Debt useful but dangerous: analyst

2012-11-01 11:12

Developing economies must treat debt with caution because – while useful – it is dangerous, an SA Reserve Bank conference has heard.

“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 today.

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. Then 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.

Join the conversation! encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

We reserve editorial discretion to decide what will be published.
Read our comments policy for guidelines on contributions. publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
Comments have been closed for this article.

Inside News24

Traffic Alerts
There are new stories on the homepage. Click here to see them.


Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.

Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire network.


Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.

Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.