sexta-feira, setembro 21, 2012

Nobody forced the creditors to lend - 2

Debt workout 101 - 18 
Correlation does not imply causality is a phrase heard frequently in economics, so an article which attempts to answer which came first, the excess of  imports over exports or the excessive external debt deserves a wide reading.  In short, the conclsuion is that  in a context of free capital flows, it is the availability of external credit (as in vendor-financing) that allows the consumption of imported goods in excess of export revenues.

As a consequence, the author, a professor at Panteion University in Athens, calls for adjustment policies  to address the proper management of capital flows, which may help to avert the next external credit tsunami.

One could go further and point out that noboby forced the external creditors to lend.  When the losses resulting from excessive credit  loom large, and borrower austerity can be taken only so far, such losses may have to be  shared more equitably between the borrowers and the creditors by negotiating real debt relief, not just the substitutition of private by official creditors.
Mariana Abrantes de Sousa 
PPP Lusofonia

Article by Anastasios Mastroyiannis,
Causality Relationships in the Structure of Portugal’s Balance of International Payments, International Journal of Business and Social Science, Vol. 3 No. 15; August 2012

This paper provides an empirical investigation of the causal relationship between the current account and foreign capital inflows in the case of the Portuguese economy, during the period 1980-2009.  We utilize unit root and cointegration analysis to test for the existence of a long run relationship. Furthermore, we examine the type of Granger-causality among the two variables on the basis of an augmented VAR model.  Our findings suggest that there exists a long run relationship between foreign capital inflows and current account position that is based upon a unidirectional causal long-run relationship, running from foreign capital inflows to current account position. In the short-run we find a bidirectional relationship between the two variables. The results indicate that policies design for attracting foreign capital should take into account their current account deficit inducing implications and that policies aiming to improve the management of foreign capital inflows have a role in addressing indebtedness and external imbalances concerns. 

In this paper we examine the relationship between foreign capital inflows and the external position of the Portuguese economy, for the period 1980 to 2009. Our results indicate that although the series are individually non stationary, together they form a long run relationship.  This long run equilibrium relationship is based upon a unidirectional causal relationship, running from foreign capital inflows to current account position.  Our results are similar to those found for the case of Turkey (Ersoy (2011)) and Greece ((Mastroyiannis (2011)).

Our findings are in contrast with evidence of previous research  indicating that  current account deficits are a “home grown” phenomenon  for developed economies; that is, foreign capital inflows are induced by current account deficits as an extra source of finance.  On academics grounds, the results indicate that in the long run foreign capital flows are “pushed” into the economy of Portugal due to external factors, instead of being “pulled” into the economy due to internal economic conditions.  

In terms of economic policy implications, our results suggests that sustainability concerns regarding the growing current account deficit  are best dealt with  not only with switching/reduction expenditure  policies, but also with policies addressing  the management of foreign capital inflows

Our results are subject to two qualifications.  First the test results may be fragile due to the low number of observations and, second, specifications problems arising due to omitted variables problems should be further examined. An important question arises regarding the causal relationships among the variables that compose foreign capital inflows and current account position. Further study is warranted. 

Noboby forced the creditors to lend too much
Debt Workout 101 Parts 1-17