Comments to S. Gopinath, Y.
Akyüz, and A. Réz
Ugo Panizza
UNCTAD
Workshop on Debt, Finance, and Emerging Issues in Financial Integration
London, 6-7 March 2007
The Unexplained Part of Debt
• The “Economics 101” debt dynamics equation
tells us that the change in the stock of debt is
equal to the budget deficit
DEBTt - DEBTt -1 = DEFICITt
• This equation can be used to decompose the
growth rate of the Debt-to-GDP ratio
Dd = i  d - pb - ( g + p )  d
The Unexplained Part of Debt
• The “Economics 101” debt dynamics equation
tells us that the change in the stock of debt is
equal to the budget deficit
DEBTt - DEBTt -1 = DEFICITt + SF
• This equation can be used to decompose the
growth rate of the Debt-to-GDP ratio
Dd = i  d - pb - ( g + p )  d + SF
The Unexplained Part of Debt
Decomposition of Debt Growth in LAC7
Percentage of GDP
24
Inflation
UNEXPLAINED PART
Interest expenditure
Primary balance
GDP growth
12
0
-12
1995
1996
1997
1998
1999
2000
Source: Campos, Jaimovich, and Panizza (2006).
2001
2002
2003
2004
2005
The Unexplained Part of Debt
15
10
5
INFLATION
GDP GROWTH
UNEXPLAINED PART
INTEREST EXPENDITURE
PRIMARY DEFICIT
0
-5
-10
-15
IND
EAP
ECA
MNA
LAC
Source: Campos, Jaimovich, and Panizza (2006).
SSA
The Unexplained Part of Debt
• What explains the “Unexplained part of
debt”
– Skeletons
• Fiscal policy matters!
– Banking Crises
– Balance Sheet Effects due to debt
composition
• Debt Structure Matters…
…sometimes more than debt level
Standard & Poor's Sovereign Rating
Public Debt and Sovereign Rating (1995-2005)
Germany
Switzerland
Norway
AAA
Australia
Luxembourg
New Zealand
United Kingdom
France
Austria
Denmark
Canada
United
States Spain Finland
Ireland
Sweden
Netherlands
AA-
Iceland
Belgium
Portugal
Italy
Cyprus
Saudi Arabia
Malta
Botswana
Slovenia
Chile
Czech Republic
Korea,
Rep.
BahrainBahamas Malaysia
Estonia
Latvia
Thailand
China
Poland
Oman
A-
Israel
Qatar
Barbados
Egypt, Arab Rep.
Panama
India
Brazil
Russian Federation
Benin
Bolivia
Papua New Guinea
Grenada
Venezuela, RB
Turkey
B-
Morocco
Philippines
Bulgaria
BBUkraine Belize
Paraguay
Investment grade
Hungary
Tunisia
and Tobago
Africa
Slovak Republic TrinidadSouth
Lithuania
Mexico El Salvador
Croatia
Colombia
Kazakhstan
PeruUruguay
Costa Rica
Guatemala
BBB-
Japan
Jordan
Senegal
Mongolia
Indonesia Argentina
Ghana
Jamaica
Pakistan
Ecuador
0
10
20
30
40
50
60
70
80
Public Debt as Percent of GDP
Source : Jaimovich and Panizza (2006) and Standard and Poor's
90
100
110
Volatility is another source of risk
As answer to these vulnerabilities, several
countries are:
• Accumulating huge reserves (well above
GG rule)
– But self insurance is a very inefficient way
to protect yourself
• Switching to the domestic market
– Currency mismatches are less likely
– Sudden Stops are less likely
Switch to Domestic Market
Public Debt Composition in Developing Countries
(share of GDP)
0.5
0.45
0.4
0.35
DOMESTIC
0.3
0.25
0.2
EXTERNAL
0.15
0.1
0.05
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Switch to Domestic Market
Composition of Public
Debt in 1994
Composition of Public
Debt in 2004
DOMESTIC
39%
EXTERNAL
41%
EXTERNAL
61%
DOMESTIC
59%
Source: Jaimovich and Panizza (2006) and GDF
Can the switch to domestic debt eliminate all
vulnerabilities?
• To some extent, but…
– Need to make sure not to trade a currency
mismatch for a maturity mismatch
– In the past debt structure has mutated very
rapidly
Can the switch to domestic debt
eliminate all vulnerabilities?
Domestic Original Sin in Latin America and Other Emerging Regions
1.0
Index of domestic original sin
0.9
LAC
0.8
0.7
0.6
Other EMs
0.5
0.4
0.3
Asia
0.2
0.1
0.0
1996
1997
1998
1999
2000
2001
2002
2003
Note : Original sin is measured as share of domesic debt which is short term, denominated in foreign currency, or indexed to prices or the interest rate. "Latin America" includes: Argentina, Brazil,
Chile, Colombia, Mexico, and Venezuela. "Asia" includes: China, India, Indonesia (from 1998), Korea, Malaysia, Philippines, and Thailand. "Other emerging markets" includes: Czech Republic,
Israel, Hungary, Poland, Russia, and Turkey.
Source : Authors' calculations based on Jeanne and Guscina (2006) data set.
Can the switch to domestic debt eliminate all
vulnerabilities?
• To some extent, but…
– The cost of borrowing needs to be evaluated carefully
• What happens if the currency appreciates
– Need to be careful not to "force" domestic institutional
investors and banks to assume "too much" government
debt
• Especially banks
– Domestic debt may be more difficult to restructure
– Externalities to corporate bond market
• Positive (market creation, yield curve)
• Negative (crowding out)
Can the switch to domestic debt eliminate all
vulnerabilities?
• While the recent switch to more domestic borrowing
may have important positive implications for debt
management, policymakers should not be too
complacent.
– "The history of crisis modelling in international macroeconomics
reveals that each successive wave of crises exposes possibilities
for crisis that were overlooked in earlier analysis." (Krugman,
2006)
• As vulnerabilities are often identified after a financial
crisis starts to unravel, crisis prevention requires
detailed and prompt information on debt structure
– Yet, most research and DSA focuses on external borrowing
and prompt and detailed information on the level and
composition of domestic public debt is often not available to
policymakers and analysts
The Development of Local Currency bond
Markets: The Indian Experience
by Shyamala Gopinath
• A remarkable feature of the Indian
experience is the ability of financing
large deficits without issuing external
debt with private creditors
• Could have this been possible with an
open capital account and fully
convertible currency?
The Development of Local Currency bond
Markets: The Indian Experience
by Shyamala Gopinath
• In the second phase of reforms, foreign
institutional investors were given access
to the primary and secondary markets
• Did they come in?
• If not, why didn’t they come in?
The Development of Local Currency bond
Markets: The Indian Experience
by Shyamala Gopinath
• The 16.9 years of average maturity of
G-Bonds is impressive
• But the figure could be misleading.
– More than 50% of the bonds are in the
hands of banks and this may shorten their
de facto maturity
• If there is a banking crisis, long term bonds
held by banks may soon become overnight!
Debt Sustainability in EM Economies:
A Critical Appraisal
by: Yilmaz Akyüz
• One key question asked in the paper is what is
a sustainable level of debt
– I am not a big fan of the “debt intolerance”
approach.
• I like: “No debt threshold is right for all countries or at all
times”
– What about the CPIA approach?
• I am not a big fan of that either
– What are the consequence of adopting the MDG
approach for future access to financing?
Debt Sustainability in EM Economies:
A Critical Appraisal
by: Yilmaz Akyüz
• Capital controls may be a good idea if
introduced during tranquil times, but
there may be a timing issue
– What would happen if Turkey were to
introduce CC right now?
Debt Sustainability in EM Economies:
A Critical Appraisal
by: Yilmaz Akyüz
• The paper raises the issue that fiscal
adjustments often go through cuts in
public investment
– Should expenditure in public investments
removed from fiscal targets in IMF
programs?
– What are the pros and cons?
Debt Sustainability in EM Economies:
A Critical Appraisal
by: Yilmaz Akyüz
• I am moderately pessimistic on spreads
Will the good times last?
1400
1200
Actual Spreads
1000
800
600
400
Predicted Spreads
200
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Predicted Spreads would be higher
with average external conditions
1400
1200
1000
800
600
400
200
0
1993
1994
1995
1996
1997
1998
1999
Spread for average External Conditions
2000
2001
Actual Spreads
2002
2003
2004
2005
Public Debt Management and ALM: The
Case of Hungary
by: Andràs Réz
• I liked the discussion on the importance of
having an independent and well working DMO
but also the possible obstacles to policymaking that come from having independent
institutions
• I was intrigued by the availability of data on
non-residents’ holdings of domestic public
debt
– ..but how can you be sure that they are nonresidents?
Public Debt Management and ALM: The
Case of Hungary
by: Andràs Réz
• Is it always the case that if one focuses
on the PV of tax revenues, the logical
outcome is to have all debt in domestic
currency?
– What about the role of the tradable sector
– What are the tradeoffs
• Cost
• Maturity
Public Debt Management and ALM: The
Case of Hungary
by: Andràs Réz
• The paper states that the size of foreign
currency reserves should be limited at the
optimal level
• But what determines the optimal level?
–
–
–
–
Greesnpan-Guidotti
Size and solidity of the banking system
Openness (Import/Exports)
Need to stabilize the XR
• Would the optimal level of reserves be lower
with a better International Financial
Architecture and a better IMF?
Comments to S. Gopinath, Y.
Akyüz, and A. Réz
Ugo Panizza
UNCTAD
Workshop on Debt, Finance, and Emerging Issues in Financial Integration
London, 6-7 March 2007