Jubilation Regulation

Is a biblical-style debt forgiveness plan the way forward?

The COVID-19 crisis, which dealt a massive blow to the existing debt levels, has brought forward several who believe a mass debt forgiveness programme must be the way forward if we are to avoid future economic shocks and facilitate the growth of hard-struck nations. Yet, simply clearing out everyone’s debts and handing people money may not be the most appropriate solution. The IMF’s approach of emergency financing, mass debt-relief programmes (as well as calls or bilateral debt relief) and policy regulations may just be the way forward. Yet, it may prove prudent to know why.

Figure 1: The Debt-GDP ratio for nations (without the financial sector) through the COVID-19 crisis; Source: Visual Capitalist

The Debt Jubilee

The Biblical etymology of ‘Jubilee’ — a Hebrew word meaning ‘trumpet’ — can be traced back to as far as the Old Testament, where, it was regarded that the tenth day of the seventh month every 50 years, i.e. the year of the Lord — would be the day that all outstanding debts are cancelled and all servitude revoked. This idea of having a ‘Jubilee day’ — where all debts are disregarded — has been a persistent feature of human civilisations through history, ranging back from almost 1792 BC, when Babylonian ruler King Hammurabi, much like several other eastern kings at the time, cancelled all debts to the government and its officials. It is thus of much intrigue that such a concept, over 4000 years old, would be relevant in the modern world.

More recent instances of debt forgiveness can be traced back to the post-WWII period, where much of Germany’s external debt was written off. Another, more recent landmark moment, was, of course, the Great Financial Crisis of 2007-08. It was at this point, when several banks considered ‘Too Big to Fail’, failed, leaving the American economy in the most major debt crisis seen since the Great Depression in 1929-30. Central banks engaged in massive stimulus packages and Quantitative Easing in buying up bank securities to tide through the economic downturn. The US Government also released a stimulus package in 2009 to aid affected homeowners through the ‘Stability Plan’, a policy that also involved forgiving a major portion of the borrower’s mortgage balance.

Fast forward to 2021, and the world currently stands recovering from the economic onslaught brought about by the COVID-19 crisis. Massive stimulus packages have already been released around the world, and several global organisations such as the World Bank and the IMF have already called for debt forgiveness (in part) for several developing nations in Asia and Africa. However, many now believe that a mass Debt Jubilee is the only way forward, i.e. if we are to avoid a depression.

Figure 2:Global Debt Levels; Source: Visual Capitalist

Relief over Jubilation?

Yet, as simplistically brilliant as the idea of releasing a “biblical-style jubilee” to combat both consumer and international sovereign debt sounds, it is more ‘academic grandstanding than a real possibility’, according to Editor-in-chief of MoneyWeek, Merryn Somerset Webb. Writing for the Financial Times, Webb opines:

“[…] If you cancel your country’s sovereign debt, even if the government only owes it to the central bank, you risk debauching your currency. [..] Doing it for households invokes another kind of problem: what are those with no debt to think if profligate others are suddenly lifted to the same level of security that they won only by scrimping? It’s politically unacceptable.

Corporate debt levels are also worth thinking about. On the face of it, the last thing most companies need is more debt. But, regardless of the health of your balance sheet, if you can borrow 25 per cent of your turnover at 2.5 per cent with a UK state-backed Bounce Back Loan and, if you have other more expensive debts, why not make the switch?”

Webb opines, of course, of the possibility of moral hazard in the marketplace that will be met with severe opposition, especially in the dividend payments and equities market. Firms with debt-bloated balance sheets may cut down on dividend payments to slash their debts or take on more debt in the equities market with COVID-19 immunity.

Mention, instead, should be made of the several pandemic-relief policies that have been employed all over the world: extended moratoriums of loans (even the forgiveness of some loans), liquidity injections or stimulus packages, among others. Yet, certain debt-forgiveness episodes, such as the relentless programme in the United States to forgive student debt, may not pass any time soon owing to staunch opposition from the Joe Biden government. Certain others, such as the one-off payments of $1200 per adult and $500 per child, unemployment benefits plus a pandemic payment of $600 per week has in fact caused a sharp fall in credit card demand, with consumers cutting their credit card debt at an annualised 31% (in May 2020).

But it will be prudent to remember that if central banks can increase inflation by providing stimulus packages and reducing lending rates, the ‘real’ value of fixed-rate debts will also fall substantially as well. Perhaps strengthening macroprudential regulations whilst pushing for growth will be the way forward. The key challenge, in this regard, would be to figure out how much capital banks should hold.