If we have a look at the composition of total debt of different countries it is easy to
see (Figure 1.2) that from 1992 to 2002 the advanced countries’ total debts mainly
consisted of domestic currency, whereas those of emerging market countries where
mainly borrowed in foreign currency. If we focus our view on sovereign debt only,
this difference vanishes. From 1980 to 2003 about 99.7 percent (Table 1) of sovereign
debt in emerging market countries was borrowed in foreign currency. In advanced
economies it was slightly less (92.5%). Nevertheless, in both cases the U.S. dollar was
the dominating foreign currency. A reason for this might be that this currency is
considered as very important in international trade.
A comparison between these facts leads me to the conclusion that private persons in
advanced countries trust their own currency, whereas private persons in emerging
market economies seem to trust foreign currencies. Otherwise the currency
composition between total debt and sovereign debt would not differ so much from
each other. Another interesting fact concerns which other currencies states prefer to
borrow in. They like advanced economies’ currencies instead those of emerging
market countries.
Another important point concerning public debt structure is their composition
structure concerning maturity. It can be seen (Figure 4.2) that during 1988 the average
maturity of sovereign debt issued in both kinds of countries was little below 8 years.
But during the following 14 years the average maturity rate in emerging market
countries decreased to about 5 years while the maturity rate of advanced countries
sovereign debt increased to almost 10 years. This tendency towards short-term debt
can also be seen on Figure 4.1. It is interesting to note the fall in 1999 in both markets
(Figure 4.2) which was nevertheless stronger in emerging countries.[...]
Table of Contents
1. Introduction
2. Structure of Debt
2.1 Foreign Currency and Debt
2.2 Indexation
2.3 Maturity Composition of Sovereign Debt
3. Jeanne’s Model
3.1 Assumptions
3.2 Debt Maturity
3.3 Equilibrium
3.4 Renegotiation-friendly Clauses
4. International Financial Architecture
4.1 Famous Recent Crises
4.1.1 The Tequila Crisis
4.1.2 The Asian Crisis
4.1.3 What Happened Then
4.2 Reforming the IFA
4.2.1 Crisis Prevention
4.2.2 Crisis Treatment
4.2.2.1 International Lender of Last Resort
4.2.2.2 Crisis Insurance Fund
4.2.2.2 Standstills
4.3 IMF & IFA
5. Conclusion
Research Objectives and Key Topics
The primary objective of this work is to analyze the structural composition of sovereign debt in emerging versus advanced market economies and to evaluate theoretical frameworks for preventing and managing debt crises within the International Financial Architecture (IFA).
- Analysis of debt composition regarding currency, indexation, and maturity.
- Examination of Olivier Jeanne’s model concerning debt maturity incentives.
- Case studies of the Tequila Crisis and the Asian Crisis to illustrate systemic vulnerabilities.
- Evaluation of crisis management mechanisms including the International Lender of Last Resort and Crisis Insurance Funds.
- Assessment of the International Monetary Fund's (IMF) role and necessary institutional reforms.
Excerpt from the Book
4.1.1 The Tequila Crisis
The origin of the Mexican Crisis lies in 1994. It was triggered by the assassination of Luis Donaldo Collosio, an important key figure in Mexican politics. These days the political situation in Mexico was quite unstable, so such an incident was not without effect. After that, the net portfolio investment fell rapidly. In the beginning of 1994 they were almost 8 billion dollars but in the end of the year they were down to -5.3 billion dollars. Other outstanding development concerning Mexico’s balance of payments becomes visible by analyzing the financial balance and the overall balance. During the same time the first dropped from 11.8 billion dollars to -3.5 billion dollars.
The drop of the overall balance was even faster; it decreased from 0.5 billion dollars in the first quarter to -8.3 billion dollars in the second quarter (Table 2). The massive capital outflow in form of the negative net portfolio investment led to a drop of Mexico’s deserves and the authorities decided to conduct a devaluation of the peso. The problem with this devaluation was that everybody knew that the peso was overvalued so they feared that this was not the end of it. In consequence of this many of them tried to get rid of their pesos as fast as possible. All this led to a very big depreciation of the peso (Kenen 2001, 21). So at this time Mexico definitely had a currency crisis, which eventually led to a sovereign debt crisis. A key role in this was played by the tesobonos. They were short-term dollar indexed bonds. In the beginning of 1994 Mexico started to change the composition of their debt by replacing cetes by tesobonos in order to strengthen the peso. Because of the indexation of the tesobonos, Mexico faced a severe debt problem after the depreciation. This was aggravated by the fact that they were short-term bonds and therefore a lot of them were about to mature.
Summary of Chapters
1. Introduction: This chapter outlines the research focus on sovereign debt structure and its relation to debt crises, introducing the comparative perspective between emerging and advanced economies.
2. Structure of Debt: This chapter examines the empirical differences in debt composition, focusing on the prevalence of foreign currency borrowing, indexation, and the maturity profiles of sovereign debt.
3. Jeanne’s Model: This chapter details the theoretical model developed by Olivier Jeanne to explain why emerging markets often favor short-term debt and the resulting equilibrium and bargaining implications.
4. International Financial Architecture: This chapter analyzes historical crises and proposes structural reforms for the international financial system, including crisis prevention and treatment strategies like the Lender of Last Resort.
5. Conclusion: This chapter synthesizes the findings, confirming that developmental differences influence debt incentives and that systemic improvements are required to mitigate future sovereign debt crises.
Key Words
Sovereign Debt, Emerging Markets, Financial Architecture, IMF, Currency Crisis, Debt Maturity, Lender of Last Resort, Tequila Crisis, Asian Crisis, Rollover Risk, Indexation, Fiscal Policy, Standstills, Insolvency, Liquidity.
Frequently Asked Questions
What is the core focus of this research paper?
The paper examines why emerging market economies tend to borrow in foreign currency and maintain short-term debt structures, and how these factors contribute to sovereign debt crises.
What are the primary thematic areas covered?
The main themes include public debt structure, theoretical modeling of debt maturity, the impact of recent financial crises, and the evolution of the International Financial Architecture.
What is the central research question?
The research explores the incentives behind specific debt structures and investigates how the international community can reform financial architecture to prevent or better manage sovereign debt crises.
Which scientific methods are employed?
The work utilizes a theoretical approach by analyzing and summarizing existing models, particularly those by Olivier Jeanne, combined with an empirical analysis of historical debt data and case studies.
What does the main body of the text address?
It covers the classification of debt (currency and maturity), a detailed breakdown of Jeanne's economic model, historical accounts of the Mexican and Asian crises, and evaluations of IMF interventions and preventive measures.
Which keywords best characterize this work?
Key terms include Sovereign Debt, Emerging Markets, International Financial Architecture, IMF, Liquidity, Insolvency, and Debt Maturity.
How does the author characterize the difference between liquidity and solvency crises?
Liquidity crises involve investors stopping lending due to fear of default, which can be mitigated by international support, whereas solvency crises imply a fundamental inability to repay, necessitating debt restructuring or bearing the cost of debt overhang.
Why does the paper argue that a "Lender of Last Resort" is problematic?
While potentially stabilizing, an International Lender of Last Resort faces issues such as moral hazard, information asymmetry, and the political difficulty of international institutions exerting control over national sovereignty.
- Arbeit zitieren
- Dipl.-Kfm. Christoph Yew (Autor:in), 2006, Sovereign Debt Crisis and International Financial Architecture, München, GRIN Verlag, https://www.grin.com/document/118981
