quarta-feira, dezembro 07, 2011

Lessons from past crises ... Buchheit on debt crisis prevention and cure

Debt workout 101 - part 5

This excellent article should be required reading in this stage in the financial storm:  

Paper prepared for Resolving the European Debt Crisis, a conference hosted by the Peterson
Institute for International Economics and Bruegel, Chantilly, France, September 13-14, 2011.

Lesson One:      Don’t let a sovereign debt problem become a banking sector problem
Lesson Two:      If debt restructuring can’t be avoided, don’t try
Lesson Three:   Keep track of all your external debt
Lesson Four:     Ask for enough debt relief
Lesson Five:     Be ruthlessly efficient in order to conclude debt restructuring as quickly as possible
Lesson Six:       Be even-handed in allocating sacrifices between the debtor and the creditors and among the creditors 


1.  Most external debt problems are or become banking problems, because it is the banks' function to intermediate between surplus/creditor and deficit/borrower countries, and banks often recycle the surplus funds to the net borrowers for too long. (recycling petrodollars, recycling Bund-euros, recycling Shangai dollars) 
2.  Denial and pathological procastination feeds the problem and allows short term lenders  to evade their share of the sacrifice in the absence of a debt standstill  (o que tem de  ser tem muita força
3.  Ignore the Eurostat Maastricht definitions of deficit and debt and keep control of all public  debt and liabilities
4.  Debt relief does not necessarily imply debt forgiveness but must include longer tenors (ex 30 years) and lower interest rates on existing debt and the provision of sufficient new debt to maintain economic activity and promote exports.   
5.  A fast debt restructuring is better than a perfect debt restruring (o óptimo é inimigo do bom).  With the mark-to-market under the new IFRS accounting standards, a "successful debt restructuring, even one that calls for a principal harircut, can often restore  market value to a porfolio". 
6.  Debtor austerity is not enough.  Sharing the sacrifice is essential because the costs are too large to be supported by just one of the parties (todos diferentes todos iguais).  The actual sharing of the sacrifices depends on relative  bargaining power of the debtor and creditor groups, perhaps under the neutral arbitration of an entity such as the IMF.  
But it is essential to favour two classes of creditors, who are by definition part of the solution and not part of the external debt problem:  
(a)  local savers and depositors who must have incentives to save and invest locally, instead of feeding capital flight, and 
(b) pre-export and export financing to help the country grow its way out of the crisis. 
Mariana Abrantes de Sousa
PPP Lusofonia

See also of Banks, Central Banks and Moral Hazard in the Eurozone ,
Orderly default ,  Five recommendations to help resolve the Eurozone crisis