Life After Debt: The Origins and Resolutions of Debt Crisis

338 Pages·2014·2.26 MB·English

by  Joseph E. Stiglitz

International Economic Association
A non-profit organization with purely scientific aims, the International Economic
Association (IEA) was founded in 1950. Its basic purpose is the development of eco-
nomics as an intellectual discipline, recognizing a diversity of problems, systems and
values in the world and taking note of methodological diversities. Since its creation,
the IEA has sought to fulfil that purpose by promoting mutual understanding among
economists through the organization of scientific meetings and common research
programmes. The publications that comprise the series, are the explorations of these
matters discussed, with special attention paid to issues of economies in transition and
in the course of development.
Series Editor:
Joseph E. Stiglitz
Other titles from IEA:
LIFE AFTER DEBT
The Origins and Resolutions of Debt Crisis
Edited by Joseph E. Stiglitz and Daniel Heymann
INCOME CONTINGENT LOANS
Theory, Practice and Prospects
Edited by Joseph E. Stiglitz, Bruce Chapman and Timothy Higgins
TAMING CAPITAL FLOWS
Capital Account Management in an Era of Globalization
Edited by Joseph E. Stiglitz and Refet Gurkaynak
THE INDUSTRIAL POLICY REVOLUTION I
The Role of Government Beyond Ideology
Edited by Joseph E. Stiglitz and Justin Lin Yifu
THE INDUSTRIAL POLICY REVOLUTION II
Africa in the 21st Century
Edited by Joseph E. Stiglitz, Justin Lin Yifu and Ebrahim Patel
THE CHINESE ECONOMY
A New Transition
Edited by Masahiko Aoki and Jinglian Wu
INSTITUTIONS AND COMPARATIVE ECONOMIC DEVELOPMENT
Edited by Franklin Allen, Masahiko Aoki, Nobuhiro Kiyotaki, Roger Gordon, Joseph E.
Stiglitz and Jean-Paul Fitoussi
COMPLEXITY AND INSTITUTIONS: MARKETS, NORMS AND CORPORATIONS
Edited by Masahiko Aoki, Kenneth Binmore, Simon Deakin and Herbert Gintis
CORPORATE SOCIAL RESPONSIBILITY AND CORPORATE GOVERNANCE
The Contribution of Economic Theory and Related Disciplines
Edited by Lorenzo Sacconi, Margaret Blair, R. Edward Freeman and Alessandro Vercelli
IS ECONOMIC GROWTH SUSTAINABLE?
Edited by Geoffrey Heal
KEYNE’S GENERAL THEORY AFTER SEVENTY YEARS
Edited by Robert Diman, Robert Mundell and Alessandro Vercelli
CORRUPTION, DEVELOPMENT AND INSTITUTIONAL DESIGN
Edited by János Kornai, László Mátyás and Gérard Roland
MARKET AND SOCIALISM
In the Light of the Experience of China and Vietnam
Edited by János Kornai and Yingyi Quian
INSTITUTIONAL CHANGE AND ECONOMIC BEHAVIOUR
Edited by János Kornai, László Mátyás and Gérard Roland
INTERGENERATIONAL EQUITY AND SUSTAINABILITY
Edited by John E. Roemer and Kotaro Suzumura
PSYCHOLOCY, RATIONALITY AND ECONOMIC BEHAVIOUR
Challenging Standard Assumptions
Edited by Bina Agarwal and Alessandro Vercelli
MULTINATIONALS AND FOREIGN INVESTMENT IN ECONOMC DEVELOPMENT
Edited by Edward M. Graham
POST-CONFLICT ECONOMIES IN AFRICA
Edited by Paul Collier and Augustin Kwasi Fosu
STRUCTURAL REFORM AND MACROECONOMIC POLICY
Edited by Robert M. Solow
THE PAST, PRESENT AND FUTURE OF THE EUROPEAN UNION
Edited by Alan V. Deardorff
LATIN AMERICAN ECONOMIC CRISES
Trade and Labour
Edited by Enrique Bour, Daniel Heymann and Fernando Navajas
ADVANCES IN MACROECONOMIC THEORY
Edited by Jacques H, Drèze
EXPLAINING GROWTH
A Global Research Project
Edited by Gary McMahon and Lyn Squire
TRADE, INVESTMENT, MIGRATION AND LABOUR MARKET ADJUSTMENT
Edited by David Greenaway, Richard Upward and Katherine Wakelin
INEQUALITY AROUND THE WORLD
Edited by Richard B. Freeman
International Economic Association
Series Standing Order ISBN 978–0–3337–1242–9 (Hardback)
978–0–3338–0330–1 (Paperback)
You can receive future titles in this series as they are published by placing a standing order. Please
contact your bookseller or, in case of difficulty, write to us at the address below with your name and
address, the title of the series and one of the ISBNs quoted above.
Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire
RG21 6XS, England
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
Softcover reprint of the hardcover 1st edition 2014 978-1-137-41146-4
All rights reserved. No reproduction, copy or transmission of this
publication may be made without written permission.
No portion of this publication may be reproduced, copied or transmitted
save with written permission or in accordance with the provisions of the
Copyright, Designs and Patents Act 1988, or under the terms of any licence
permitting limited copying issued by the Copyright Licensing Agency,
Saffron House, 6-10 Kirby Street, London EC1N 8TS.
Any person who does any unauthorized act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The authors have asserted their rights to be identified as the authors of this work
in accordance with the Copyright, Designs and Patents Act 1988.
First published 2014 by
PALGRAVE MACMILLAN
Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills, Basingstoke,
Hampshire RG21 6XS.
Palgrave Macmillan in the US is a division of St Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries
ISBN 978-1-137-41147-1 ISBN 978-1-137-41148-8 (eBook)
DOI 10.1057/9781137411488
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources. Logging, pulping and manufacturing
processes are expected to conform to the environmental regulations of the
country of origin.
A catalogue record for this book is available from the British Library.
A catalog record for this book is available from the Library of Congress.
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