Life After Debt: The Origins and Resolutions of Debt Crisis

338 Pages·2014·2.259 MB·English

by  Joseph E. Stiglitz, Daniel Heymann (eds.)

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Series Editor:
Joseph E. Stiglitz
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Life After Debt
The Origins and Resolutions of Debt Crisis
Edited by
Joseph E. Stiglitz
University Professor, Columbia University, USA
and
Daniel Heymann
Professor of Economics, University of Buenos Aires, Argentina
© International Economic Association 2014
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Contents
List of Figures vii
List of Tables viii
Foreword and Acknowledgements ix
Notes on the Contributors xii
Introduction 1
Joseph E. Stiglitz and Daniel Heymann
Part I Analytical Issues
1.1 Crises: Principles and Policies 43
Joseph E. Stiglitz
1.2 Comment on “Crises: Principles and Policies” by Joseph E.
Stiglitz 80
Martin Guzman
Part II Debt Crises: Varieties of Experiences
2.1 The Latin American Debt Crisis in Historical Perspective 87
José Antonio Ocampo
2.2 C omment on “The Latin American Debt Crisis in Historical
Perspective” by José Antonio Ocampo 116
Pablo Sanguinetti
2.3 What Have the Crises in Emerging Markets and the Euro Zone
in Common and What Differentiates Them? 122
Roberto Frenkel
2.4 C omment on “What Have the Crises in Emerging Markets
and the Euro Zone in Common and What Differentiates Them?”
by Roberto Frenkel 142
Ricardo Bebczuk
2.5 F rom Austerity to Growth in Europe: Some Lessons from
Latin America 145
Stephany Griffith-Jones
2.6 C omment on “From Austerity to Growth in Europe:
Some Lessons from Latin America” by Stephany Griffith-Jones 171
Hernán D. Seoane
v
vi Contents
Part III Debt Defaults: Costs and Restructuring Games
3.1 Strategic Behavior in Sovereign Debt Restructuring:
Impact and Policy Responses’ 179
Rohan Pitchford and Mark L.J. Wright
3.2 Comment on “Strategic Behavior in Sovereign Debt
Restructuring: Impact and Policy Responses” by Rohan
Pitchford and Mark L.J. Wright 191
Federico Weinschelbaum
3.3 “Sovereign Debt Restructuring: The Road Ahead” 193
Benu Schneider
3.4 C ommentary on “Sovereign Debt Restructuring: the Road
Ahead” by Benu Schneider 221
Fernando Navajas
Part IV Dealing with Crises: Instruments and Policies
4.1 S aving the Euro: Self-fulfilling Crisis and the “Draghi Put” 227
Marcus Miller and Lei Zhang
4.2 C omments on “Saving the Euro: Self-fulfilling Crisis and
the ‘Draghi Put’ ” by Marcus Miller and Lei Zhang 242
Alfredo Schclarek Curutchet
4.3 “GDP-linked Bonds and Sovereign Default” 246
David Barr, Oliver Bush and Alex Pienkowski
4.4 Comment on “GDP-Linked Bonds and Sovereign Default”
by David Barr, Oliver Bush and Alex Pienkowski 276
Enrique Kawamura
4.5 “ Multiple Choices: Economic Policies in Crisis” 281
Daniel Heymann and Axel Leijonhufvud
4.6 Comment on “Multiple Choices: Economic Policies in Crisis”
by Daniel Heymann and Axel Leijonhufvud 309
Jorge Carrera
Index 317
List of Figures
2.1.1 E conomic crises of Latin America 1820–2008: A. Number of
countries on a currency, external debt, or banking crisis; B.
Number of country/years in crisis by period 89
2.1.2 E conomic growth and trade balance 92
2.1.3 Net resource transfer (% of GDP at current prices) 95
2.1.4 A . Real interest rates; B. Real non-oil commodity prices (1980=100) 97
2.1.5 D ynamics of the Latin American external debt
(% of GDP and exports) 99
2.1.6 A Comparison between the crises of the 1930s and 1980s:
external indicators: A. Purchasing power of exports; B. Trade
Balance as % of exports (vs 1929 and 1980) 101
2.1.7 A comparison between the crises of the 1930s and 1980s:
GDP and per capita GDP: A. GPD; B. Per capita 107
2.1.8 Public sector finances and inflation (simple averages), A. Central
government deficit; B. Median rate of inflation 109
2.5.1 A dditional proposed EIB and EU growth expenditure program
(billions of Euros) 155
2.5.2 E stimates of the European GPD growth with and without
investments pact 158
2.6.1 G DP volatility, selected Latin American countries 174
2.6.2 G DP volatility, selected European countries 175
4.1.1 Spreads and debt to GDP ratio in the Euro Zone (2001Q1–2011Q3) 231
4.1.2 Spreads and debt to GDP ratio in stand-alone countries
(2000Q1–2011Q3) 231
4.1.3 Self-fulfilling partial default 234
4.1.4 A voiding the default equilibrium with the Draghi Put 236
4.1.5 Effects of OMT 236
4.1.6 B EFORE: investors holds sovereign bonds – but are
prone to switch 238
4.1.7 AFTER: stability and growth fund pools sovereign debt – and
diversifies types of bond 239
4.3.1 Debt dynamic phase diagram 258
4.3.2 Real GDP growth outturns, 1870–2008 258
4.3.3 Expected return on conventional and GDP-linked bonds 263
4.3.4 Output growth and the change in the primary balance,
conventional bonds 267
4.3.5 Output growth and the change in the primary balance,
GDP bonds 267
vii
List of Tables
2.1.1 Gross Fixed Capital Formation (% of GDP) 93
2.5.1 Original Brady/exchange issue amounts (US$ bn) and
multilateral debt relief agreements with commercial banks 149
2.5.2 Additional proposed EIB and EU growth expenditure
programme (in € billions) 155
2.5.3 Effect of Investment Pact on GDP and employment 159
2.5.4 GDP in £ billion, 2010 prices under two scenarios 166
4.1.1 The debtors’ dilemma: An engine of austerity? 237
4.1.2 Different types of stability bonds 238
4.1.3 Balance sheet of SPV 239
4.3.1 Model calibration 255
4.3.2 Sensitivity of parameter values 257
4.3.3 Debt limits under various coefficients of relative risk aversion 262
4.3.A1 Summary of key model outputs 272
viii
Foreword and Acknowledgements
This volume collects papers and comments presented in the Roundtable on Debt
Crises and their Resolution organized in Buenos Aires, Argentina, in August
2012 by the International Economic Association (IEA) jointly with the Argentine
Association of Political Economy (AAEP) and the Faculty of Economic Sciences of
the University of Buenos Aires (FCE- UBA), with the sponsorship of the Argentine
Ministry of the Economy, the Institute for the Integration of Latin America and
the Caribbean (INTAL , IDB) and the National University of Córdoba (UNC).
The project of the conference derived from the recognition that debt crises
continue to pose substantial analytical challenges, and that a discussion of the
topic would be particularly pertinent at the time and place of the meeting. The
financial turbulences and macroeconomic contractions of central economies
in recent years have shown that high wealth and state-of-the-art institutions
do not provide immunity against debt-originated disturbances. Europe, in par-
ticular, is still dealing with difficultywith the crises in its periphery, which have
proven to be highly costly, not only in terms of economics, but also in terms
of the broader burdens placed on society; and it has yet to find ways to restore
growth in the region as a whole. Latin America, for its part, has a long history of
crises and more or less strong recoveries, which offer a rich experience on which
to contrast analytical propositions about the prevention, causes, and resolution
of debt crises anddiscuss policy proposals, with due regard for the specifici-
ties of each episode. Argentina, in particular, offers an example of one of the
themes of the conference: overcoming a crisis may be helped considerably, in
some cases, by a restructuring of financial contracts aimed towards the sustain-
ability of future obligations when the volume of outstanding debts has become
excessive. Argentina managed its way through a very deep crisis, using as part
of its set of instruments a large-scale redefinition of debt obligations, public and
private. After dramatic episodes, there was indeed life after debt; at the same
time, the country´s recent economic performance hasalso shown that a lighter
debt burden, while necessary,may certainly not be sufficient to determine a
stable macroeconomic trend of solid growth. In calling for the Roundtable, we
thought it would be particularly useful to think about the European crisis, then
in its early days, from the vantage point of the lessons that might be learned
from the experiences of others, and in particular that of Argentina.
By their very nature, debt crises are systemic events, driven by intricate inter-
actions of individual and collective behaviors. This book looks both at crises
which originate in the public sector and at those that arise from excessive
indebtedness in the private. We do this for good reason: one kind of debt crisis
ix