Financial Markets

Scheffer: Thank you, Julissa, and good day everyone. I am David Scheffer, a visiting senior fellow at the Council on Foreign Relations and the Tom Bernstein fellow at the U.S. Holocaust Memorial Museum. I'm working on a project for both the museum and the Council on the subject of today's roundtable. Today's discussion is part of the Council's Roundtable Series on Human Rights Issues, and it is on the record. Before I introduce our speakers, I want to convey to you that for several years, I've been exploring the social bond market for the purpose of enhancing the funds available to meet the needs of international criminal justice and the victim populations of atrocities. At the beginning of this inquiry, the idea of social bond funding seemed almost bizarre to most of my audiences, whether they be tribunal or humanitarian organization officials. But within the last two years, the social bond market has exploded, not only in its magnitude, but in its range of social policy objectives. The COVID-19 pandemic, and the surge of social bonds in Europe, including with the European Commission, has been a shot in the arm, no pun intended, for this form of private financing for very worthy public causes. Now in the result, bonds that address social themes and appeal to the rapidly expanding class of socially concerned investors have continued to be the fastest growing sector of the bond market, and they have become a pillar of humanitarian investing. The rising appeal has been influenced by evidence that sustainable investments can outperform traditional ones. So while COVID-19 catalyzed the rapid rise of social bonds issued in 2020, the interest in these bonds is expected to last far beyond the crisis, and to increase further in 2021. Meanwhile, victim populations are suffering not only from the pandemic, but also the atrocities inflicted upon them in the past, and currently, such as vast victim groups in South Sudan and Central Africa, the Rohingya of Burma, the civilian population of Yemen, the Syrian people writ large, and the nearly eighty million refugees and displaced people usually fleeing atrocities across the globe. Are their opportunities to meet these challenging needs in the social bond market? To help us answer that question today, we have two experts, one on the social bond market, and the other on the needs of atrocity victims, who, by the way, seek not only reparations, and basic support for their survival, but also justice. And those are expensive propositions. Our first speaker is Maud Le Moine, the head of SSA debt capital markets at Goldman Sachs and based in London, SSA standing for sovereign, supranationals, and agencies. She has a fifteen-year track record at Goldman Sachs and worked on one of the very first social bonds, which she'll describe, and in this position, she interacts with many international organizations, including the World Bank, African Development Bank, and European Commission. She has provided invaluable advice to me over the years about the social bond market. The second speaker is Maya Shah, the head of operations of the Global Survivors Fund, which focuses on victims of sexual violence arising from atrocities in Africa and elsewhere. So she is on the front line along with GSF’s Dr. Denis Mukwege, who won the Nobel Peace Prize in 2018 for his work with victims of mass sexual violence. Prior to joining GSF, Maya worked for twenty years with Médecins Sans Frontières in field positions and headquarters where, until recently, she successfully ran large-scale innovation projects. I've asked Maud to go first and provide her perspective on the social bond market, including briefing those in the audience who may not know much about this specialized market. Maud the floor is yours for about ten minutes. Le Moine: Thank you very much, and good morning. Good afternoon, everyone. And thank you again, David, for having me today to discuss such an important topic in the market. As David mentioned, my name is Maud Le Moine. I'm responsible for debt capital markets coverage of public sector clients at Goldman. And as such, I've worked with a number of multilateral development banks in structuring and issuing debt products in the markets including social bonds. So perhaps I thought I would start with a little bit of background on the ESG bond market as a whole and the evolution of the social bond market specifically. Really, it has started fifteen years ago with the first social bond at the time, not called a social bond. But IFFIm was really the true first social bond issuer. The International Finance Facility for Immunization issued the first bond with a specific use of proceeds at the time directed towards vaccination programs in poorer countries. It has since evolved to include: the European Investment Bank issued the first climate awareness bond in 2007, then the World Bank issued the first green bond. And from sporadic issuance, the market has grown to represent around €400 billion of issuance for 2020, which to give a little bit of perspective represents a huge increase from only five years ago, where it stood around €90 billion. So this is obviously a substantial growth in a very short period of time. But just also to give a little bit of context, it's still a fairly small portion of the overall bond market. It's sub-10 percent of the overall bond market. So really, what are ESG label bonds and what role do they perform in the markets? ESG label bonds are fixed income debt instruments, which means that they are issued in the market with a specific use of proceeds. This is the key difference with any normal debt instruments, where usually the use of proceeds are for general corporate purposes. In this case, they are issued with a specific purpose. They can take several forms. The most common are still green bonds with proceeds directed towards environmentally friendly projects. And in the family of ESG bonds, you’ll also find the likes of sustainability bonds, social bonds, and many subcategories (climate transition, climate resilience, education, sustainability in bonds, etc.). They all perform a very similar function, which is to direct investments towards a specific set of projects. I think that's incredibly key, as they perform the role of aggregating demand towards a specific set of projects that have a social outcome. And since 2017, ICMA, which is the International Capital Markets Association, has worked on a set of guidelines called the Social Bond Principles that really lay out the objective criteria for social bonds. And they are based on four pillars: the use of proceeds, the project evaluation, management of proceeds, and reporting. And the purpose of the Social Bond Principles is to set out a common base for the definition of social bonds and really ensure the transparency and accountability. So the way they work is the issuer, if we take an international organization, such as the World Bank or the African Development Bank, will set out a framework in which they describe the types of projects that they intend to finance. Sometimes they'll have very clear exclusions as well. But generally describe the types of eligible projects that will be financed under that framework. And they also usually explain the performance metrics and also how they will report. The reporting is very key, as investors at the point of investment do not necessarily know exactly how their funds will be allocated into certain projects. They will only know later on when it's reported by the issuer. So the social bond also performs the function of issuing upfront for needs of projects that will be dispersed over time. This is a key element, which was the entire construct of IFFIm at the time, as the needs are usually very important to tackle quickly. And so there's a need to raise money upfront. And projects can be dispersed over time. To give you perhaps an idea of the types of projects that are included as eligible projects under the Social Bond Principles and what most social bonds finance, these would include, for example, affordable infrastructure, access to essential services, affordable housing, employment generation, food security, or any social or economic advancement or empowerment. This is a broad definition of what the project can include, but to give you an idea of what they have financed in the past. So why are they so important? And I think that's quite an important topic of discussion here. And I think, for me, the key is that really any of these projects would not normally be financed directly. They would be too small, too risky for any investors to be financing directly or at attractive economic terms. So really what the World Bank or African Development Bank or any other multilateral development institution, the role that they perform, is to aggregate demand for this product and therefore ensure the deployment of capital in the most needy places. So if we take an example of the World Bank raising a billion bond, for example, they'll manage their balance sheet dynamically. Therefore, this billion will really serve to finance a number of different loans. And over time, the World Bank is able to access the market thanks to its high credit rating, their standing in the market, their global investor following, and their longstanding market presence. They're able to raise this billion at very favorable terms, and they're therefore able to lend at very favorable terms, and this is the key to the entire construct. Given the COVID crisis, somewhat unfortunately, it has resulted in a significant surge in the social bond market last year as a portion of the overall ESG market, given all of the difficulties that countries have faced to cope with lockdown measures and generally the effect that it had on people, small businesses, the healthcare sector, etc. So if we take the difference between 2019 and 2020, the social bond market has almost increased tenfold. So it's a huge increase. And one of the biggest portions of this development was the EU SURE program, which has become one of the largest social bond issuers in the market since they created the program in the summer of last year. The SURE program is a €100 billion temporary support to mitigate unemployment risk in an emergency, and it is intended to be entirely financed in social bond format. They have already issued €53.5 billion of that program and have an entire envelope of €100 billion. So they can fund the rest over the course of this year. It was entirely created as a result of the pandemic and is designed to urgently provide financial assistance in the form of loans to member states. And so, I think the question that we are often asked about social bonds is really, who buys social bonds? What is the appeal for investors? What is the difference between a normal bond in terms of payout structure, and things like that? And so, first of all, I think the background is that, generally speaking, what we are seeing is there is an increasing realization from both public and private sector market participants that a lot more needs to be done in the field of sustainability as a whole. ESG investors and social bond investors can really be any investors. What we're seeing in the market is central banks, asset managers, pension funds, retail investors, foundations, etc. can be interested in this product. Generally, the investor community as a whole is increasingly putting in place sustainable investment strategies, and as such, they're trying to find suitable financial products to fit their strategies, and social bonds are one very good example. How are investors repaid? Well, social bonds themselves are really used to finance loans. So the purpose of these multilateral organizations is to aggregate the demand. They have the expertise on the ground. They are able to do the due diligence of the project, and they have backings of governments that are their shareholders and, therefore, have higher credit ratings and are able to access the market at favorable terms. As such, the projects themselves really finance loans and therefore generate a return themselves, part of which is paid to investors in the form of usually a fixed rate coupon. Some instruments have been designed to have a slightly different payout structure with predefined targets. For example, it's been seen in KPI-linked bonds, where there is a step-up or step-down coupon when the targets are met or not met, depending on what the targets are. But the very vast majority of social bonds issued in the market have a fixed coupon and therefore fixed return to investors. I think that's quite an important point because the growth of the social bond market is also driven by the depth of the fixed income investor base. And this is an investor base that's generally focused on the liquidity and generally conservative in their risk profile. And therefore, it's important that there is a fixed return. For example, there are other types of instruments that exist in the market, such as social impact bonds, and it's important to differentiate those two social bonds that I'm talking about, because social impact bonds are slightly different instruments. They're generally much smaller in size, and they have a payout structure that's directly linked to the successful outcome of pre-agreed social benefits, but they are much more similar to equity products in nature, and they are much higher risk instruments, and they do not have a fixed return. So they are different instruments. They are called bonds as well but generally not issued as broadly in the market as social bonds are at the moment. Scheffer: Maud, if I may, perhaps another thirty seconds or a minute, and then we'll move on to Maya. Le Moine: No, of course. I mean, I think that's a broad overview. I think you wanted to discuss specifically, the application that it can have on international criminal justice, but I can take it as a question afterwards. Scheffer: Exactly. Thank you so much. That's an excellent brief. I'll share that with every student I ever teach. Maya, the floor is yours. Shah: Thank you. So good morning, and good afternoon, everyone. And thank you, David, for inviting me today. And as you mentioned, yes, I'm the head of operations for the Global Survivors Fund. So this is a global fund for survivors of conflict-related sexual violence. The fund’s mission is to enhance access to reparations and other forms of redress for survivors of conflict-related sexual violence across the globe. So the fund was established in October of 2019 by Dr. Denis Mukwege and Ms. Nadia Murad, a survivor herself, after they both received the Nobel Peace Prize in 2018. It is also the realization of a vision that was long held by survivors through the SEMA network. So this is a network of survivors from over twenty countries in the world that have been lobbying for reparations. Additional to this, the fund was endorsed by the UN Secretary General in his statement to the Security Council in April of 2019, where he strongly encouraged governments to support this fund. So what is the purpose of the Global Survivors Fund? Well, it's to fill a gap in addressing the rights of survivors by providing interim reparative measures, and this is when states are unwilling or unable to do so. And while we recognize that it is a government's responsibility to provide reparations, often they are not able or not taking this responsibility. But we cannot leave survivors behind, because reparations are a right. So the main principles to the fund’s approach are, one, a survivor centered approach, and this is really to co-create projects with survivors, so not for survivors but really with survivors. The second fundamental approach is local and contextualized solutions. So really looking at the different countries where there are projects and the local solutions available in those countries with survivors. The third is a multi-stakeholder approach. So that's including survivors, civil society organizations, activists, local authorities, and UN agencies within what we call the steering committee that runs the project, so that there is a lasting impact of these projects. So the three main pillars of our work at the fund are what we call act, advocate, and guide. The act pillar is really to provide interim reparative measures. So we work with local civil society organizations that are our implementing partners, and we provide interim reparative measures in the form of compensation. Currently, we have three projects in the Democratic Republic of Congo, in Guinea, and in Iraq. And we're looking later this year to open in Central African Republic and Nigeria and possibly South Sudan. I was in the Democratic Republic of Congo three weeks ago, where there is an estimate of between 200,000 and 400,000 victims of conflict-related sexual violence. And I was discussing with the head of the National Survivors Movement there what it means. And she basically said that survivors, what they want really is an acknowledgment of the crimes that were committed against them, to not be blamed for what happened to them, and to receive some sort of compensation. And whilst at the fund, there is no way we're going to be able to cover all the victims of conflict-related sexual violence in the Democratic Republic of Congo. What we can do through our project is to show that interim reparative measures are possible and to act as a catalyst then for governments to take on the responsibility. The second pillar of our work is called advocate, where we really want to make survivors’ voices heard in order to influence at the international, regional, and national level policies that will then prioritize reparations and allow governments to take their responsibilities in providing reparations. And that leads me to the third pillar of our work, which is the guide pillar. And in this pillar, this is where we look to provide technical assistance and expert advice to support governments who want to put in place reparation programs, but to ensure that these programs are really survivor-centric and that they have a survivor-centered approach. Another part of our work is we are currently doing a country mapping study of over twenty countries to look at the state of reparations in different countries around the world and then to be able to make a better informed decision of where we want to put in place projects. So currently, the fund is funded through institutional funding, so through government donations. But in general, there is not a lot of sustainable funding for human rights abuses, but specifically for conflict-related sexual violence. And the needs in this field really vary from the immediate life saving needs of health care and psychosocial support, then to much more long-term needs, such as restitution of livelihood, education, support, and financial compensation, which these require, of course, substantial resources and extended periods of time. And as I mentioned before, when you look at a contextualized approach, these kinds of reparations are going to differ whether you're doing it in Ukraine compared to Central African Republic compared to Iraq. You know, one size doesn't fit all in these different contexts. But I don't think that this should be a deterrent to start providing reparations, and neither should having to put in place all the transitional justice mechanisms before. We strongly believe at the Global Survivors Fund that reparations are a right. Survivors have a right to them. And therefore, in fact, when you put in place interim reparative measures, often you are empowering survivors by making them reestablish dignity, have livelihoods, have health care, and so to be able to benefit from this, to be able to then go through the transitional justice mechanisms. But of course, all these need some form of sustainable financing and innovative financing mechanisms. So I hope that we'll be able to discuss this further today. Thank you. Scheffer: Thank you so much, Maya. That is excellent. I'm going to ask a few questions and then at the thirty-minute mark, or approximately that, we'll open it up to the audience. Maud, could you dip into what we worked on for a couple of years whereby we were looking at a particular type of social bond that is of an endowment character that's generating annual revenue. That could be extremely useful either for a tribunal or for an organization like Maya’s that might be looking for a steady stream of revenue year after year as sort of a base set of revenue that they could rely upon, as opposed to a huge expenditure of money in the first or second year of a bond. Le Moine: Yeah, absolutely. I know we've been discussing this for a couple of years. So first of all, perhaps I should mention that it's an extremely worthy cause, and one that should generate interest from ESG investors. I think the problem is trying to find a structure that works and fits within the criteria of investments of fixed income investors, if large sums of monies need to be raised, or other types of investors depending on how much is needed. The idea of an endowment social bond is certainly an option. But I would raise a couple of points that I think are important to understand. In order to attract fixed income investors, and I say fixed income investors because they are the largest pool of investors out there in terms of ESG investors at the moment, the fund itself would need to have a certain rating if the fund is to issue a bond in the market and generate interest. And that's unlikely to be a high rating without the backing of certain sovereigns and a structure that, David, we have discussed over the years. If the structure were to work, the fund would need to have, ideally, at least an AA rating in order for the money to be raised in the market at a certain economic term, which would then be able to be invested in the market to generate enough returns to generate a steady stream of revenue. And so a high rating is really the key to making the structure work in order to have affordable terms in the market and be able to invest it and generate the needed returns. Scheffer: Thank you so much. Maud. Maya, you touched on this in your remarks and I want to try to emphasize it to our audience. You used a couple of examples of a gap between the need and the actual resources available to deal with reparations. Could you expand on that just a little bit and sort of emphasize how large is this gap of funding for these humanitarian purposes for victims, particularly when they involve issues of reparations? Shah: Thank you, David. I mean I certainly can't put a monetary figure on it today. But what we know is that the needs of victims are huge, because it goes from life-saving care, long-term psychosocial support, to compensation, restitution, and rehabilitation. And if you look at that, that can be from livelihood programs; reinsertion because often they're completely stigmatized out of the communities, lost all their jobs; education for children, children born out of rape particularly that also are ostracized from society; and if reparations programs are being put in place, it's also compensation on a monthly basis for the survivors. So there is a range of needs that are there, and each with varying amounts, but we can see that the numbers of survivors are enormous. And so yeah, I can't give you a monetary figure, but just the needs are huge. Scheffer: And let me jump back to Maud. We've talked, you and I, about the whole phenomenon of pre-qualified investors. I get this question quite often from organizations. They don't want any and all investors stepping up to help them. For example, if they're a humanitarian organization, they may not want gun manufacturers to be in their investor pool. Can you just expand on that a little bit? When you put a social bond together, how do you structure the pre-qualified investors so that the organization is confident in that investor pool? Or do you do it at all for some of the bonds? Le Moine: That's a good question. When we issue social bonds in the market, it's a fairly quick process. And so there's a lot of preparation ahead of the issuance itself, setting up the framework in place, perhaps marketing for a number of weeks ahead of a potential bond issue, but the issuance itself is fairly quick. The issue will rely truly on the banks and the lead managers of the bond to have KYC. So know your customer. KYC to all of the investors that are in the transaction, and they will have access to the list of investors. And they can choose to exclude some of them if there were any concerns with the background of the issuer. They will mostly rely on the bank’s proposal of allocations and things like that, but they have the ability to exclude any investors if they wanted to. I must say we've never come across an issue, given the types of investors that are generally interested in these bonds. We're talking about central banks and large asset managers that are very well known, pension funds that are also large pension funds, European pension funds, Canadian pension funds, or U.S. pension funds that are very well known. So these are large institutional investors that are very well known by the market. Scheffer: Thanks so much. You know, I think I'll be following strict rules here. We're at the thirty-minute mark, and I want to open up the floor to our participants in this roundtable. I'd like to first just see, I see on my list of participants that Naomi Kikoler is actually with us. Naomi, I wanted to give you a chance to say just a few words, if you wish to. But now would be the opportunity, if you'd like to come on board. Kikoler: Thank you so much, David. Appreciate that. And just want to congratulate also Maud and Maya just for the phenomenal presentations. On behalf of the U.S. Holocaust Memorial Museum, we're incredibly honored to be able to help advance the work that you're doing, David. Along with CFR, I did want to thank our colleague, Erin Rosenberg, and your colleague, Madeline Babin, for their work. I think from our perspective, as Maya especially highlighted, this is one of the most challenging, vexing, and urgent issues that many of the communities that we work with are seeking to find a way to address and are seeking innovative solutions too, so I really commend the effort that all of you are doing to try to find innovative sources of funding. I think we all know, as we look at the experience of the Holocaust, the importance that reparations has played for many communities, while recognizing that you can never truly restore or return a person to the life that they had prior. But the importance of finding creative solutions, as you're doing, is really I think something that needs to be commended. I think the big challenge, and the challenge that I've raised with you, David, at times, and I'd be curious for Maya and Maud to build a little bit on your comments is around the political will, especially of governments and large multilateral organizations, to step up and increasingly support these types of initiatives. I'd be curious where you see there being potential openings. Are there specific governments that you think are particularly promising, or other multilateral institutions that have shown an interest in using things like social bonds? But again, just a profuse, on our behalf, honor to be involved in this particular project, and we very much hope that for the various communities we work with today, the Yazidi, the Rohingya, the Uighurs, and others, that your innovative approach to this will help to ameliorate the very big challenges that they face for the future. So thank you so much. Scheffer: Thank you, Naomi. Maud, would you like to just take on Naomi's question about the willingness of the multilateral banks and of governments and I might also add of large foundations to step into this breach? Le Moine: Absolutely. And I mean, generally speaking, multilateral development banks are incredibly willing to step up to the plate when they can. If you think of all the ones that are currently existing and active in the market, they have responded incredibly quickly last year to the needs of their member states following the pandemic; have mobilized incredible amounts of resources; issued very quickly what was needed to disperse funds very quickly to the most needed places. So I think the multilateral development organization family as a whole has been incredibly quick to respond. And that has shown the willingness of the institutions to help when they can. At the political level, it differs from time to time, I think. We've also seen with the pandemic that there's also a great political willingness to step up. If you think about the European member states incredibly quickly getting together and forming a budget that was on multi-year to support the European recovery fund, but also their SURE program and other initiatives that were done in Europe. And over the years, capital increases of these multilateral development institutions, new ones have been put in place over the last few years in Asia, most notably with the Asian Infrastructure Investment Bank and the New Development Bank, to try and support the needs of specific regions. So I think there's an incredible political willingness as well. Generally speaking, what we're seeing, however, is that the structures also need to be quite clear. And accountability of these institutions is very high. So they have very high standards to uphold in terms of the types of project that they lend to and the result, as they have the impact in the local community. It's very important to guarantee their political willingness to participate. Scheffer: Thanks a lot. And I want to get to our other questioners. But Maya did you have anything you wanted to add to that because you do have government contributors to GSF? Shah: Yes, thanks, David. I mean, we do, but I think there are two things. I think governments sometimes will react when the political will is strongly there, when it affects them. So we saw that, for example, previously in the Ebola crisis, governments reacted when it started happening to them. And now in the pandemic, when it's happening to governments, they will have the political will to react quickly. We do have governments on our board, but I don't think there is enough being done. And the governments where these crimes are committed are perhaps not the ones reacting as quickly or as much as they should be. And while we believe that they do need to be taking their responsibility, I don't think we can always wait for political will to be there because the needs are so urgent, and we need to address them, but it's definitely a joint responsibility. Scheffer: Thanks, Maya, shall we now go to Jonathan Berman. Jonathan, are you there? Berman: Thank you. Sorry about that. I'm in a remote area. So if I phase out again, please go on to the next questioner. But while I'm in touch, David, thank you for hosting this meeting. And thanks also for asking Naomi to say a word. As a Holocaust descendant, it's uniquely gratifying to see the Holocaust Museum active on this topic. Maud, my question actually was for you. I just wanted to go back to what you said about the distinctions between social bonds and social impact bonds. Could you just confirm that social bonds, the terms of the bonds are uncorrelated to the outcomes that are received, and if that's correct, and then on social impact bonds, if you could say a little more about how that correlation is achieved? Thanks. Le Moine: Thank you, Jonathan, for the question. And yes, I can confirm that the terms of a social bond are uncorrelated to the outcome. And that reason is, if you think about the World Bank as a whole, they will have an issuance program per year of somewhere in the context of €60 to €70 billion. And part of this, they issue now all of their bonds under their sustainability debt framework. But if you think about perhaps the African Development Bank, they have a social bond framework, and that is only a portion of their debt issuance, but when they access the market to raise this portion of their program in social bond format, they access the market at the terms that are available to them at the time of accessing the market. What the investor is really buying at the time of the investment is the African Development Bank credit within the context of their social bond issue. So they know where their investment is going, they know the eligible project that will be financed with their funds, but the actual outcome is de-correlated to the terms. The market moves all the time, and at the time of issuance, the African Development Bank will be able to access the market at specific terms, and other times at other terms. However, the investor will have access to the impact of their investment, because all of the issuers of social bonds have the obligation to report on the use of proceeds and what they were used for and what the impact was. So the investor will have access to that. And I guess in theory, they can choose later on in the process to reinvest or not, if they are not satisfied with the impact that they are seeing. On the social impact bond, it's a slightly different construct where usually you have an outcome that is decided between a public institution in an area, if we take early childhood education, for example, where a municipality doesn't have upfront money to invest in early childhood education, but there's a strong correlation between making sure early childhood education is taken care of to influence the greater social benefits later on. And there's a study to make sure that the correlation is important. Then, effectively, it's calculated as whatever the municipality is saving in early investment by the private investor is returned to the investor if the social outcome is met. Scheffer: Thanks, Maud. Le Moine: I hope that's clear. Scheffer: Yes, I hope so, Jonathan. Sarah Whitson, I think you're next on our list. Whitson: Hi. Thanks to both of you. Maya, I'm particularly grateful for your characterization of the funds that you're raising and distributing as reparations and not charity. And two questions is why the focus exclusively on survivors of sexual violence, which is, of course, a much smaller pool, and much more idiosyncratic, frankly, than the larger population of victims of violence. And I wonder whether you are looking or considering assisting victims in places like Yemen or Gaza, which are much harder to get to, and yet where the needs are overwhelming, with thousands of people disabled by sniper fire or bomb attacks. And Maud for you, in terms of the social bonds, which, as you describe are effectively loans to governments, what are the criteria? Particularly given the fact that the reason that many of these countries are in such catastrophic economic situations is because they have tyrannical, abusive, corrupt governments, like Egypt, for example, where the World Bank and the IMF continue to provide loans to a government that is wholly corrupt, wholly controlled by the military, which enriches itself at the expense of its own people. So how do you ensure that you're not a part of the problem when you make loans to corrupt, abusive governments, where the World Bank and IMF fail actually to do meaningful due diligence? Scheffer: Maya, why don't you go first on this one? Shah: Okay, thank you. Thank you for that question. Yes, why are we focusing on conflict relating to the sexual violence victims? Because we feel that they are one of the most vulnerable populations. They are often very much overlooked due to stigma and shame and hardly ever recognized as war victims. And they really do merit the focus. And through this focus, we can break the silence because of the stigma. There's so much stigma attached, particularly to conflict-related sexual violence. And to your to your second question, yes, we are looking at, as I mentioned previously, in the country study, one of the countries where we're trying to look and work is Yemen, and Syria both, but particularly looking into Yemen and seeing how we can support survivors, whether they are outside of the country, and then to look to support through, but in very difficult circumstances. So indeed, we're looking into it. Le Moine: Yeah, perhaps I can try to address your question to me as well. I think, first of all, I really cannot comment on behalf of any of these multilateral development institutions on what their due diligence procedures are. However, I would mention that they lend to individual projects, rather than at the sovereign level. The projects themselves are subject to scrutiny and due diligence, and they have the sovereign backing, so that in case the project becomes insolvent and is unable to pay back the loan, there is a sovereign guarantee, which is part of the reason the construct works. So that's a key part of the understanding of how the whole lending works. One thing I would say, though, is that if you think about the number of projects that are financed, it's really absolutely key infrastructure, or education, or healthcare projects on the ground. There might be issues at the broader level in the country where you also have to think about the number of people that these projects help on the ground. And I think that's the real key to these organizations and their purpose. Scheffer: I see that Erin Rosenberg is on our list. Erin, did you want to perhaps ask any questions, since you've been so deeply involved in this project? Rosenberg: Thank you so much, David. Um, yeah, actually, this is perhaps speculative, but I am quite curious of maybe digging into the question of political will matched with the issue of victims of atrocity crimes. I’m wondering whether both of our panelists, just in terms of bringing this concept, and recognizing as Maud you have identified, the types of projects that are typically funded. How would you view in terms of political will or just more generally the viability of projects that are aimed specifically at the reparative aspects addressed by Maya for victims of atrocity crimes? Le Moine: Thank you, Erin, for the question. And I think that this is a topic that David and I have discussed in the past. And I think in the case of victims of atrocity crimes, there's a real strong case for frontloading support. And I think when we think about garnering political support, what is important to try and highlight is that the need to tackle mental health issues, quick economic recovery, integration, and early education upfront have long-term strong benefits. And I agree with Maya when she said earlier that countries step up when it's in their interest, and I think that's part of the answer. In trying to garner political will for this specific topic, it's very important to frame it in the context of the long-term benefits globally but also to specific countries. It has benefits that can transcend the actual quick reparation; it has long-term benefits in the economic development of the country, and therefore, its security, international relations, etc. And I think that's the framework in which to try and garner political support for this specific issue. Scheffer: Thank you, Maud. I see we have Whitney Debevoise, who would like to interject. Debevoise: Thank you very much. This is Whitney Debevoise of Arnold and Porter. I’m former U.S. executive director of the World Bank. This question is for Maud, could you talk about the various initiatives to start to regulate this ESG bond world in terms of standards and the like? And what impact, if any, you think that may have on the growth of this market? Le Moine: Absolutely. Thank you, Whitney. The main development has been the development of the Social Bond Principles by ICMA, the International Capital Markets Association, which followed the Green Bond Principles. And now we also have another set of principles for sustainability bonds and sustainability-linked bonds. Generally speaking, the issuance of the first bonds have always preceded the existence of the principles, and the ICMA body has gathered private market participants, banks, investors, and regulatory bodies to try and understand how to frame the discussion, making sure that there's a common set of standards that are upheld by issuers, and that the word social bonds was not going to be used for just any types of issuance. And the green bonds have been accused of doing a little bit of greenwashing at some point when there wasn't enough of a standard. So I think that's the main development of the social bond market. And it has, I think, helped the social bond market, because it has provided issuers with very detailed guidelines and made the market a lot more transparent and also accountable. So I think it has greatly helped the issuers know how to frame their social bond issuance and how to focus their eligible projects, and it’s also given some confidence to the investor base as well that they are investing in a project that has a certain standard. Scheffer: Thank you, Maud. Can I just ask a question? Oh, I see we have Patricia Rosenfield. Rosenfield: Thank you so much for that question. And the earlier one about the role of philanthropies, private philanthropies investing in social impact bonds, particularly social impact bonds not just social bonds, prompts this question. I'm Patricia Rosenfield. I'm president of the Herbert and Audrey Rosenfield Fund, but I also work at the Rockefeller Archive Center where we look back at things like program-related investments and mission-related investing, and that's what I'm wondering if you're seeing. If foundations or some foundations are increasingly looking at mission-related investing, and divesting themselves of oil and gas and perhaps negative impact investments, if you're seeing an increase in philanthropic assets being invested in social impact bonds, and if not just in the United States, but in other private grant-making activities around the world? Scheffer: Maud, I think that's for you. Le Moine: Okay, and perhaps Maya will have a view as well on what she's seeing on the ground in terms of types of philanthropic investments, but on my side, absolutely. It's a general development that investors are incredibly focused on re-centering their strategies and making the sustainable, or ESG, or philanthropic part a greater part of their investment strategy. Foundations have been, in fact, the very early investors in social impact bonds. So I'm not sure if that has necessarily increased so much, but they were at the very beginning of the product when it first was coined and evolved. So I think that's still the case. In social bonds, specifically, we're seeing also foundations being active. But I would say that it's not the dominating investor base because of the sheer amount of volume that is issued in the market. So they don't represent the largest investor base. We're still talking about larger institutional money being the driver of social bonds. Scheffer: Maya, did you want to add something to that? Shah: Well, I think Maud covered it very well on who is investing. I don't have much authority on that. Scheffer: Okay. Let's go to Jennifer Warner. Warner: Hi, thank you both for your time. This is Jennifer Warner from the Elton John AIDS Foundation. As we're talking about social bonds and how they might relate or be different from social impact bonds, as well, it would be interesting to hear, Maud, your perspective on what problems are best suited for a social impact bond or social bond? So the distinction between why you might pursue one or the other? Le Moine: I think there's one element that's absolutely key to a social impact bond, which is the correlation that we were talking about earlier. So, for example, I have looked in the past at doing impact bonds in developing countries. And very often the problem is that we lack data. So the problem in structuring the social impact bond is that you need a very strong historic correlation between a certain a certain problem and a certain outcome in order to build the case for a social impact bond. And that's really, I think, the key difference between the two. The other thing that is important to differentiate the two is that the social impact bond will generally be a much smaller scale and very targeted. Therefore, it will be municipal level, a small issue that can be tackled with specific investment and has a great social benefit. Social bonds, generally speaking, are much larger, because we're talking about a much larger scale of projects that are being financed. I’m looking at the clock, which is why I stopped here. Scheffer: No difficulty at all. I just want to cover one last issue if I might, and I'm afraid it's a question for Maud. When governments guarantee the social bonds, particularly if it's a reparations issue in the future, it's one way for the government to, and particularly if it's the subject government of the reparations, to actually weigh in with its own responsibility towards the victims. Rather than making a cash payout under reparations to the victims, they can step forward and guarantee a social bond, which, of course, the social investors, particularly if it's AA or AAA, will want to respond to. Can you just briefly tell us how concerned governments are about the contingent liability of providing a guarantee? Why would that worry them? Le Moine: Fair enough. I think the general worry about contingent liability, and that's obviously a very generic statement. It does differ from country to country. But when we look at sovereign or state budgets, if the liability of the guarantee goes beyond the term of the governing body at the time, then it's very difficult sometimes for governments to be sure that the next government will uphold the similar guarantee. So it's difficult for governments to justify sometimes having guarantees or contingent liabilities over a period of time that goes beyond their term. That's generally the issue. But there are systems in place, and the shareholding of a multilateral organization is without limit in time. So, there are plenty of situations where governments have pledged over a period of time that goes beyond their term. But in the discussions that we have sometimes this is the problem that's being raised. Scheffer: Thank you very much Maud. I think this brings us to the conclusion of our hour. I just want to say how pleased I am with our speakers. Maud, I know it was years ago, but you made the London School of Economics proud today. And Maya, for our friends at Médecins Sans Frontières, they're probably asking why in the heck are you at GSF still, so you made both of them proud. Thank you so much to our audience. And we will continue to forge ahead.

The World Economic Update highlights the quarter’s most important and emerging trends. Discussions cover changes in the global marketplace with special emphasis on current economic events and their implications for U.S. policy. This series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies and is dedicated to the life and work of the distinguished economist Martin Feldstein.

Panelists discuss the economic outlook for 2021, including post-pandemic global recovery expectations and the potential economic priorities of an incoming Joe Biden administration.    JOYCE: Good morning and good afternoon to everyone. Thank you for joining us. My name is Tom Joyce. I'm a capital markets strategist at MUFG. I'm going to lead our discussion today on the economic outlook for 2021. Absolutely no question that we entered 2021 with political risk, economic risk, and public health risk elevated. And to navigate that discussion I'm very pleased today to introduce our two panelists, Elga Bartsch, who is the head of macro research at BlackRock, as well as Jay Bryson, who is the chief economist for Wells Fargo here in the United States. In the course of this discussion, we're going to cover the global economy, we're going to cover the U.S. economy, the virus and the vaccine, the Biden policy agenda, and other such topics. I'm going to ask questions for approximately thirty minutes and then we'll turn it over to audience Q&A. Elga, let's start with you. Let's start really high-level, macro, the global economy, before we get into more details on specific issues. I think we all know that the recovery this year is exceptionally likely to be an uneven one, with huge differentiation across geographies, across industries, and across business. What is your assessment of the global economy for 2021? And what are the key drivers of this view? BARTSCH: Yes, thank you very much, Tom. That's a very good question. So to start out with, I'm not even sure that we should call it a recovery, because calling it a recovery would imply that the normal business cycle logic applies. And that's the starting point of my thinking about the global economic outlook is that this isn't a regular business cycle and therefore the normal dynamics are suspended. What this is, is a natural catastrophe where economic activity was deliberately stopped in order to protect public health. That natural catastrophe is to some extent still ongoing. We have seen a relief in the course of last year. But now it's intensifying again. And so that means that economic activity everywhere in the world is mostly driven by virus activity, the vaccine rollout, and mobility and the restrictions that governments put around this. So crucially, economic data doesn't really convey much information at this stage, because it's the consequence of other actions or other dynamics. And so that's why I prefer to speak of a restart, rather than a recovery, to also make clear with the choice of words that we're dealing with something very different. It's a stop-go economy to some extent. I think eventually, in the course of this year, we will see an accelerated restart of economic activity. At the moment in a number of places it seems to be disrupted, at least temporarily, by the spike in virus infections that we are seeing, by the spike in hospitalizations that we're seeing. But eventually, we will get back to pre-COVID activity levels. And, more importantly, we will also get back to the pre-COVID growth trend. And that is important because that means that this isn't a replay of the global financial crisis, which saw a material decline in long-term growth trends in the following ten years. That means that the cumulative loss in activity, even though sizable, will just be a fraction of that of the global financial crisis. And depending on virus activities, vaccine rollout, and governments’ policies around that, that will be the main driver of the restart this year. JOYCE: Elga, if I could take us back two months to mid-November, we had this extraordinary event, and that is the breakthroughs on the vaccine. And I think we were expecting the vaccine breakthrough back in November, but we weren't expecting this 90 to 95 percent efficacy. And so we became perhaps quite optimistic. And rightly so, that was a remarkable scientific achievement. But we stand here today now realizing that implementing this vaccine is going to be difficult and administering the doses. So far, since December, we basically have thirty-five million people in the world across fifty countries have received doses. That's not even half a percent of the global population. Has the slow vaccine rollout changed your view on the year ahead? Or are you substantively in a pretty similar place in terms of how you're looking at 2021? BARTSCH: Yeah, let me say at the outset that I think the vaccine breakthrough is a game-changer. And it's a game-changer from a qualitative point of view because it gives us and everybody in the private and the public sector greater visibility about what a post-COVID world will look like. And that's very important because it anchors private sector expectations for long-term growth, long-term revenues, long-term income streams, and that will materially affect behavior today. More importantly, for policymakers, it makes clear that they are building a bridge to somewhere as they're trying to support households and corporates through the disruptions caused by COVID-19. And that's another very important aspect of the vaccines being available. It strengthens the argument for policy support, whether it's fiscal or monetary, because you know that it's likely to be temporary. And you're absolutely right. It was an amazing breakthrough of science. These vaccines are very innovative. And yes, there are some initial bottlenecks in terms of production capacities, in terms of the administration of the vaccine rollout. But to be honest, I don't think that that is the main new development. I think the main new development is the presence of new virus versions that are a lot more easily transmitted between people. And we are obviously in a race between these faster viruses and the vaccine rollout. I think the emergence of those virus mutations are the really new development. And they will temporarily force us to keep a distance from each other, work from home, shop online, refrain from going to restaurants, maybe splurge on a takeout. But I think it's the new virus mutation more than the vaccine that is at the moment where the marginal news flow is. JOYCE: Well, that's a very good point. And let's bring Jay Bryson into the discussion here. Jay, the consensus view for 2021 in the United States, but I think beyond the United States, is this notion that virus resurgence, and of course amplified by mutation risk, is going to weigh heavily on Q1 activity but that as we get to mid-year we could have a significant pivot to above-trend growth actually finishing the year with pretty impressive growth numbers. Do you agree with that consensus view–a year in two halves, so to speak? And are the risks here to the upside or the downside in your view? BRYSON: Well– JOYCE: The preponderance of risks I should say, are they to the upside or downside in your view? BRYSON: Right. Tom, to start with your question, yes, we share that consensus view. In what we know right now, just looking at the data coming into the first part of the year, it's pretty weak. And so we're gonna clearly have a weak first quarter, not only in the United States, but if you look at the United Kingdom, you look at parts of the eurozone, it's all going to be very, very weak there. But under the assumption that the vaccines really start to accelerate here and the service sector starts to reopen you should get much stronger growth in the second half of the year. Now, there's two caveats to that. The first, and Elga already mentioned this, are these new mutations of the virus. God forbid those happen to be not affected at all by the vaccine, or they're resistant to the vaccine. That's going to delay that recovery. So we'll have to wait and see there. The other caveat to keep in mind here is we're talking about the developed world right now, you mentioned fifty countries. There's lots of parts of the emerging world where vaccines have not started to roll out yet. It's going to be quite some time before that happens. So you could have very, very strong recoveries in the United States and in the eurozone, etc. But many parts of the emerging world could potentially lag here as well. And then in terms of upside. Are there upside risks here? Yeah, the vaccines could be deployed much faster than we currently expect. And these mutations could also be put down by the vaccine. So there's just a lot of unknowns right now as it relates to COVID. And not being an epidemiologist, it's hard for me to know exactly which way the risks are balanced at this point. JOYCE: Jay, one of my lessons from last year when you look to that May to August timeframe, I think this is true in the U.S. in particular, is the speed with which the consumer reengaged the economy. Now let's put aside that we had a bit of a sloppy reopen in the U.S. for sure from a virus perspective. But the speed of reengagement was fairly impressive. As we progress, whether it be April, whether it be June, as we progress on this timeline of vaccine implementation, do you think we could see something even more powerful this year in terms of reengagement of the economy, pent up demand, and so forth? BRYSON: I don't think, Tom, it's going to be quite as strong as it was last year. And last year, you essentially shut down the entire economy and then it came roaring back. In the third quarter here in the United States, growth was at an annualized rate over 30 percent. And in many European countries you also had very, very strong growth rates. Are you going to have the same sort of thing this year? No, probably not, not 30 percent. I mean, when I look at our third quarter estimates, or projection at this point, it's 9 percent annualized. That's very, very strong. But again, it's not 30-some percent. The thing that brought about that really strong recovery, not only United States but in other countries as well, was the fiscal relief packages that were put in place, the income support that was done. So you know, in mid-March and April, people had nowhere to spend their money because everything was shut down. But they were getting checks from the government, either through unemployment benefits, or here in the United States direct payments as well. And so when May and June came around, the economy was open, people had a lot of excess savings pent up and that's part of what came roaring back, or brought about that big roaring back. We've had this second round of fiscal relief here in the United States and that will certainly help as we go forward. But again, I wouldn't expect the 30 percent growth rates later this year. JOYCE: Elga, I'm gonna come to you in a moment about the type of government stimulus and support in Europe. But Jay, let me just stick with you. President-elect Biden announced last night plans for a $1.9 trillion stimulus. In December, we had a $900 billion stimulus announcement. If you added it all up, you're talking about a $6 trillion type of number. Now, I think the real number we all know is a little lower, because some of the funds from the Cares Act are perhaps being reused. But suffice it to say, we've got some big numbers here, $1.9 trillion, the most recent announcement. As you look into 2021, what are your expectations for how much of this stimulus is put in place and when, and the impact that it has on your forecast? We talked about the consumer, let's talk about the role that the government is playing in supporting this economy. BRYSON: Right, so let's talk about what's in that package. So the first thing would be $1,400 checks on top of the $600 checks that were in December. Another thing that's in there is extended unemployment benefits, $400 a week through September. There’s money in there to help fight the pandemic, there's money in there to reopen schools, and there's money in there for state and local government. How much of that survives? I'm certainly going to take the under on $1.9 trillion. Now, how much of it actually makes it through? I don't know, that's a political question at the end of the day. But I could see broad support for more money to fight the pandemic. I could see broad support for money to open up schools. Are some senators going to sign on to $1,400 checks? Just last week, Senator Joe Manchin, Democrat from West Virginia, was skeptical about that notion. They're gonna need his vote because right now the Democrats have fifty in the Senate with Kamala Harris breaking the tie. And if he's skeptical about that notion, maybe that doesn't survive. Putting unemployment benefits out through September? I don't think that's gonna happen, frankly. So how big is this number? I think it's going to be significantly less than $1.9 trillion. There will be something, but I think it's going to be more targeted towards measures to fight the pandemic and aid to schools and things of that nature. JOYCE: So more relief, really, than fiscal stimulus so to speak. BRYSON: Yeah, well, things like reopening schools is relief. And there probably will be some sort of check. But I don't think it's going to be a $1,400 sort of thing. So most of this, and most of the Cares Act, and the act that was passed back in December, I would put in the bucket of relief rather than actual stimulus itself. It helps to prop the economy up, it eliminates downside risk, but it's not so much actual new stimulus per se. JOYCE: Elga, can you characterize for us where we are on the fiscal support and stimulus out of Europe? We're well aware of where the ECB is on monetary policy, but talk to us about the status of fiscal support across Europe, an economy in aggregate that is just as large as the United States. BARTSCH: Yes, I'm happy to. So, first of all, roughly the amount of fiscal relief that is provided in the euro area by individual governments is roughly on par with what they did last year. So it's roughly the same size fiscal stimulus. As you probably are aware, the pretty strict fiscal rules in Europe are suspended at the moment. They are still suspended until next year. And I think that already tells you how Europe is rethinking fiscal policy. And I think this would be a great opportunity to actually use this hiatus in the stability and growth plan to actually think about it a little bit more broadly. In addition, we have seen a very important initiative for Europe. The Recovery and Resilience [Facility] which is basically the pan-European response to the pandemic, which will allow individual countries to draw down significant grants that are jointly financed by the European Union countries. And that for the first time really is a very sizable joint response to what is, at the end of the day, an asymmetric shock to economies given which ones were hit harder by the virus than others. And so this is just getting underway. As you probably have seen this plan, which is part of the multi-annual budget process in Europe, was just approved before Christmas. And it's now on its way through ratification, also in the individual member states. And while that is happening, the different member states who want to and need to put together some recovery and resilience plans that are then going to be discussed with the European partners, before the fund starts to disperse funds in the second half of this year. So this is the pooling of the fiscal response in a pretty sizable way, is another very important qualitative change that we have seen in the way that Europe responds to this crisis, versus the global financial crisis or indeed the Europe crisis that followed. JOYCE: Elga, I think we need to discuss China as well. China, of course, being the world's second largest economy. They have outperformed in recent months on virus suppression, having achieved virus suppression in a way that Western economies have not. As we enter 2021, is this Chinese economy one that continues to have significant momentum? Or is it an economy that is slowing down and being dragged a touch lower by the virus resurgence that is taking place in the West? BARTSCH: So you're absolutely right. China was most successful in suppressing the virus by taking very radical restrictions to mobility and thus already last year saw a swift restart in its activity. As a result, the economy has not just moved back to the pre-COVID level of activity, but also converged back towards trend. So in that sense, China is leading the rest of the world and much of Asia is benefiting from this strength in economic growth as well as their own virus control measures. But this optimistic outlook on Asia also relies on continued effective virus control, and also on the vaccine programs being rolled out. And one aspect that already shows how different the situation is, is that China, if anything, is not really discussing about additional policy stimulus or additional policy support. If anything, [they’re] thinking about normalization, a very cautious and gradual normalization of policy. So there is a sort of strong economic performance and that will likely continue this year, despite a number of challenges that come from the rest of the world. Not least with the rest of the world struggling more with the renewed acceleration in infections, but also from the rewiring of globalization that we are seeing being accelerated by COVID-19. JOYCE: Jay, when I think about the risks for the year ahead—we've certainly spent quite a bit of time on the virus and the vaccine—but I would say the question I've been getting asked the most is inflation. What is your view on the upward pressures on inflation that we're seeing? Are they likely to be temporary? Or is there something going on here that we ought to pay more attention to? And what are the implications for Fed policy? BRYSON: Right. So right now, just to kind of level set, we got the December CPI out just the other day. On a year over year basis the core rate of inflation—I think that's kind of what you want to look at, that eliminates some of the volatility by oil and food prices— the core rate in December was up to about 1.6 percent. Now in coming months, we're going to see that go over 2 percent, just because of base effect. We got a collapse in prices last March and April when the pandemic really hit, and so you'll see that core rate go up above 2 percent. But it could probably get as high as two and a half percent as well. I mean, goods prices have come up here, there's been a lot of demand for goods. People are buying goods. They're not buying services. That's the part of the economy that's shut down. So again, you'll probably see that come up to about two and a half percent. Now we view this as more as a one-off price adjustment, rather than a continuance spiraling higher in the rate of inflation. I mean for that to happen, you have to really start to change people's expectations of what will happen with inflation. And so far, if you look at survey measures of inflation expectations, they remain very, very muted at this point. So we do believe you're going to get this one-time level effect on the price level that brings the inflation rate up marginally here, but we don't see it spiraling out of control. And I think what that means for the Fed then is, the Fed knows this as well, they know you're going to get this upwards creep in inflation in the near term. I don't think they'll be spooked by higher inflation numbers in the next few months. And so I would expect them, obviously, to keep the Fed funds rate, the Fed Funds target at zero for the foreseeable future. We also think they will continue their bond buying program through most of the year as well. And if anything, if the Fed's going to make a mistake here, they're going to tolerate a higher rate of inflation than they historically have. They want to get the inflation rate. And now we're not talking 1979-like inflation, but they would be happy with an inflation rate at two and a half percent. So we don't think they will be spooked by a little bit higher inflation rates later this year. JOYCE: We have seen a reset higher in the ten-year Treasury, 20-25 point move in recent weeks. The consensus view on the street is one and a half percent area. We don't have to get specific on where you think the ten-year is going, but are you concerned, given inflation risk, temporary as it may be, or other market dynamics, are you concerned that rates can get away from us a little bit here? Or do you think that the Fed will succeed in keeping them as low as they would like to? BRYSON: Well, certainly the Fed will have a have a role here. As I mentioned, we think they'll continue to buy Treasury securities at the pace of $80 billion per month, in coming months. But it's the private sector, as well. And we've seen this before, when you have a dislocation in the Treasury markets, rates snap higher. They may snap higher for a while, then they start to stabilize. And at that point, money floods back in again. And so, could we go from where we're sitting right now on the ten-year Treasury about 110 basis points, two weeks from now, can we be at 150 basis points? Sure. But if you get that dislocation, I do believe then that sets up more buyers coming in. Again I think what you have to worry about is inflation expectations getting out of control. And within an economy that still remains, I'll use the word–rather depressed–it's hard to see inflation getting really out of control in that sort of situation. JOYCE: Elga, certainly another topic high on the list of questions from clients, and this existed pre-COVID and it certainly has accelerated post-COVID, and that is this notion of elevated global debt. The United States has arguably, for example, done a full decade of debt build in one year when you think about where the CBO projections were, just a year ago, prior to COVID. We've done a full decade in a year, and many other geographies globally have done something similar. What is your assessment of elevated debt risk? Does debt matter in today's global economy? BARTSCH: It matters, but it probably matters less than it has done in the past. For the reason that real interest rates remain very low and could potentially fall even further. So I think the first thing to note is, it's not the level of debt that matters, but whether you can finance it. So something like debt service costs is probably something to look at. They are at near record lows, if not at record lows, depending on which country you're looking at, given the very low level of yields that we are having. And we have had a significant period of time now during which growth rates were above real interest rates. Which actually means that expansionary fiscal policy, if done correctly, and enhancing long-term activity and growth are actually leading to a lower, not a higher, level of debt over the medium-term. So in that sense, I think there are a number of important secular shifts that we need to take into account when we look at the debt dynamics. And of course, we also need to be aware that there were no alternatives but to provide the policy support and potentially to provide more policy support in the current juncture, because otherwise, you would really have seen some very serious harm to productive capacities globally, making things considerably worse. So I think especially what we have seen happening in the last twelve months, or a little bit less than that, which is obviously unprecedented in terms of speed, in terms of extent of coordination with monetary policy, was required. And what I think you can see now in amongst policymakers is that there is a very different mindset compared to what we saw, let's say, in the aftermath of the global financial crisis. There seems to be very little appetite to immediately tilt back towards austerity. And we've seen Christine Lagarde, we've seen Lael Brainard and also Jay Powell, sort of warning against a premature withdrawal of policy stimulus, whether it's monetary or fiscal. And I think that we really have to recognize that we are in a completely different situation today. That I think means that the traditional concerns about debt, for instance, in Europe that you shouldn't have more than 60 percent of GDP in terms of government debt, they're probably outdated. JOYCE: Well, before I shift it over to our audience questions, I feel compelled to pivot in a slightly more positive direction. We've been talking about the vaccine and elevated debt and inflation and risks and risks and risks. Jay, are we ignoring the potential for significant upside risk here in 2021? What is your assessment of that? We have a vaccine rollout that is likely to accelerate. We arguably have an improved global trade regime in 2021 than we've had in recent years. We certainly have an abundance of stimulus. And we have markets that are functioning quite well, albeit with maybe some valuation bubbles here or there. But our credit markets are very much available to middle and large cap companies in particular. Are we paying enough attention to the upside here in 2021? BRYSON: There certainly are upside risks that I can think of. I would start, if I'm just focusing on the United States, I would start with the elevated savings rates among households right now. And so once the service sector does start to open up again, many households have the financial wherewithal to start going out to restaurants and bars and start to travel again. And so that can be very, very positive. The other underlying fundamental here, which is good, is when this pandemic hit there were not a lot of major imbalances in the U.S. economy. It's not like it was back fifteen years ago, when we had a housing bubble. And when that collapsed, that put the financial system flat on its back, and many parts of the household system as well. And that deleveraging by the household sector, and by the financial sector, is one of the reasons why growth was so slow coming out of the last recession. We don't have those imbalances today. And so given the fact that you have a lot of pent up demand, given the fact that you have a very high savings rate, with not a lot of imbalances out there, growth in the second half of the year and heading into 2022 could be quite strong, certainly. Even stronger than the above average, with a bit above consensus forecast that we have for the second half of the year. I acknowledge, there certainly are some upside risks. JOYCE: And Elga, very quickly because we want to get to audience questions, areas of optimism that you would point to? BARTSCH: Yeah, I would sort of echo what Jay just said. But in addition also point to the turbocharged transformations that COVID-19 has brought on, whether it's towards digitalization, ecommerce, towards sustainability. And I think this is a period of accelerated structural change. And that could be very transformational, not just in terms of growth, but also in terms of the structure of the economy. I mean, one, I think, amazing feature of the current environment is the fast pace at which new businesses are founded, new businesses are created. Obviously, this is often out of dire need to earn a living. But the fact that we see these trends that were in play at a much slower pace before, now accelerated and really recharged. I think it's also reason to be optimistic, especially for the long run. JOYCE: Okay, well, I think that's a good note to end our prepared remarks on. I think you raised some very good points here on how COVID has accelerated a whole host of preexisting trends. Let me turn it back over to the Council to guide us through some questions from our participants. STAFF: We will take our first question from Mark McLaughlin. Q: Okay, can you hear me? BRYSON: Yes. Q: Great. Mark McLaughlin, lead strategist for the insurance industry for IBM. I was struck by Tom's comments about debt potential, or I'm sorry, interest rates potentially getting away from us a little bit. And just noting, obviously, the level of indebtedness of the U.S. is starting to reach World War Two levels. I don't think Europe is a whole lot farther behind. You know, the wild card in my view is sort of China and their economic might. Their much more opaque finances and their much more centrally controlled economy. Is there a potential for Chinese policy to upset the applecart a little bit and force either the EU or the United States into an environment where they've got a lot of bad policy choices, right? It's tough to raise rates for that level of debt without potentially destabilizing matters. It's tough to retire the debt, given the levels of debt relative to the economy. Is there a foreign policy risk that the U.S. and EU should be considering regarding Chinese activity and potential for forcing economic decisions on the U.S. and EU? JOYCE: Elga, should we pivot to you, given your global focus? BARTSCH: Sure. Thank you for the question. I'm less concerned in the context of debt dynamics in the U.S. or in Europe, partially because we're talking about reserve currencies, we're talking about currencies or government bonds that have the implicit backing and support of the central bank and where developed market economies borrowing in domestic currency. I do think where China comes in is the tensions or the rivalry between the U.S. and China in the technology space. And so we like to think of it in the context of the rewiring of the global trading system. Moving towards a more bipolar system, with one pole being the U.S. and the other being China, and tensions not so much playing out in trade anymore, or maybe capital flows into the developed market, government bond markets, but more in the technology space. And so, this rivalry is something that is here to stay. Even if with the change in the administration in the U.S., we are likely to get a different approach to global trade policies and also to China in terms of some of the communication around it. But the fundamental technology rivalry is here to stay. And that, I think, is where the tension is likely to lie, not so much on the interest rate side, because of the potential role of central banks in the U.S. or in Europe. BRYSON: Tom, can I chime in there just to offer a thought? JOYCE: Please. BRYSON: So there is a debt issue in China today. And it's largely in the non-financial corporate sector. Now, some of that is government, state owned enterprises and everything. But if there is going to be a debt problem in China, that's where it's going to show up. I don't think that if there was a debt crisis in China, knock on wood, that it would have the same effect as the debt crisis in the United States a decade ago, because most of that debt is held internally in China. European investors, American investors hold very, very little of that debt. Now, if there were a debt crisis in China, it would be an economic event for the world. The second largest economy slowing sharply would have a negative effect on growth in the world. But I don't think we'd be in a financial crisis for the rest of the world. And then Mark, to get back to your question, how that relates to government debt here in the United States and in Europe. If you were to have that, I think you would see a flood of investment buying U.S. Treasury securities. That is a huge risk-off move that money would flow into U.S. Treasury securities, German bunds would clearly benefit from that. It's an open question, what would happen to Italian bonds or Spanish bonds. But in general, there would be a flight to quality and I think in that situation, U.S. Treasury yields would come down even further. JOYCE: All very good points, the difference between an open and a closed financial system. Council, any further questions? STAFF: We do have another question from Yves Istel. Q: Hello, thank you all. Yves Istel, advisor at Rothchild. Could you just comment on what you see as the growth trend in global trade over the next years? Will it be the more restrained growth rate we've seen in recent years? Or will we have a shot at returning to the higher rates of global trade, which in turn, was a significant contributor to our domestic growth rate? JOYCE: I think that's an excellent question. This notion of deglobalization. And trade is certainly an important part of that. Elga, why don't we start with you? And, Jay, if you have anything you want to add on as well, but let's start with Elga on this question. BARTSCH: Yeah. So we think that global trade growth will normalize. But I don't think we're going to get back to the strong growth rates that were consistently and materially outpacing global GDP growth that we saw up and including to the global financial crisis, essentially. So already about ten years ago has that deepening in the international division of labor started to stall. So you by and large start to see trade growth broadly in line with GDP growth, maybe a little bit higher, but not at a pace that consistently and materially outpaced global GDP growth. And there are a number of reasons for that. One is obviously, the initial push of Central Eastern Europe, Asia, notably China, into the WTO and sort of opening up to trade was a major pivot, and we have seen no further opening of material size in the last ten years. In addition, you see countries such as China becoming increasingly reliant domestically in terms of capital goods. They also are having a rapidly increasing consumer sector that is increasingly focused on services. So again, in the course of their economic development, these countries become less reliant on global goods trade. And then of course, overall, there are a number of factors that I think have slowed this down. But I wouldn't talk about deglobalization. I think it's more the rewiring of globalization. Because it's not just trade that matters in this context. I mean, that's the one that we usually talk about and think about. But there is the flow of workers, of physical capital, of financial capital, across borders. And so we think it's not that there is no disengagement, but it's just that things are rewired a bit differently. Let me give you one example. I think COVID-19 has really driven the point home that you need to assess, every company needs to carefully assess, the resilience of its own supply chain against a whole host of different risks, whether it's trade protectionism, whether it's health emergencies, or natural catastrophes, or in the future could be climate risk. And so as a result, I think you see more diversification, a move away from the lowest cost producer in a very tight just-in-time production chain towards something that is more resilient and can better withstand major shocks. JOYCE: Jay, as you comment, maybe you could overlay some additional commentary on your expectations for the Biden administration on global trade policy. I know my view is that we're likely to see a significant change in tone. Probably not an unwind of tariffs with China. A return to multilateralism on the one hand, but at the same time, perhaps a reticence of getting involved in multilateral global free trade agreements. How do you think about Biden on trade? He's hardly a pure free-trader, so to speak. But what type of normalization are you expecting? And how does it impact your view of U.S. and global growth? BRYSON: Right, so I expect a more multilateral approach, if you will vis-à-vis our European allies. I think the Biden administration will quickly bury the hatchet there and ramp down trade tensions with our European allies. If for no other reason, to use that as leverage as it relates to China. We don't expect the Biden administration to reduce the tariffs when it comes into office. We think they will keep those in place as negotiating leverage. Now, certainly the rhetoric will get toned down vis-à-vis China. But, again, I think if you see more of a multilateral approach, at least initially, it'll be towards Europe. But I think the Biden administration does want to pursue, to use a term from the Trump years, a “Phase Two” trade agreement with China. And one way to do that is not to unilaterally get rid of the tariffs, keep them on in terms of negotiating leverage, and also do it in concert with our European allies. JOYCE: Any additional questions from our audience members dialing in today? STAFF: Yes, we have another question from Ryan Hill. Q: Hi, thank you. For wealthy Americans, they seem to be doing very well in the U.S. economy and housing prices and sales have gone up. But for less wealthy Americans the economy has been much more difficult. I believe the CDC moratorium on evictions, I think it ends this month. And many single family mortgages that are backed by the Federal Housing Administration have been delinquent of late. How do you see that affecting the economy and the sector? I mean, do you see a wave of foreclosures coming? Or how would that affect the larger U.S. economy? JOYCE: Jay, can you take that one? Thank you. BRYSON: Yeah, sure. Could you see some more foreclosures coming this year? Yes, absolutely. Because of the two points that you just pointed out. Most of the job losses have been concentrated in the lower-paying parts of the economy. Most of the job losses have been in the leisure and the hospitality sector, bars, restaurants, things of that nature. And that's the lowest paying sector in the economy. And then secondly many of these mortgages that these folks have, have been put on hold for a moratorium. So you could potentially see some of those defaults ramping up. Is this going to be another financial crisis a la 2007, 2009? Or to rephrase another burst in the housing bubble? No, I don't think so. And again you talk about the overall macroeconomic effects on the U.S. economy. If you look at the top 10 percent of income earners in the country, and these people have been largely [un]affected by the pandemic because they can work from home, etc. That top 10 percent accounts for 46 percent of the spending in the economy. If you look at the bottom 80 percent, they account for 40 percent of the spending in the economy. So in other words, the top 10 spend more than the bottom 80 combined. Now, that says something about the income distribution in the economy and I'm not going to opine on that. But the point is that if some of those people at the lower end part of the spectrum start losing their houses and start ramping back on their spending. Is that a drag on the macro economy? Yes. But we're talking a few tenths of a percentage point rather than something that would probably bring the economy to its knees because again, most of the spending is done, or a big part of the spending is done by the top 10 percent, or even the top 20 percent, account for more than half of the spending in the U.S. economy. So it's more of a micro effect in my view than it is a huge macro effect. JOYCE: I think we have time for one or two more questions. STAFF: At this time, we don't have any other questions in the queue. Oh, we just had a hand go up. Brandon Archuleta. Q: Hi. Thank you all for doing this. This is terrific. My name is Brandon Archuleta. I'm a Council on Foreign Relations international affairs fellow for 2020–2021 and I'm currently at the Treasury Department. I want to come back to Elga and this question of China vis-à-vis the debt sustainability initiative. The DSSI has really opened our eyes to Chinese bilateral lending and given us a sense of how much external PPG debt some of these countries owe to China, and it's pretty significant, especially in African countries. Do you anticipate the question of debt trap diplomacy? Perhaps vaccine diplomacy? Are the Chinese going to be slowing down their Belt and Road spending going into 2021? Or are they going to find a way to leverage the current state of play with vaccine distribution in the pandemic to flood the zone with additional Chinese economic policy? Thank you. BARTSCH: Yeah, that's I think, a very nuanced topic, because there is some indication that lending around the Belt and Road Initiative is slowing. The question is whether that's temporarily or something that is a more conscious slowdown. I think there are two aspects to it. One aspect is that it speaks to China's ambitions, especially on the technology side, and to ensure the appropriate access to raw materials. And it potentially also speaks to the fact that the Western world has not given enough attention to some of these continents, such as Africa, for instance. So there clearly, and this is not unique to China I think the Western world does this as well. We're using multilateral organizations typically rather than bilateral organizations, including sort of relief measures, health care support, and so on, to support countries, to stabilize them, and to make them allies, and functioning members of the international community and the international economy. So I think it just speaks to the longer-term ambitions of China to become a serious global player on a whole host of different dimensions that they also go down this route. And the difference maybe with Western efforts of development aid or development landing is that most of it is multilateral and there is more transparency around it. But I think it just speaks to the rivalry that I mentioned earlier, and the sort of bipolar nature of the geopolitical landscape that I already talked about. JOYCE: Do we have one final question? Otherwise, I'll wrap it up here. STAFF: We do not have any more hands raised. JOYCE: Okay. Well, we're at fifty-five minutes now. We've had an excellent discussion. Thank you, Elga. Thank you, Jay. Your many years of experience have brought quite a bit to this conversation. I would also like to thank the Council on Foreign Relations very sincerely for the fantastic programming that you've done through this entire COVID crisis. Everything from politics, to economics, to public health, and so forth. You're doing a great service for all of us. So thank you. Hope everybody enjoys the weekend. Thank you.

The 2020 Stephen C. Freidheim Symposium on Global Economics will discuss the implications of the coronavirus pandemic on global economic policy. The full agenda is available here. This symposium is presented by the Maurice R. Greenberg Center for Geoeconomic Studies and is made possible through the generous support of Council Board member Stephen C. Freidheim.

The World Economic Update highlights the quarter’s most important and emerging trends. Discussions cover changes in the global marketplace with special emphasis on current economic events and their implications for U.S. policy. This series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.