06 May Europe’s Lost Generation: April Discussion with Alberto Gallo, European Macro Credit at RBS
Finance Matters was pleased to welcome Alberto Gallo, current Head of Macro Credit Research at RBS for our March Happy Hour at the Borough Barista. The discussion was a stimulating presentation centered on the topic of Europe’s lost generation, and more specifically European monetary policy and its’ social impact. Alberto helped us understand the effects (intended or not) of macroeconomic policy choices on societal wealth. The consequences on wealth distribution among age groups were discussed – underlining young generations emerging as losers.
As a way of background, Alberto stems from the traditional banking world – a first for Finance Matters and a good reminder of the inherent links between financial system and real economy. He runs the research team leading idea generation across credit markets at RBS. He writes The Revolver, which combines macro and micro analysis to cover sovereigns, banks and corporates. The team has received top rankings in Institutional Investor’s All-Europe Fixed Income Research Team awards for Investment Grade and High Yield Strategy in 2013 and 2014 and 2015, most recently as #1 in Investment Grade Strategy.
Alberto started his presentation by explaining several fundamental issues of the debt market, with the presence of a debt supercycle caused by multiple factors, including bank deregulation and government subsidies encouraging credit growth, as well as the implementation of monetary policy aimed to solve the crisis by lowering interest rates. These factors have consequently created debt-based democracies, leading to rising inequalities which in turn, have increased risks of protectionism, populism and social divide. He continues to underline these prevalent risks by underlining how voters are currently losing faith in democratic institutions, with decreasing concensus that democracy is the best form of government, as well as underlining how an educational divide contributes to the proliferation of inequality; student debt, for example, has steadily grown to 8% of GBP in the United States.
Yet, in response to the risks of debt-based democracies, policy responses have been inefficient in finding credible solutions to the issues at hand. More specifically, central banks are characterised by ever-growing balance sheets, and are large holders of sovereigns, consequently pushing down yields. The inefficiency of policies to tackle the issues at hand can be attributed first and foremost to an unresilient financial system, with the European financial system relying too heavily on banks, with the latter being structurally weak with 44% of banks failing or narrowly passing stress tests.
Having analysed the issues at hand and the attempted solutions, Alberto then explains his perspective on efficient solutions that could be implemented, starting of with dealing with debt overhangs, building on the example of deeper capital markets having helped the US restructure debt more quickly. He then explains a potential long-term plan, building on the notion of a “financial system that serves the economy” and highlighting policy solutions for achieving sustainability in debt issues. For example, a potential solution to private sector would be diversified funding, through implementing actions such as speeding up insolvency procedures, deepening capital markets to spread losses more evenly (CMU), as well as reviving the market for Asset Backed Securities to share risk of loan lending. Following this, Alberto then explained potential outcomes and solutions to inequality issues, with “good” factors such as improving access to education, improving social mobility; “average” solutions such as minimum wage increase and high income taxes/redistribution; as well as “bad” solutions such as protectionism, revolution and war.
To conclude the presentation, Alberto built on the strong notion that there is currently a strong need for structural solutions. Easy credit creation has caused long-lasting damage in the system, with inequalities growing and productivity declining as a result, and policy responses have proven to be only a temporary relief to the issues at hand. The real solutions, he explains, are building a system that can both fail and recover, reducing reliance on bank funding, and most importantly based on the concept of less debt, and more equity.
Find the full presentation here: RBS – Debt and Inequality .