Recently I decided to start exercising more and eating healthier to help bring my weight down to a more socially agreeable level because, let’s face it, “dad bods” are sadly nowhere near the hot trend of the summer proclaimed by gossip magazines. As a public debt management expert consultant, I then quickly realized how many debt management lessons can be learned from weight management techniques and dynamics. The analogy is almost complete. Read on.
Public debt accumulation: Calorific surplus (or simply, when your daily calorie intake from food is higher than your calorie burn) leads to weight accumulation just like chronic budget deficits lead to debt accumulation. Additionally, the pace of debt accumulation is a direct factor of the size and frequency of budget deficits and the level of economic growth: persistent and sizeable budget deficits, coupled with sluggish real growth rates, lead directly to a rapid rate of debt accumulation (assuming that the financial gap is financed from net borrowing, and not from drawing down of asset reserves). It is common knowledge that a healthy diet and exercise help maintain a healthy weight. In public finance, dieting is the equivalent of fiscal discipline, and exercise is the equivalent of pro-growth reforms and investments.
Public debt composition: Public debt management focus has been for the longest time focused solely on the level of public debt (often expressed as a percent of GDP), and its long term sustainability. Rules of thumb (40 percent) were floated indicating the maximum levels of debt to GDP below which debt is considered sustainable. For the past decade or so, a new thinking on public debt management is now highlighting the importance of the composition of public debt: how you borrow is apparently as important as how much, and public debt portfolio cost and risk dynamics are important dimensions to manage through a well-designed and implemented medium-term debt strategy. In parallel, we also know that what we eat (sugar, fat, carbs) is as important as how much we eat (total calories): that pint of heavy cream can conceivably be substituted with a same amount of much healthier low-fat Greek yogurt. Even fat has good fat and bad fat types. Diet choices are thus crucial for a healthy living, and choices abound.
The cost of public debt: The cost of public debt is often approximated and captured by a statistical measure like the average interest rate paid on the debt portfolio, but this relatively simple measure often ignores the hidden and sometimes non-financial costs of debt accumulation like social costs (see modern day Greece), the eviction effect of buying domestic government securities, the hidden cost of tied aid from certain bilateral creditors, and others. Similarly, unhealthy weight management practices and diet choices often lead to bigger health problems down the road like heart disease and diabetes: That 5 dollar McDonald combo may look cheap and tasty, but its ultimate cost on your health may prove down the road to be higher than you could bare.
Portfolio risks: The overall risk profile of the debt portfolio is determined by the levels of risk factors like refinancing risk and/or exchange rate and interest rate risk. For example, high refinancing risk exposes the portfolio to short-term frequent rollover of (generally cheaper) debt, but at possibly different terms and most likely higher volumes each time. Similarly, a diet high in (cheap artificial) sweeteners for example exposes the body to frequent intra-day snacking due to a large fluctuations of sugar-derived energy levels during the day. This often leads to on average eating more to counter the effect of energy crash.
Debt relief: When weight becomes unmanageable, gastric bypass surgery is often used as a drastic measure to return to normal weight. In public debt management parlance, this is the equivalent of irrevocable debt relief from creditors. But just as weight will likely re-accumulate if nothing is done about one’s eating and exercise habits, debt is likely to re-accumulate (and often at faster pace than before) if nothing is done about the structural factors behind debt accumulation, like sluggish growth and poor fiscal discipline. That’s why creditors often insist on wide-ranging structural reforms as a condition for debt relief (albeit my decade-long experience as public debt consultant tells me that monitoring and follow-up by multilateral creditors is often weak and spotty).
Growth: Body metabolism is the process by which food is transformed to energy. People with high metabolic rates burn fat faster and more effectively than people whose metabolic rate is slower. Slow metabolic rate is often a result of a combination of age and daily practices. Healthy eating habits and regular exercise helps keep metabolic rates at reasonable levels. Economies with slow metabolic rates (sluggish growth, structural inefficiencies, and poor governance) would have a harder time “absorbing” debt into productive, investment-driven economic activities that would ultimately improve economic growth, and hence help raise the metabolic rate of economies.
DMO independence: Debt managers often complain about undue interference from the political class in debt management decisions and lack of independence of the debt management office (DMO). In a social setting, this is called peer pressure (“what do you mean you can’t come out with us tonight for a few beers??”). Fiscal discipline is not very popular for politicians in an election year, and let’s face it, the gym is boring, but go ahead, go out, be social, don’t be a party-pooper, but count your beers wisely and be ready to hit the gym the following morning.
Ultimately, if we were to distill some practical lessons for public debt managers from weight management and healthy living practices, we find the following sensible recommendations:
- Debt composition matters: Watch what you eat as well as how much you eat or you could be liable for health trouble down the road. This is the essence of the medium term debt strategy (MTDS) vs the debt sustainability analysis (DSA) argument.
- There are no magic solutions to public debt: Burn more calories than your daily calorie intake and maintain healthy metabolic rate through regular exercise and diet choices. Lean and credible budgets are a pre-requisite, and fiscal discipline is hard to achieve and maintain overnight. A harsh, prolonged, and unrealistic diet will ultimately kill your body and lead to over-eating relapse, just like overly-harsh fiscal austerity measures are likely to choke off your economy and lead to a public spending binge in efforts to revive growth.
- Debt relief only buys you time if countries don’t upgrade their debt management capacity and practices in the meantime. Statistics show that gastric bypass surgery is only successful in keeping the weight off for only a small fraction of patients.
- Debt is not bad by itself if you’re borrowing sensibly to finance needed investments for the economies that will ultimately accelerate growth. Eat what you want (within sensible limits) but make sure you find effective ways to burn it.
- Each body is different and unique in its ability to burn calories (environmental, genetic, chronic diseases), just like each economy is different and unique in its structure and growth engines. Debt managers should avoid the temptation of comparing with and imitating other jurisdictions when it comes to public debt management practices. Similarly, countries with specific economic features like a narrow economic base and high natural vulnerabilities to external shocks are left with little maneuver space when it comes to borrowing and debt.
- DMOs should set reasonable debt management objectives and diligently pursue them: you simply can’t stabilize your debt in the short to medium term if you keep running successive budget deficits in a sluggish growth environment, just like you can’t possibly expect to lose some weight if you eat junk food 5 times a week and have your idea of an active life as walking to the nearest burger joint.
- You can still borrow to finance that mega infrastructure project with an equally-mega loan from EXIM bank [insert latest emerging bilateral creditor] “for the good of the country” (says the Minister of Finance), but make sure you negotiate the terms of the loan according to your preferred debt portfolio risk profile if you are presented with choices of loan terms and creditors.
High debt levels is a burden on the economy, but a couple of pounds around the waist enhances love handles, and I’ve heard from the same aforementioned gossip magazines that love handles are in vogue again!