UNCTAD’s Seventh Debt Management Conference
9-11 November 2009
Debt Defaults and Economic Crises: Will This Time
Be Different?
by
Mr. Carlos A. Primo Braga
Director, Economic Policy and Debt Department
The World Bank
The views expressed are those of the author and do not necessarily reflect the views of UNCTAD
Debt Defaults and
Economic Crises: Will This
Time Be Different?
Carlos A. Primo Braga
Director, Economic Policy and Debt Department
The World Bank
7th UNCTAD Debt Management Conference
Geneva
November 2009
Outline
Sovereign Debt Defaults: The Usual
Suspects
Debt Ratios: The Case of the HIPCs
The Debt Sustainability Framework
3
Sovereign Debt Defaults: The
Usual Suspects
Walter Wriston, Citibank chairman, 1967-1984: “[a] country
does not go bankrupt,” New York Times, 14 September 1982
Bad output shocks (defaults are
countercyclical)
Tighter international financial
conditions
Overborrowing
4
Debt Defaults: The Usual Suspects
Bad output shocks
External shocks
Domestic macro crises (banking crises; currency
crashes…)
5
Sovereign defaults and world GDP
growth 1970-2012
10
10
World GDP Growth
Subprime Crisis
Global Financial
and Economic Crises
8
In Percent
12
Number of Defaults
8
6
6
4
4
2
2
0
0
-2
Source: World Bank, Sturzenegger and Zettelmeyer (2006)
6
2010
2008
2006
2004
2002
2000
1996
1994
1992
1990
1988
1986
Cluster 2
1984
1982
1980
1978
1976
1974
1972
1970
Cluster 1
1998
-2
-4
Asian Crisis
LTCM Collapse
Tech Bubble Collapse
US Recession
LatAm Debt Crisis
-4
Number
12
A tale of two depressions
Source: Eichengreen, B. & O’Rourke, K. – “A tale of two depressions”,
VoxEu, (updated) 06/04/09
9
7
The current crisis will not be a rerun of
the Great Depression…
(Source: Brahmbhatt and Pereira da Silva, 2009)
Larger weight of developing countries in
the world economy (24% in 2008 vs. 13%
in 1929) plus “decoupling” of underlying
trend rates of growth (growth gap =
growth in Developing Countries – growth in
ICs = 0.8 % in the 1990s/3.5% in 200008);
Larger share of services in global activity
(employment in services less volatile);
Changes in the structure of world trade
(greater elasticity of trade with respect to
GDP);
Different policy responses: monetary,
financial sector, trade and fiscal policies.
8
A recovery is underway, but is relatively weak,
uneven, and subject to considerable risks
(Source: DEC)
Real GDP growth rates (%)
9
Government Debt: Medium Term
Prospects (Source: Horton et al., 2009)
Significant expansion of public debt in advanced economies
Debt/GDP 2007
2009
2014
Advanced G20
77.6
100.6
119.7
Emerging G20
37.8
38.8
36.4
USA
63.1
88.8
112.0
Japan
187.7
217.4
239.2
UK
44.1
68.6
99.7
Korea
33.0
35.8
39.4
Brazil
67.7
70.1
62.2
China
20.2
20.9
21.3
India
80.4
83.7
73.4
Indonesia
35.1
31.1
28.4
10
Debt Defaults: The Usual Suspects
Tighter international financial
conditions
11
Private capital flows to developing
countries as a percent of GDP 19702009 (projected)
10.0
9.0
8.0
Private Debt Flows
Portfolio equity flows
Foreign direct investment
Percent of GDP
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Source: World Bank GDF
12
Relative to past downturns the decline of capital
flows has been even more dramatic
Net private capital flows / GDP in developing countries
Projection
2007-10
Percent
1997-02
1980-83
Source: DECPG/GDF 2009
13
Private capital flows are unlikely to recover to
pre-crisis levels for some time
US$ billion
1600
Net Private Capital Flows to Developing Countries
percent
10
9
8
1200
7
Percent of GDP (right axis)
6
800
5
4
3
400
2
1
0
0
1995
1998
2001
2004
2007
14
2010p
2013p
Yields on 10-year US T-Bond and number
of sovereign defaults 1970-2008
# of Defaults
16
10 year US T-Bond Yield
14
10
T-Bond yields lower than
at any point in nearly 50
years
10
8
8
6
6
4
4
2
Source: Federal Reserve, Sturzenegger and Zettelmeyer (2006)
15
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
0
1970
2
0
Number
12
In Percent
12
Yields on 10-year US T-Bond and
defaulting issuer spreads
70
12
# of Defaults
60
10 year US T-Bond
Yield
EMBI Spread ARG
50
EMBI Spread ECU
10
40
Ecuador
30
6
Russia
20
Argentina
4
2
10
0
0
Source: Federal Reserve, World Bank, Sturzenegger and Zettelmeyer (2006)
16
Number
In Percent
8
EMBI Spread RUS
Short-term debt as percent of total
external debt in low and middle income
countries
Number of Defaults
Low income
Middle income
12
25
10
20
8
15
6
10
4
5
2
0
0
Source: World Bank, Sturzenegger and Zettelmeyer (2006)
17
Number
In Percent
30
Sovereign and corporate external
debt refinancing needs ($b)
25%
1000
Corporate
900
800
700
Sovereign and
600
20%
As a percent
of U.S. dollar GDP
(right scale)
Corporate
500
15%
Sovereign
10%
400
300
200
5%
Asia
Emerging Europe
Source: IMF
18
Latin America
2012
2011
2010
2009
2008
2007
2006
2004
2005
2003
2002
2001
2000
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
100
0%
Bank non-performing loans relative to
total loans
Latvia
Georgia
Spain
Lithuania
United States
South Africa
Armenia
Hungary
Russia
Estonia
Ireland
Montenegro
Turkey
Moldova
Serbia
Ghana
Pakistan
Ukraine
2007
2009 (most recent observation)
0
5
10
15
20
In Percent (of Total Loans)
Note: Median across 59 countries = 2.7% in 2007 and 4.4% in 2009
Source: IMF Global Stability Report (Oct. 09), World Bank
19
25
30
35
Debt Defaults: The Usual Suspects
Overborrowing
Willingness to pay vs. ability to pay
20
“Cluster 1” defaults and other
developing countries: lessons from the
1980s
'76-'89
5'000
Gabon
4'500
Venezuela
4'000
GNI per Capita (US$)
Other Developing
3'500
Uruguay
3'000
Mexico
2'500
Argentina
Jordan
Brazil
Chile
2'000
Panama
Ecuador
1'500
Turkey Peru '82
Paraguay
Cameroon Peru '77
Nigeria
Bolivia
Philippines
Cote d'Ivoire
Honduras
MadagascarZambia Angola
Nicaragua
Liberia
Niger
Sudan
Pakistan Gambia
Togo
Sierra Leone
Mozambique
Malawi
Dom. Republic
1'000
500
0
0%
50%
100%
150%
200%
250%
Morocco
Egypt
300%
PV of Debt to Exports
Note: Other Developing Countries include LICs and MICs for whom data was available; year for measurement of developing country
ratios was 1980, which represented the lowest level of annual GDP growth during the ‘76-’89 crisis period.
Source: World Bank
21
“Cluster 1” defaults and other
developing countries: lessons from
the 1980s
5'000
'76-'89
Other Developing
Gabon
4'500
Venezuela
4'000
GNI per Capita (US$)
3'500
Uruguay
3'000
Mexico
2'500
Argentina
2'000
Chile
Jordan
Brazil
Panama
1'500
ParaguayTurkey
1'000
Nicaragua
500
0
Mozanbique
0
Dom. Rep
Cameroon
Cote d'Ivoire
Bolivia
Honduras
Nigeria
Gambia
Zambia
Egypt
Liberia
Madagascar
Sudan
Togo
Malawi
Sierra Leone
10
20
30
40
Ecuador
Peru '82
Congo
Peru '77
Morocco
Philippines
Niger
50
60
70
80
90
Total Debt Service as % of Exports
Note: Other Developing Countries include LICs and MICs for whom data was available; year for measurement of developing country
ratios was 1980, which represented the lowest level of annual GDP growth during the ‘76-’89 crisis period.
Source: World Bank
22
“Cluster 2” defaults and select emerging
market countries: Asian crisis
14
'98-'03
Max. Negative % Change in Annual GDP: '97-'03
Indonesia
Select Countries
12
Uruguay
Argentina
Thailand
10
Venezuela
8
Malaysia
Ecuador
Moldova
6
Russia
4
Dominica
Ukraine
2
Mexico
0
0%
-2
50%
Philippines
100%
Brazil
200%
150%
250%
300%
PV of Debt to Exports
Notes: Select Emerging Market Countries includes countries known to have experienced stress during the ‘97-’03 period; y-axis
represents the most severe negative annual growth rate for each country during the crisis period.
Source: World Bank
23
“Cluster 2” defaults and select emerging
market countries: Asian crisis
14
'98-'03
Max. Negative % Change in annual GDP: '97-'03
Indonesia
Select Countries
12
Argentina
Thailand
10
Uruguay
Venezuela
8
Malaysia
Moldova
6
Ecuador
Russia
4
Dominica
Ukraine
2
Philippines
0
0
-2
10
20
Mexico
30
Brazil
40
50
60
70
80
Total Debt Service as % of Exports
Notes: Select Emerging Market Countries includes countries known to have experienced stress during the ‘97-’03 period; y-axis
represents the most severe negative annual growth rate for each country during the crisis period.
Source: World Bank
24
90
The Case of the HIPCs
Primo Braga and Doemeland (2009)
25
Combined HIPC and MDRI Debt Relief
Debt indicators of HIPCs have substantially declined since
1999
HIPC Initiative and MDRI: Estimates of Debt Relief 1/
(End-2008 NPV terms, in billions of U.S. dollars)
World Bank Group Debt
Relief
Total Debt Relief
HIPC
MDRI
HIPC and
MDRI
HIPC
MDRI
HIPC and
MDRI
All HIPCs
14.7
18.2
32.9
73.9
28.5
102.4
26 Post-CompletionPoint HIPCs
10.6
15.3
26.0
38.8
24.4
63.2
9 Interim HIPCs
2.6
2.6
5.2
18.5
3.7
22.2
5 Pre-Decision-Point
HIPCs
1.5
0.3
1.7
16.6
0.4
17.0
1/ Assumptions include timing of HIPC decision and completion points, and where applicable, of arrears clearance
Source: HIPC Initiative country documents; IDA and IMF staff estimates
35 Post-Decision Point HIPCs 1/
1999
2008
NPV of debt-to-exports
457%
121%
NPV of debt-to-GDP
114%
36%
Debt service-to-exports
18%
5%
NPV of debt-to-revenue
552%
151%
Debt service-to-revenue
22%
3%
1/ Data are simple averages; subject to data availability
Source: HIPC Initiative country documents; IDA and IMF staff estimates
26
GNI per Capita (US$)
HIPC 2008 countries
2'500
Completion Point
2'000
Congo, Rep.
Decision Point
Honduras
1'500
Bolivia
Guyana
Cameroon
1'000
Nicaragua
Senegal
Mauritania
Zambia
Sao Tome
Guinea
BeninHaiti*
Ghana
Chad
Mali
Tanzania
Uganda
Rwanda
Madagascar
Niger
Afghanistan
Ethiopia CAR*
Malawi
Mozambique
Sierra Leone
500
Cote d'Ivoire
Togo
Burkina Faso
Gambia
Burundi*
0
0%
50%
100%
150%
200%
PV of Debt to Exports
Note: Burundi, Haiti and CAR, due to their recent attainment of Completion Point status, have not yet fully benefitted from debt
stock reduction; figures used here are pro-forma for debt stock reduction in 2009. 3 Decision Point countries—DRC, GuineaBissau, and Liberia—have PV Debt/Export ratios >200% and are not shown on this graph.
Source: World Bank, CIA World Factbook
27
HIPC 2008 countries
2'500
Completion Point
2'000
Decision Point
Congo, Rep.
GNI per Capita (US$)
Honduras
1'500
Bolivia
Guyana
Cameroon
Nicaragua
Cote d'Ivoire Sao Tome
Senegal
Mauritania
Guinea
Ghana
Benin
Mali
Haiti*
Tanzania Madag. Chad
Burkina Faso
CAR*
Uganda
Rwanda Niger
Gambia
Afghanistan
Mozambique
Togo
Sierra Leone
Malawi
Ethiopia
Liberia
Burundi*
1'000
Zambia
500
0
0
1
2
3
4
5
6
7
8
9
Total Debt Service as % of Exports
Note: Burundi, Haiti and CAR, due to their recent attainment of Completion Point status, have not yet fully benefitted from
debt stock reduction; figures used here are pro-forma for debt stock reduction in 2009. 2 Decision Point countries—DRC
and Guinea-Bissau—have Total Debt Service/Export ratios >10% and are not shown on this graph.
Source: World Bank, CIA World Factbook
28
10
Cluster 1 countries now in the HIPC
Initiative: past versus 2008
1'600
Cluster 1 at Default: '76-'89
Bolivia
1'400
Cluster 1 at HIPC Completion Point 2008
Cluster 1 at HIPC Decision Point 2008
GNI per Capita ($US)
1'200
Cameroon
Nicaragua
1'000
Cote d'Ivoire
Cameroon
Zambia
800
Bolivia
600
Cote d'Ivoire
Zambia
Liberia
400
Mozambique
Sierra Leone
Madagascar
Niger
Malawi
200
Togo
Niger
Sierra Leone
Nicaragua
Madagascar
Gambia
Gambia
Togo
Mozambique
Malawi
0
0%
25%
50%
75%
100%
125%
150%
175%
200%
PV of Debt to Exports
Note: Liberia—currently a HIPC Decision Point country—had a PV Debt/Export ratio >200% at end-2008 and is not shown here.
Source: World Bank
29
Cluster 1 countries now in the HIPC
Initiative: past versus 2008
2'000
Congo
Cluster 1 at Default: '76-'89
1'800
Cluster 1 at HIPC Completion Point 2008
1'600
Cluster 1 at HIPC Decision Point 2008
Bolivia
1'400
GNI per Capita ($US)
Uganda
1'200
Cameroon
1'000
Cote d'Ivoire
Zambia
800
Cote d'Ivoire
600
200
Bolivia
Zambia
Madagascar
Uganda
Togo Gambia
Madagascar
Mozambique
Gambia
Niger
Togo
Sierra LeoneMozambique
Malawi
Sierra Leone
400
Congo
Cameroon
Niger
Malawi
0
0
10
20
30
40
Total Debt Service as % of Exports
Source: World Bank
30
50
60
The Debt Sustainability Framework
31
The DSF in a nutshell
Framework developed jointly by the World Bank and the
IMF (2005):
• Brings greater consistency, discipline, and transparency to
sustainability analyses
• Allows for better informed policy advice
• Allows for cross-country comparability
Objectives: to support the efforts of LICs to meet their
development goals without creating future debt problems
by:
• Supporting LICs’ borrowing decisions in a way that match the
financing needs with their current and prospective ability to
repay
• Allowing creditors to tailor their financing terms in anticipation
of future risks
• Help detect potential crises early so that preventive action can
be taken
32
The DSF in a nutshell (cont.)
It is a tool (thermometer) aimed at
informing Bank-Fund analyses on
countries’ debt vulnerabilities
(diagnostic), allowing better informed
decision making by donors, lenders and
borrowers (treatments).
33
How the DSF works: three
pillars
20 year projections of debt burden indicators in baseline,
alternative and stress test scenarios.
For external debt such indicators are compared against country
specific (policy dependent) thresholds:
Table: Debt Sustainability Framework Thresholds
PV of debt in percent of
Exports
GDP
Revenue
Weak Policy (CPIA < 3.25)
Medium Policy (3.25 < CPIA < 3.75)
Strong Policy (CPIA > 3.75)
100
150
200
30
40
50
200
250
300
Debt service in percent of
Exports
Revenue
15
20
25
Risk ratings of low, moderate, high, or in debt distress are
assigned to countries.
34
25
30
25
Risk of debt distress
IDA-only countries
20
16
HIPCs
15
18
11 11
14
15
10
10
5
12
9
10
8
5
6
0
0
5
Low
Moderate
0
Low
Moderate
High
In debt distress
All 40 HIPCs
High
In debt
distress
26 Post-CP HIPCs
In the case of IDA, the graph reflects only countries for which a DSA is available. The graph for
HIPCs includes: Bolivia and Honduras (both Blend countries) and Somalia (for which a DSA is not
available)
35
Debt sustainability and the crisis
• Debt sustainability indicators are likely to
deteriorate due to the fall in exports and
government revenues, and (eventually) the
increase in debt service;
• For some countries rollover and accelerated
repayment may be an issue;
• Debt sustainability indicators may
deteriorate even further as governments
implement fiscal stimulus packages.
36
Debt sustainability prospects
A critical issue is how long the crisis
will last.
A short lived crisis will have a small effect
on debt sustainability as relevant analysis
is of a long term nature (e.g., the Debt
Sustainability Analysis is forward looking,
20 yrs);
In contrast, a protracted crisis will have a
more lasting effect on debt sustainability.
37
Debt sustainability and the crisis
Two scenarios/shocks with different financing
conditions
YEAR
(A) Exports: % deviation
respect to baseline
with
1
2
3
4
5
6
7
30
25
20
15
10
5
0
20
10
0
0
0
0
0
(i) IDA terms: 40 yrs; 10 yrs
(B)
Conditions
of
additional
grace period; 0.75% interest
financing incurred to maintain
consumption
and
expenditures
(ii) Commercial: 10 yrs.; no
constant
grace period; 5% interest
38
Debt sustainability and the crisis
39
Debt sustainability and the crisis
40
A protracted crisis?
Recessions, Crunches, and Busts
Output Trajectory During U.S. Recessions
Recessions
Credit
Crunches
46
Output Trajectory During US Recessions
(Pre-recession Output Peak = 1, at time = 0)
1.04
10
Average of 7 previous
recessions
2008:2
1.02
1981 Recession
1
3
4
18
9
House
Price Busts
1973 Recession
1.00
3 31
1
Equity
Price Busts
0.98
J.P Morgan
forecast through
2010:1
0.96
-2
-1
0
1
2
3
4
5
6
Quarters before and after the peak
Source: Claessens, Kose, Terrones (2008)
•
•
Source: JP Morgan
Current crisis is one of four of the past 122 recessions to include a credit crunch, housing price
bust, and equity price bust
Average of past US recessions has shown that it has taken 5-6 quarters before pre-recession
output levels were regained; current recovery will take longer
41
7
Debt management and the crisis
While a debt sustainability analysis focuses on the long-term sustainability of
debt, which is influenced by both its level and composition, a debt management
framework focuses on how the composition of debt is managed.
The crisis creates particular challenges for debt managers:
How to close an increasing financing gap and finance a country’s
development needs at low cost with a prudent degree of risk, especially at a time
when conditions in financial markets are severely constrained?
Given limited external financing options, how can potential benefits from
developing domestic markets be exploited at a low cost and prudent degree
of risk?
Given the efforts by many governments to strengthen their balance
sheets over the past decade, how can these sounder public debt structures be
protected?
Since the crisis implies substantial macroeconomic adjustments, how
should debt management strategy reflect the new reality?
42
Concluding remarks
Will this time be different? “Yo” (cross border collaboration, reciprocal
currency swap lines among Central Banks to address foreign currency liquidity
shortages, reserve “cushions,” debt relief…);
Slower world economic growth and higher cost of capital will mean a more
difficult environment for developing countries seeking to accelerate growth and
progress toward the MDGs;
Financial crisis: scale of policy responses is country specific, but, given the
procyclicality of the financial system, it is important to coordinate financial sector
reform and to synchronize macroeconomic responses;
The severity of the downturn highlights the need for an increase in highimpact fiscal expenditures. But embedding stimulus packages in a credible
medium-term strategy, that safeguards fiscal sustainability, is key;
Expansion of public debt will be massive in industrialized countries.
Countries need to design exit strategies to the ongoing fiscal interventions and to
introduce growth-enhancing reforms to reassure markets of the public sector’s
solvency;
Debt sustainability implications for LICs: a function of the crisis duration.
Implications of non-concessional borrowing need to be carefully evaluated;
Debt management: the crisis further underscores the importance of debt
management practices and makes the Debt Management Facility even more
relevant;
43
Concluding remarks (cont.)
DSF Flexibility -- G20 April 2009 Communiqué: IMF
and World Bank to review the flexibility of the DSF and
report to the IMFC and the Development Committee at
the 2009 Annual Meetings;
The review focused on:
Investment-growth nexus
Treatment of remittances
Threshold effects
Treatment of state-owned enterprise debt
In addition, the WB/IMF (2009) paper proposes
changes to some operational aspects of the DSF. The Staff
Guidance Note is being updated. Adjustments are also
being made with respect to the IMF’s debt limits policy and
IDA’s Nonconcessional Borrowing Policy.
44
References
Brahmbhatt, M. and L. Pereira da Silva (2009) “The Global Financial Crisis:
Comparisons with the Great Depression and Scenarios for Recovery” PREM
Note 141;
Claessens, S., M.A. Kose, and M.E. Terrones, (2008) “What Happens
During Recessions, Crunches and Busts?” SSRN Working Paper Series,
December;
Eichengreen, B. & K. O’Rourke (2009) “A tale of two depressions”, VoxEu,
(updated) 06/04/09;
Horton, M., M. Kumar, and P. Mauro (2009) “The State of Public Finances:
A Cross-Country Fiscal Monitor,” IMF Staff Position Note, SPN/09/21;
Primo Braga, C.A. and D. Doemeland (eds.), (2009) Debt Relief and
Beyond, The World Bank;
Sturtzenegger, F. and J. Zettelmeyer (2006) Debt Defaults and Lessons
from a Decade of Crises, MIT Press;
World Bank (2009) Global Development Finance: Charting a Global
Recovery;
World Bank and IMF (2009), “A Review of Some Aspects of the LIC Debt
Sustainability Framework.”
45
Thank You
For more information:
http://www.worldbank.org/debt
cbraga@worldbank.org
46