James Militzer

Weekly Roundup – 2/7/15: Debt and Forgiveness: A drastic solution to over-indebtedness among the poor

It was an unusually eventful week in global finance. Let’s start with some new research that might keep economists (and maybe a few others) up at night:

“Seven years after the bursting of a global credit bubble resulted in the worst financial crisis since the Great Depression … global debt in these years has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points. In fact, rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to GDP than they did in 2007.”

That’s the key finding in a report released this week by McKinsey, which assesses the debt of 22 advanced and 25 developing countries. That $57 trillion includes debt owed by governments, non-financial corporations and households, and the report suggests that it could pose new risks to financial stability and global economic growth. If there’s a silver lining in the data, it’s that the top 17 countries in debt-to-GDP ratio are all developed economies, which in theory should be able to handle high debt loads better than their poorer counterparts. And though developing economies have accounted for 47 percent of the total growth in global debt since 2007—particularly in the household and corporate sectors—this could be due, in part, to greater financial inclusion, as more households and companies gain access to financial services, the report indicates.

That’s not to say that high debt in more developed countries isn’t an issue, as Croatia illustrated on Monday. Starting that day, its government began wiping out the household debt of thousands of its poorest citizens. The scheme targets about 60,000 of the 317,000 Croatians whose bank accounts have been blocked due to excessive debts – a problem that’s become a significant economic burden for the country. It will force multiple cities, public and private companies, and banks to clear the debt, without a government reimbursement for their losses. Though the program could cost creditors over $300 million USD, the Croatian government expects the long-term economic benefits to justify the loss.

In an age where debt has become a major driver of poverty, even in wealthy countries, this kind of intervention seems tempting. But it has raised eyebrows among economists – including some who normally support government efforts to help the working class. “I can’t think of anything comparable,” Dean Baker, co-director of the Washington-based Center for Economic and Policy Research, was quoted as saying in the Washington Post. “I am not sure that this is the best way to help low-income people. If lenders think this can happen again they will charge very high interest rates to low-income borrowers.” The results and repercussions of the initiative will certainly be worth watching.

India’s financial inclusion scene has also been in the news lately. Consider just a few recent developments:

  • On Wednesday, MasterCard opened a technology center in Pune, making India the site of the company’s largest Tech Hub outside of the US. The Hub will be a key part of the company’s strategy to help develop the digital payment ecosystem in the country.
  • That same day, the Shell Foundation announced plans to invest up to $75 million in clean energy in India over the next five years
  • On the heels of last week’s announcement by Bharti Airtel, India’s largest mobile services provider, that it was applying for a payments bank license from the Reserve Bank, a number of the country’s other top telcos and retailers followed suit this week. If granted, the licenses will allow them to accept limited deposits to be applied toward extending payments and remittance services to small businesses and low-income households.

These announcements built on the momentum generated by President Obama’s recent visit, which ended with a pledge that USAID will collaborate with India’s “Jan Dhan Yojana” financial inclusion initiative, in partnership with several U.S., Indian, and international private sector organizations. These partnerships will focus on boosting the use of mobile money for purchases and payments throughout India. What’s more, the U.S. announced that USAID will also partner with the Calvert Foundation and several private financial institutions in India to facilitate development investments in the country from the Indian diaspora living in the United States. Targeting not only wealthy individuals but also retail investors, this first-of-its-kind initiative for USAID could inspire other efforts to mobilize diaspora resources for the benefit of their home countries.

In other news, our friends and frequent collaborators at Root Capital announced a first of their own this week, as their outstanding portfolio balance passed the $100 million mark for the first time in their 15-year history. As Robert Annibale, Global Head, Citi Microfinance and Community Development put it, “This milestone is significant as it shows that organizations like Root Capital have developed the scalable and innovative approaches required to overcome the inherent challenges facing corporate buyers and commercial financial institutions in providing financing in rural areas.” We’d like to add our congratulations – besides being significant for Root Capital, this accomplishment will hopefully generate even more investor interest in the agricultural finance and impact sectors.

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digital payments, financial inclusion, impact investing, public policy