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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°133 ▪ 15th February 2018



Davos, IMF, OECD: are you really ready to tackle inequality?

At the 2018 World Economic Forum in Davos (Switzerland), billionaires hashed over the question of inequality, a subject in line with its theme of “Creating a Shared Future in a Fractured World.” Indeed, panellists worried that inequality is driving the sort of political “populism” that landed Donald Trump in office, as his “America-First” philosophy runs contrary to the Davos dogma of globalization, economic integration, and free trade. In October 2017, the IMF published a new report addressing inequality in economic growth, building on a theme that the OECD has also explored.

The share in total income of the wealthiest 1% grew from 10.7% in the United States in 1980 to 20.2% in 2014 according to the World Wealth and Income Database, while the share of the middle class fell significantly during the same period, from 19.9% to 12.5%. It is noteworthy that increasing inequality in the US began during the “neoliberal wave” in 1980s. Given the IMF and the OECD’s strong support for neoliberal policies during that period, the sincerity of these institutions’ recent fears about rising inequality could be questioned. Are they really ready to “tackle inequality”?

Evolution of share of 1% highest- and 50% lowest-income in total national income in United States between 1980 and 2014

Source:  World Wealth and Income Database

“God laughs at men who deplore the effects of which they cherish the causes.” (Bossuet, 1688)

As underlined by Sergei Guriev, Danny Leipziger and Jonathan D.Ostry in a recent article, “Some reforms – such as those promoting impartiality and efficiency of legal institutions – are good for growth and equity (in this case, equality of opportunity)”. But “incidence results for deregulation of product and labor markets are more mixed” and “when it comes to financial deregulation and the liberalization of international capital flows, there are clear equity-efficiency trade-offs: they boost growth, but they also tend to increase inequality.” In an earlier paper, Ostry & al. (2016) concluded that “Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion”. The article focused on two main policies: capital account liberalization and “fiscal consolidation” (austerity), which are proved to:

  • Have no clear benefits in terms of increased growth;
  • Have large costs in terms of increased inequality;
  • Hurt the level and sustainability of growth.

Thus, the policy agenda defined in IMF structural adjustment programmes during the past decades, OECD policy recommendations, and WEF calls for liberalization have encouraged economic policies that have reinforced inequality and then weakened growth. While recognizing its past errors can be considered virtuous, we are still waiting for a systematic approach to inequality when these institutions build policy agenda in the future.

How to tackle inequality? Take the ESG route!

Evolution of average distance to best in class* relative to Beyond Ratings’ Inequality score by financial peers group

*distance to best in class: best country is at 100%, worst at 0%.

Source: Beyond Ratings

Along this path, part of the financial sector could serve as inspiration. Indeed, for several years already, a considerable amount of research has been conducted through the construction and use of “ESG” performance indicators (Environmental, Social and Governance). Taking a closer look at these ESG indicators could allow these institutions to have objective measures of trends in terms of inequality, but also of adaptation to climate change. For example, the chart above indicates the continuous decreasing performance of the United States in terms of equality, measured by distance to the best-in-class in Beyond Ratings’ inequality score (considering GINI Index, poverty rate and share of 10% highest income in total national income) between 1999 and 2017.

Regarding the evolution of ratings of financial peers, it seems evident that “AAA” countries have a higher and improving performance to tackle inequality than other groups. Thus, far from leading to exclude best countries in terms of creditworthiness, inequality performance can be used as an advanced indicator of financial performance.

So, in the next few years, will ESG performance improvement become a condition for IMF structural adjustment programs?

Thomas Lorans, Economist



Sovereign Risk

About the cicada and the ant


When we think about fiscal policy in the Eurozone, we often think about the differences between the “ant” (Germany) and the “cicadas” (Spain, Portugal, Greece, Ireland and Italy – denominated as “PIGS” in the graph below). But is the story really true, or is it a fairy tale from European Commission and for lazy, fable-loving economists?

What does the chart below tell us about the cicadas and the ant?

From 2009-2011, the PIGS pursued a countercyclical expansion policy that was “rectified” by the Troika. The pro-cyclical contraction that started in 2012 intensified the economic crisis and thus worsened the sustainability of debt these countries.

In the Eurozone situation, where no federal budget exists, there were only two solutions:

  • Let the PIGS countries use countercyclical expansion to return to growth with an accommodative monetary policy;
  • Ask the PIGS countries to limit their countercyclical expansion but oblige countries in a better situation such as Germany to pursue pro-cyclical expansion.

Neither one of these solutions was followed, meaning that many years of growth have been lost for the PIGS countries.

Evolution of relationship between output gap and budget balance** in “PIGS*” countries and Germany between 2009 and 2016

*defined as the weighted average (relative to GDP) of budget balance and output gap of Portugal, Ireland, Greece, Spain and Italy

**defined as difference between budget balance (in % of GDP) at time t and budget balance at time t-1

Sources: Beyond Ratings, IMF, World Economic Forum



Beyond the bounds!

Biophysical limits and social achievements

Nature Sustainability recently published a research from the University of Leeds confirming that current development pathways are not sustainable. Physical constraints are split into four planetary boundaries (climate change, land-system change, freshwater use and biogeochemical flows) and two footprints (ecological and material) and consumption-based values per capita are compared to planetary boundaries to identify which ones have been overreached.  The study compares these with eleven human wellbeing indicators, with the corresponding SDG is defined as the level to achieve.  In an ideal world, all countries should be in the top left part of the graph, that is obviously not the case (with the notable exception of Vietnam).

This suggests that there are too many of us on earth to be as inefficient as developed countries, and since we are talking about average values, biophysical usage could be capped (and traded?) to limit gluttons’ appetites.

Sources: Beyond Ratings, University of Leeds


Carbon/Climate Change

“Not just paper plants”


Cumulative future emissions expected to be released by coal power plants

The news flow is full of talk about the end of coal (see announces from EU companies, Britain, Ontario, China, etc). Yet, if we look at the number of coal power plants that are under construction or have been announced, we should expect GHG emissions from coal to continue increasing significantly. As climate change policy expert Ottmar Edenhofer highlights, information on planned coal power plants must be taken seriously: “These are not just paper plants, these are real plants”. While it is true that many countries are committing to retreat from coal, this is not the case everywhere; coal use continues to grow in India and several other countries in Asia are still developing many projects (see graph above). Even if some plans have been shelved, Edenhofer’s recent report is clear: “If all the coal-fired power plants that are currently planned were built, the carbon budget for reaching the 2 °C temperature target would nearly be depleted.”

Sources: Beyond Ratings, Edenhofer, Steckel, Jakob, Bertram





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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via; Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)


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