Thank you for inviting me to participate in the 2nd Bund Summit.
It is an honor to be on the agenda with so many distinguished speakers from around the world.
And of course, a special thank you to the China Finance 40 Forum and the Shanghai Huangpu District Government, along with other partner institutions, for organizing this event.
The theme of this Summit is “Crisis and Opportunities: New Finance and New Economy in a New Situation”.
I really appreciate this framing. Today we find ourselves in very difficult and challenging times.
The COVID-19 pandemic has touched all of our lives and changed – in some profound ways – the fabric of our society… how we interact with our friends and family, how we perform our jobs and how we go about our daily routines, even how I’m delivering these remarks.
However, I am an optimist by nature and a firm believer in the following quote from Albert Einstein: “In the midst of every crisis, lies great opportunity.”
This is what energizes and excites me every day. The challenges we face are real… and sobering, but we have the opportunity to innovate and improve, which is what I want to focus on today.
This, in fact, fits very well with the theme of my remarks – “Viewing Obstacles as Opportunities and the Role of the Financial Services Industry”.
And I will do so by focusing specifically on three key areas:
? Financial services - In the age of COVID-19;
? Financial services - During the current (fourth) great debt wave; and
? Financial services - As a catalyst for a more sustainable future
These are topics are incredibly important to our 450 member institutions, distributed across more than 70 countries.
First, Financial services in the current age of COVID-19.
The IIF - for close to forty years - has worked with its private-sector members, and with the official sector, to analyze and debate policy approaches that can mitigate economic and financial crises.
In fact, our mission statement notes that our role is to help prudently manage risks; develop sound industry practices; and to advocate for regulatory, financial, and economic policies that foster global financial stability and sustainable economic growth.
While each crisis is different, and this COVID-19 induced crisis certainly stands out, one constant remains -- that we live in an integrated global system.
This system has been responsible for the rapid economic growth we’ve witnessed across all corners of the globe, over the last several decades.
Take China, specifically, and Asia, more broadly, as an example of the success and prosperity that have been possible with the interconnected global economic system we have today.
As a result, we must ensure the policies and approaches we develop and implement in response to this crisis are globally integrated and avoids disorderly fragmentation.
The current pandemic and its related health and economic crisis is an important moment for financial regulation.
Prior to the pandemic, the Financial Stability Board and global standard-setters focused on finalizing the remaining components of the regulatory reform agenda put place in response to the GFC, but were forced to quickly shift attention and energy to the current crisis. Which is best described as a global stress test in real-time.
In short, the system performed well, and authorities reinforced the system with hundreds of (1,600) policy actions and accommodations.
Because of this swift, global response, our latest research indicates global growth will contract by only -4.2 percent in 2020 – more the GFC but much less than was feared a few months ago.
Moreover, the global financial system is significantly safer, stronger and more resilient: over $3.7T in more capital, more liquidity, and less leverage than at any point in modern history – meaning that we are able to put our balance sheets to work to fuel the global recovery.
More policy support is needed, and we urge ongoing action – action that is coordinated and appropriately consistent across jurisdictions to avoid creating more fragmentation, which is a top threat to the effectiveness and agility of the financial system.
Next, I’ll turn to an issue that is central to the IIF. In fact, it’s the reason we were founded over 35 years ago: sovereign debt crisis.
We are currently living through the fourth (and largest) great debt wave of the past fifty years. The first three all ended in crisis:
? Latin America in the 80s;
? Asia in the late 90s; and
? The subprime and sovereign debt crisis in the 2000s.
And now, the COVID-19 pandemic, which is accelerating the unprecedented surge in debt that’s occurred across sovereigns, corporates, and households, over the past decade (since the GFC).
This surge occurred in both mature and emerging markets, with the biggest drivers being Sovereigns in the mature markets; and Sovereigns, Corporates and State-Owned Enterprises (SOEs) in emerging markets.
The drivers behind this current debt wave are numerous but four stand out:
1. Low interest rates and savers/investors searching for yield
2. A surge in sovereign borrowing with different and more diverse creditors
3. The emergence of China, both as borrower and creditor
4. Borrowing by Emerging Market corporates
And this debt “tsunami” has only accelerated in response to deteriorating economic conditions and pandemic-response-driven fiscal expansion.
As a result, global Debt/GDP surged to new record of 331% of GDP ($258T) in Q1, up from 320% in Q4 2019.
Mature market debt reached close to 400%/GDP (392% of GDP vs 380% in 2019) and EM debt surged to over 230% of GDP (also for Q1 2020 vs 220% in 2019), largely driven by non-financial Chinese corporate borrowers.
We also witnessed similar debt trends in the poorest and most vulnerable countries – those that are eligible for the G20’s Debt Service Suspension Initiative or DSSI.
These 73 countries have more than doubled their debt stock since 2009. And private lending quadrupled, mainly driven by bond holders, which skyrocketed more than twelve-fold: ($5.4 to $66.4 billion).
Many of these DSSI countries have taken years to establish themselves as attractive destinations for international capital, capital that fueled development and that raised living standards.
These countries are reliant on commercial flows for short-term liquidity, and to finance trade, intermediate goods, and longer-term capital projects.
It’s essential, critical that the DSSI countries retain access to international private markets and capital, at an affordable price, so that they can recover and build for the future.
Over the past six months we have worked closely with many of these DSSI-eligible countries - and their creditors – and policymakers to forge a way forward that allows continued access to markets.
In this process we have learned several key lessons/discoveries:
First, over the past thirty years, we (sovereign creditors and borrowers) have developed experience-honed private-sector tools, protocols and instruments to work through a sovereign insolvency crisis, but we lack equally refined tools to quickly respond to a liquidity crisis, and the need for debt service standstills, especially those caused by a catastrophic event.
While we have developed new protocols and frameworks, we think this is fertile ground for future work - notably contractual, guarantee and insurance instruments.
These will become ever more important given likely climate-related events in the future.
Accordingly, this brings me to the second lesson: The surge in demand for ESG and climate-related investible products and projects.
A growing number of investors are looking for consideration of climate and related environmental sustainability factors in debt solutions—for example, SDG-aligned bond funds, partially guaranteed SDG bonds, or debt-for-nature swaps.
Again, examples of financial innovations that can help address obstacles created by debt.
Third, this crisis has brought into stark relief, the absolute need for debt transparency.
If there is a lack of transparency, a lack of disclosure, a lack of debt sustainability will remain elusive.
Therefore, increasing transparency must become a top priority for both the private sector but the public sector too, and not just speeches but real action.
Finally, let me move to the topic that I think will be one of the defining issues of our lives: Climate Change.
In recent years, Sustainability and climate change has emerged as one of the most important issues affecting the financial system and global economy – and thus our Member Firms.
Accordingly, we at the IIF have prioritized – and are committed – to help finance a more sustainable, greener economy.
We will do this by contributing cutting-edge research on Climate-related policy and regulatory issues and providing a platform for public-private dialogue on innovative capital markets solutions, focused on climate change mitigation and adaptation.
Sustainable projects and sustainable financing need to be the name of the game – consumers want it, investors want it, and society is demanding it.
Moreover, the potential for a change in the U.S. administration could trigger a rapid acceleration of global momentum on climate change.
As a global institution, we feel that it is critical to find ways to leverage our energy, and the expertise of global leaders, to ensure that we have the best possible shot at limiting/reducing GHG emissions in the decades to come.
At this point I would be remiss if I did not mention President Xi Jinping’s speech at the United Nations on September 22nd, where he pledged to cap peak carbon emissions by 2030 and achieve carbon neutrality before 2060.
We applaud this ambitious goal and note that it could, by itself, slow the projected rise in temperature by a material amount.
We now need to take that level of ambition, and the ambition we see from Europe, the UK, Japan and soon the US, and translate into real investment, real projects and real outcomes – and not allow the Pandemic to slow us to down.
We can address COVID-19 pandemic AND invest in climate change mitigation and the Sustainable Development Goals. There are not mutually exclusive!
In fact, a “green” recovery will create millions of new jobs: $1tn annually in green energy investment could create 9 million jobs in three years, while reducing emissions by 15 percent.
Unfortunately, while governments have approved $11 trillion in Pandemic-related global fiscal stimulus over the past 8 months, less than 1% of this is “green”.
The COVID-19 crisis represents a unique opportunity for meaningful change in how we consume, save, build, invest and borrow.
With strong political commitment, and an active partnership with the financial sector, this shift will help bridge the gap between economic and environmental goals and bolster inclusive growth.
We stand ready to do our part for a more sustainable, greener economic recovery and growth ahead.
Before I conclude, I want to commend the Bund Summit Organizers once again for putting together this terrific conference with such an impressive list of speakers.
And I look forward to the day when I can return to Shanghai – one of my favorite cities in Asia – and once again meet with the financial policymakers, regulators, and financial institutions.
I also appreciate your desire to, not simply dwell on today’s challenges, but to recognize that there are opportunities in the days, weeks, months, and years ahead.
We just need the courage to grab hold of them.
As responsible citizens and stakeholders, it is imperative that we first and foremost help and support the most vulnerable during this devastating moment in our history.
However, what would be truly unfortunate is if we didn’t strive to come back from COVID-19 – stronger, more resilient, and on track to achieve our ambitious sustainability and development goals.
I know that the financial services industry has a critical role to play. We understand that responsibility. And working together with the international community, I believe we will make a difference.
Thank you.
