Sebastián Edwards: "This is devastating, but very different from an earthquake or tsunami"

The first information about the seriousness of the coronavirus caught Sebastián Edwards (Santiago de Chile - 1953) in an arbitration trial in Washington.

In March, the University of California professor participated as a witness in the World Bank court and remembers that, sitting behind him, a man coughed.

“I was scared.

Then I would move my seat and he would move behind me.

I started to worry a lot, ”says the Chilean, former chief economist for Latin America at the World Bank.

"Later I learned that he was having an asthma attack, he did not have covid, but that was the last trip I made."

Edwards speaks with EL PAÍS by video call from his home in Los Angeles.

The pandemic truncated his plans for this year but fueled his sociological curiosity.

In these months of confinement, the academic goes to the supermarket about three times a day.

"I'm walking to buy a packet of butter, then a dozen eggs, an orange," says Edwards.

Communication between strangers is often based on smiling, he explains, and now, with the mask, he watches as strangers are learning new ways of communicating.

"The supermarket is essential to stay sensory informed of temperament, pulse, society," he says.

The trimester was canceled, but Edwards took his knowledge of the 1918 Spanish influenza pandemic and, as he understood the current coronavirus pandemic, prepared an online class.

It incorporated statistical and mathematical modules of contagion, the increase in debt, the fiscal and monetary response;

also the consequences on employment, production, the exchange rate and international trade.

The class attracted more than 600 students.

Q.

How does the economic future of Latin America look?

R.

I see that there will be, in the best of cases, a mediocre result.

It is a continent that in the world narrative is disappearing or disappeared a long time ago.

I read the

every day

, I receive it on paper because as I am old I read it on paper, and there is no news from Latin America or there are very few.

And more than that, in the conferences, seminars and events they organize there are guests from different countries and continents and there is hardly ever a Latin American or a Latin American.

The perspectives of the continent, of the region, are, for my taste, regular.

Obviously, with differences in different countries, not all can be put in the same box.

There is a kind of disappearance of the continent from the world conversation while talking about China, Europe, Asia, Africa.

For example, the most important business news, the most interesting published today, is that Volkswagen is going to make a share offering of a lithium battery manufacturing division, with a new and different technology.

They explain that this is going to revolutionize cars, trucks and electric trucks and the article does not name, for example, that the largest lithium deposits in the world are in Bolivia and Chile.

They ignore that, which is an essential fact.

If Bolivia and Chile disappeared, the lithium problem would be huge.

But there is talk of a whole issue ignoring the region.

Nobody is very interested in Latin America because there are no countries that generate much enthusiasm.

Q.

Usually, multilateral organizations such as the International Monetary Fund and the World Bank, tend to condition their loans to countries with commitments to adjust public spending.

Do you think this will change after the pandemic?

R.

I believe that we are experiencing a change and we are already in unknown terrain.

First, because of the pandemic, because of the way this has been dealt with and what it means from an economic point of view.

This is devastating, but very different from an earthquake or tsunami.

The capital stock such as machines, mines, ranches, oil rigs, everything is there.

The problem is that there are no people who buy and we have told the workers not to go to work.

So in a way this could be resumed from one day to the next, and that was the idea of ​​V-shaped recovery. Now, as time goes by, that ability to resume activities becomes more complicated.

So the characteristic of the shock as such makes us rethink quite a few things.

The second thing is that the world interest rate is zero.

One of the IMF's concerns is to say: 'Well, countries have to fulfill their obligations and especially their obligations towards the Fund.'

And, normally, that complying with the obligations generates a problem if the debt is very high, because then the interest payment on that debt is very high.

As a result, the fiscal space to spend on other things, especially social programs, shrinks.

So, if I have to spend a lot servicing the debt because the debt is very large, I have to spend less on other things, especially on social programs, and that is a problem.

Now this is starting to change, because if the interest rate is zero, suppose I have a large debt and I have to pay 0% of that large debt, I don't have to pay anything.

P.

But there is still the nominal debt, or the principal of a bond.

R.

It is that debts never have to be paid, the principal does not have to be paid, it has to be renegotiated.

That is what one needs to do with debt.

If one is ordained, what one has to do is

, renew it, not pay it.

There is no successful company that has paid the debt.

This is debt management and it is very important.

The next question is: Is the interest rate going to be zero forever?

We do not know.

What is the maximum debt that a country can have?

Well, we were saying 60% of gross domestic product (GDP) in advanced countries like France, Germany, Belgium.

And countries like Latin America had to have less than advanced ones.

Where did that number come from?

Who said?

Did God come one day and tell us 60%?

No. That number was invented by the Brussels bureaucrats when they created the euro.

They said: 'We are going to put a restriction on who can enter the euro.'

They saw that if they put 60% all the countries entered, except the Greeks.

Then they said to the Greeks: 'You cannot enter because you have many debts.'

The Greeks made up the numbers, lowered it to 59 and also entered the euro.

Everyone knew that and then they were surprised when the crisis came.

60% was arbitrary.

Then came the financial crisis of 2008-2010.

The advanced countries got into a lot of debt.

Then everyone said: no, 60% was not the number, it is 90%.

Why?

Because they all went up to 90. Then Carmen Reinhart and Kenneth Rogoff came out to say that if we go past 90, it will be an earthquake.

And now they are going to say: 'Well, 120% or 130% is the limit', and there are already people who say 'no, the limit is Japan, which has 230%'.

And the answer is that we do not know well.

The questions have to do with what you said a second ago: Are we going to be able to do the

?

Is there going to be enough interest in buying the debt?

What is the risk perception going to be?

We are on new ground, which makes this all very, very interesting.

There are many players in this game and some are more foolish than others.

For example, the credit rating agencies are going to play a super important role and I don't know if they have sat down to talk about what you and I are talking about now.

That is a problem.

P.

Ecuador and Argentina have already renegotiated their debts and they did so during the pandemic.

How do you see these renegotiations?

Do you agree with who argued that the payment of the debt should have been forgiven?

R.

I believe that today there is a historical precedent and that in a way it is indicating a direction.

Total debt forgiveness has only happened with some countries of what was called the HIPC [for its acronym in English], Highly Indebted Poor Countries, which was the initiative of the Fund and the World Bank.

Even with this precedent, the loss for debt holders, the so-called

, has averaged about 32% since 1975. I have a job where I do all the math.

The

for Argentina in 2005 was between 75% and 77%.

Now it is lower, between 30% and 35% maybe.

And there is a whole vision, which is the justified default, what they call the

.

In a way, Ecuador is an

.

It is a country that was managed in a populist way by Rafael Correa, who took on excess debt by cheating a little, making up the numbers.

They used the oil company as collateral and the price of oil collapsed.

Restructuring was easy for Ecuador.

The holders saw it as something exclusive, that there were justified reasons and they had good will.

In the case of Argentina there is today, and with justice on the part of the investors' holders, a lot of anger, or they are stunned that this is being repeated over and over, over and over again.

Q.

But if Argentina has defaulted on its debt obligations so many times in the past, why are there still investors interested in lending them money?

R.

Here what there was was a mixture of naivete on the part of the investors and arrogance on the part of the Macri team, who thought that the Argentine problem is fixed because they studied at MIT.

Nonsense.

No, things are fixed when you do your homework and do it well.

There was some arrogance from President Macri's team and it pains me to say it because they are all my friends.

We all know each other.

In Latin America it is a group in which we all know each other and are friends.

We have worked together or have been leading intellectual adversaries.

Q.

What do you think of the privatization of the debt?

And by this I mean the change that has occurred since the end of World War II, when countries borrowed directly from other governments or multilateral organizations and now go out onto the international financial market and borrow from private banks on Wall Street.

Has this had any impact on the region?

A.

The more options there are, the better.

Between 1945 and 1973 there was only access in Latin America to official money, government-to-government loans, in addition to trade loans for exports.

At the beginning of the seventies, privatization began in the sense that private sources of credit emerged, they were the first syndicated loans.

I believe that in some countries it was well used, in other countries it was misused.

There was corruption and the central problem at the beginning is that these countries have a fixed exchange rate and all this debt is in dollars.

The problem comes when there is a great devaluation in all these countries, with Argentina as the most emblematic case.

Today many countries issue debt in their own currency in international markets, including Mexico, Chile, Colombia and Peru.

I think a more interesting question is what about

?

These debt restructurings are best understood when you think of a corporate debt crisis.

The corporation has assets, machines, trucks, mining deposits, etc., and is financed in part by this patrimony and in part by debt.

The notion of such a restructuring is that those who have the debt take over the patrimony, the

.

In theory, the machines have not disappeared.

Maybe bad decisions were made, but for the future it is possible to improve what is happening.

For example, with the airlines of Latin America that have declared themselves in restructuring by the Covid.

The planes are there although there are no passengers for now.

And the idea is that those who are debtors now become

.

It is a

.

And the question will be: can this be done at the country level?

Can it be done with sovereign debt?

It was made in Mexico after the debt crisis in the Salinas de Gortari government.

It was made in Chile, it was made in various countries.

But I believe that now there is not much to privatize, that is, government assets and there is not the oven for buns either.

Ideologically there is a rejection of neoliberalism.

The pendulum is swinging more toward more populist policies, more focused on a greater role for government.

But the issue of

is an issue that I think needs to be explored.

Q.

Finally, let's talk about the countries in the world, like Mexico, that prioritized containing the deficit and not increasing their debt over offering economic stimuli or social assistance during this pandemic.

Do you think they will regret it?

R.

I think so, but sometimes austerity pays.

We were talking a second ago that it was first said that debt equivalent to 60% of GDP used to be the maximum.

And after the financial crisis of 2008, it went to 90%.

All advanced countries went to debt of 90%, 100% of GDP.

When the pandemic hits, the US has debt of 107% of GDP.

Except for Germany, which begins to pay and pay debt as of 2010 and, when the pandemic comes, Germany has only 59% of GDP in debt and that allows it to have one of the most expansive aid programs: because during good times they opened a space that allowed them to do so in the future.

If this is repeated, countries like Peru, Chile, Colombia, Brazil will be at the top.

In contrast, Mexico, due to AMLO's austerity, no.

I think they will regret it, but the issue is actually political.

If Chile had not responded, for example, it would have gone completely to the left and violence would have resurfaced and who knows what would have happened.

Ecuador similar, Colombia the same.

So it's political and I get the impression that in Mexico the political part is more or less under control, but I'm not sure.