are just taking it in the teeth and it's much harder for them politically to make the kind of arguments and implement the kind of policies that you are suggesting.

So in that environment, are you suggesting still that the private sector is 90% of the answer? Or do governments need to come in when it's counter cyclical to ensure that the developing countries aren't... They're already disadvantaged.

David Malpass:

Governments aren't doing countercyclical, they're actually going procyclical, meaning they find fiscal responsibility after the fiscal deficits have become huge.

Ian Bremmer:

And by countercyclical we mean?

David Malpass:

That means that when things slow down, you do more, and when things speed up, you do less in terms of spending monetary policy. So I think governments do need to be countercyclical, but neither on monetary policy nor fiscal policy is that the lay of the land. China does that. Remember after 2008, the global financial crisis, they both did monetary and fiscal expansion at that moment, in order to-

Ian Bremmer:

For about a year.

David Malpass:

... strengthen. And they achieved a lot of results. They're an authoritarian regime, which is not going to be in the long run growth enhancing, but at moments, if you make decisions that are stabilizing, that can help. So I think we need to do that. But the core of what you're saying is right, we're coming off a 0% interest rate environment. I think it was artificially low. It directed capital into the wrong parts of the-

Ian Bremmer:

Into risky asset class, right. Yeah.

David Malpass:

It concentrated assets, and also did this point of reach for yield, which put people into the wrong risky assets and duration mismatch, as we're saying-

Ian Bremmer:

SVB was a part of this, Silicon Valley Bank.

David Malpass:

Some of the banks, they were just using overnight deposits to buy long-term bonds, not a smart move.

Ian Bremmer:

So I saw the CNN town hall a week ago when Donald Trump, presently front-runner for the Republican nomination, said, "I think we can just default on that debt. There's no problem. There's no implication." Do you think he doesn't understand the economy?

David Malpass:

We can't default, because the how active the futures markets are in the derivatives that come off the US debt. So there are deep markets every month going forward. And so if you delay payment it really is destabilizing. And so I don't think the US will default. I worked on the debt limit increases in the 1980s. President Reagan really didn't like having to ask Congress to raise the debt limit.

Ian Bremmer:

You're basically threatening not to pay loans you've already taken.

David Malpass:

That's right.

Ian Bremmer:

The credit card that you need to pay off.

David Malpass:

You've spent the money, now what?

Ian Bremmer:

You spent the money.

David Malpass:

You're not going to pay. And there's no methodology for making logical decisions on who not to pay. And so it's really problematic. So I think they will sort it out. I thought it was good that the House passed a bill saying how they would do it, and it's good now that the president is engaged in negotiation to figure out how to do it in an effective way. But the bottom line on this, the current law, the debt limit law really doesn't achieve what it's trying to do. And so there should-

Ian Bremmer:

In terms of fiscal responsibility-

David Malpass:

Fiscal responsibility-

Ian Bremmer:

... not at all, no.

David Malpass:

... not there. And so it really needs to be rewritten, where there's no threat of default. There's other... If you're over the debt to GDP limit, don't pay salaries to senior government workers, to congressmen, and have an actual pressure on Washington to try to get out of the excess spending. So rewriting the debt limit, the world would look at that and say, "Holy mackerel, the world's leader is now having a rational fiscal policy." So that's going to be growth enhancing. You would immediately begin seeing more investment in the world if there was some relief from the idea of the advanced economies taking all the money.

Ian Bremmer:

So why does a country like Germany seem to understand this, and the Americans, not? Whether it's Democrats or Republicans, it doesn't seem to matter. Everyone in office in the US just wants to spend with reckless abandon. Why is that?

David Malpass:

And Germany understands deeply fiscal constraint. But that goes back to pre-World War II, the hyperinflation. And then in the recovery from World War II, after, remember they had very important fiscal insights in Germany that they needed to have checks and balances on debt and on central banks.

Ian Bremmer:

So you think 80 years later those lessons have helped?

David Malpass:

Absolutely. So Germany had huge growth for 50 years as they followed those principles, and it caused a giant post World War II advance there. And other countries could achieve that with the same techniques. That means some core understanding that you want your currency to be stable for the long term. For 50 years, there should be a relatively stable currency that you shouldn't overspend. Some basic principles that are emblazoned in Japan's founding, their rule of law, the Bundesbank still operates on that, whereas that's not inside US law.

The US Constitution doesn't have a debt limit in it. So when the Founding Fathers thought up a country, they had no idea that the country was going to be able to borrow a 100% of GDP. And so there's nothing in our core procedures. So we're stuck with this debt limit law that's a 100 years old, that hasn't worked for a 100 years.

Ian Bremmer:

Now I continue to get people randomly saying, "We should mint a trillion dollar point." Please tell me very quickly the stupidest reason why we shouldn't do that.

David Malpass:

If it worked, the government would just get bigger, which is not the goal. So that's not a good idea from any aspect that you look at. And it wouldn't prevent the default either, because people would look at it and say, "You haven't created any new wealth or any new asset, so why should I believe that you're actually more stable?"

Ian Bremmer:

This is probably our last time having a conversation on air with you as World Bank president, and we've spoken many times before. Tell me, just looking back since 2019, what do you consider your biggest accomplishment?

David Malpass:

The world went through multiple crises. The World Bank was a leader in that. We were able to really expand commitments of the bank during the COVID crisis, the Afghanistan evacuation, which was traumatic, very sudden, huge number of people had to get out of Afghanistan, of course, the Ukraine war and the bank was a smooth participant, very fast, in the responses to crises. So I'm proud of that.

And also, being aware of the problems caused by slow growth and by debt. That permeates our economic analysis over the years, and I'm proud of that. And we had a core vision that we want people in developing countries to have better lives tomorrow than today. So the personnel of the bank have really embraced that. So you end up with a 35% expansion of the bank with no increase in the budget.

Ian Bremmer:

Okay. And then, tell me finally, what's the one thing that you would like to tell your successor, Ajay Banga, that you wished someone had told you on your first day?

David Malpass:

Coming in-

Ian Bremmer:

Coming in, yeah, absolutely.

David Malpass:

Time is short. You need to push on with urgency. The bank has lots of capabilities and so that I think will come naturally. The question is how do you really get to an endpoint on any of the issues we've just talked about on debt, on the climate challenges, how do you get to the endpoint on this global macro rethinking that's needed? Who's really going to stand up to the advanced economies and say, "You're taking all the money, so there's not enough left for the rest of the six billion people in the world that aren't in advanced economies."

Ian Bremmer:

What's the closest you came to doing that? What's the closest you've come over the last few years and said, "Guys, you aren't getting it"?

David Malpass:

I do say that in the meetings and it's a push forward there. It's very hard because they are confronted over and over with a new crisis. So the attention goes to the current crisis, whether it's Ukraine or whether it's relationships with China, whether it's the intractability of this debt problem. And so it's hard to get through. That this is the only moment where we can really rethink what's going on with fiscal and monetary policy and the capital flow. The capital is all flowing to a centralized point. Is that really what you want? And the answer is, yeah, it's working. It's working, and we will keep the system the way it is.

Ian Bremmer:

Is anyone close to getting it?

David Malpass:

There has been over the last six months a realization that the developing countries are not satisfied with the solutions that they're being asked to do.

Ian Bremmer:

Absolutely.

David Malpass:

This shows up in-

Ian Bremmer:

The Global South is going-

David Malpass:

The Global South-

Ian Bremmer:

... farther away. Absolutely, I hear it all the time,

David Malpass:

And they're more vocal. We hear it in the board discussions. There were 11... Almost half of our board expressed in writing together, they did a joint missive inside the World Bank to say, "We have to rethink how we're doing energy, because we need more energy, not less."

And so how do we find a pathway to that? That means more efficiency of... and the investment choices have to be done better. The world still has some 700, 800 million people that don't have electricity, and so that's unacceptable. And I'm happy to see that there is now discussion within the G-7, within the G-20 of how to break out of that paralysis.

Ian Bremmer:

So the developing countries need to cohere more. They need to be louder. They need to push harder.

David Malpass:

And we've invited that, and use our board, say what you would like to see in terms of more capital inflows. And the developing countries do that, but their voice is simply not as loud as that of the advanced economies.

Ian Bremmer:

So if you were forced against a wall, one or the other, would you say in this environment that China's more of a developing country or more of an advanced industrial economy?

David Malpass:

Clearly, there they're industrialized and you see that everywhere in China. They've come so far. They don't want to give up their roots, which came out of the debacle of Mao, of the Cultural Revolution that failed. And so they want to feel like they're a developing country, and they have synergy with the Global South.

Ian Bremmer:

Well, not on the debt issue, huh?

David Malpass:

Not on debt and not on technology. They're the ones selling now many of the advanced systems into developing countries. And so they bridge the two, and they're doing it with some policies that are really very effective. It's unfortunate that they're authoritarian and don't give freedoms to people in the way that they should.

But they are running, we mentioned, a countercyclical policy on a bank regulation. They still run a monetarist policy. They're not post monetarists, the way the advanced economies are, where they just expand their balance sheets of the central banks. China hasn't been doing that. They set interest rates based on money supply growth. Sure they make mistakes, but it allows them to have currency stability and this very fast growth rate.

We want to learn things that work and we should be open to the world. And so let's end it by saying we need to really rethink the macro policies that are underpinning, that's both monetary and fiscal policies and also transparency policies. We didn't talk about the muni bond market, but the US has this unique giant market that's not transparent. And so as we look forward, we need to be open to world techniques that work better.

Ian Bremmer:

David Malpass, thanks so much.

David Malpass:

Thanks, Ian.

Ian Bremmer:

That's it for today's edition of the GZERO World Podcast. Do you like what you heard? Of course, you did. Well, why don't you check us out at gzemedia.com and take a moment to sign up for our newsletter. It's called GZERO Daily.

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