Allianz Global Investors White Paper Series Deconstructing the Mechanics and Market Implications of Financial Repression
Executive Summary
Table of Contents Page 2 Historic Precedent Page 2 The Least Bad Option
Page 4 Financial Repression Now Page 5 Redefining Risk Page 5 Financial Repression: Here to Stay
us.allianzgi.com Deconstructing the Mechanics and Market Implications of Financial Repression
Historic Precedent Exhibit 3 Exhibit 1
The US government successfully reduced debt America’s debt-to-GDP ratio improved from using financial repression after World War II 121% in 1946 to 33% in 1974
The Least Bad Option Exhibit 2
Exhibit 1: When debt-financing costs are below the pace of Exhibit 2: Financial repression results in market distortions that economic growth, a country’s debt-to-GDP ratio declines will feel foreign to many investors
10% 20 Financial Repression Financial Repression Real 10-year Treasury yields CPI less 10-year avg. CPI
5% 10
0%
0 Percent
-5% 10-Year Treasury Yields Minus Nominal GDP Treasury 10-Year -10 -10%
-15% -20 1945 1955 1965 1975 1985 1995 2005 2012 1945 1955 1965 1975 1985 1995 2005 2012
2 Deconstructing the Mechanics and Market Implications of Financial Repression
4. Financial repression. 1. Growth. The principal characteristics of financial repression* 2. Austerity. International capital controls
3. Debt restructuring or default.
Exhibit 3: The US has previously used financial repression to reduce debt
125 Financial Repression
100
75 Percent of GDP
50
25
0 1940 1950 1960 1970 1980 1990 2000 2010 2017
3 Deconstructing the Mechanics and Market Implications of Financial Repression
Financial Repression Now
Financial repression is a global phenomenon Government-borrowing costs can be suppressed by forcing banks to hold more public debt
We haven’t seen public-debt-deleveraging Direct interventions in capital markets are occurring efforts on this scale in the industrialized world in more than 60 years Administrative decisions support financial repression Exhibit 4 .
Exhibit 4: Financial repression is evident in negative real government bond yields
6 Financial Repression
4
2
Yield (%) 0 United States United Kingdom -2 Germany
-4 1998 2000 2002 2004 2006 2008 2010 2012
4 Deconstructing the Mechanics and Market Implications of Financial Repression
Redefining Risk Financial Repression: Here to Stay Bond investors would not accept negative inflation-adjusted yields under “normal” circumstances Rising rates are a considerable threat Economic contraction makes it more difficult to reduce a nation’s debt-to-GDP level
Exhibit 5: Industrialized countries face an extended period of public-sector deleveraging
300 Japan Greece IMF Forecast Italy Portugal United States Ireland Spain United Kingdom 200 France Percent of GDP
100 90% debt-to-GDP threshold
0 2000 2002 2004 2006 2008 2010 2012 2014 2016
5 Deconstructing the Mechanics and Market Implications of Financial Repression
Europe is learning an important lesson
A historic debt crisis that could take years to resolve Exhibit 5
6
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7 About Allianz Global Investors Understand. Act.
Past performance is no guarantee of future results. A Word About Risk: