How does private foreign borrowing affect the risk of sovereign default in developing countries?

We argue that increased foreign borrowing by the private sector reduces the risk that a developing country's government defaults on its foreign debt. We present a simple model in which private foreign borrowing reflects a surge of private entrepreneurship. A larger "entrepreneurial class" raises the political costs of default and reduces the government's incentive to deny repayment. The results of our empirical analysis support the model's key hypothesis.

An analysis of the sources of import growth in Turkey: 1985-90

Ankara : Department of Economics and Institute of Economics and Social Sciences, Bilkent Univ., 1995.Thesis (Master's) -- Bilkent University, 1995.Includes bibliographical references.The sources of import growth in Turkey during the 1985-90 period are decomposed into four casual factors domestic demand expansion, export expansion, import substitution and technological change, using the inputoutput framework. Domestic price indices for imports and gross output were constructed, and the 1990 input-output table was double deflated into constant 1985 prices. The decomposition results are analyzed within the context of the economic conditions in Turkey during the period. It is observed that the structure of the causal factors have changed compared to the previous period of 1979-85. The contribution of export expansion is observed to be negligible, and domestic demand expansion and import substitution are the most prominent sources of import growth between 1985 and 1990.Celasun, OyaM.S

Boon or Burden? The Effect of Private Sector Debt on the Risk of Sovereign Default in Developing Countries

We explore how the share of the private sector in total external debt affects perceived creditworthiness and the likelihood of sovereign default in developing countries. While there are theoretical arguments both in favor and against a stabilizing role of private-sector borrowing, the evidence clearly supports the notion that a greater share of the private sector in total external debt is associated with a reduced likelihood of sovereign default. --International Investment,Sovereign Risk

The 1994 currency crisis in Turkey

As a result of Turkey's currency crisis in 1994, output fell 6 percent, inflation rose to three-digit levels, the Central Bank lost half of its reserves, and the exchange rate (against the US dollar) depreciated by more than half in the first three months of the year. The author presents stylized facts associated with the government's debt-financing mechanisms and other relevant macroeconomic variables to show the system's inherent fragility at the time of the crisis and to clarify the extent to which different factors contributed to the crisis. The author argues that huge requirements for public sector borrowing in 1993 and early 1994, combined with major policy errors in financing the deficit, led to the currency crash. As a result of interventions to control interest rates and treasury borrowing at the same time, the market for domestic borrowing almost disappeared, the government turned to monetization for financing, and the value of the overappreciated Turkish lira plummeted.Banks&Banking Reform,Economic Theory&Research,Fiscal&Monetary Policy,Payment Systems&Infrastructure,Environmental Economics&Policies,Banks&Banking Reform,Macroeconomic Management,Environmental Economics&Policies,Economic Theory&Research,Economic Stabilization

Capital flows, macroeconomic management, and the financial system - Turkey, 1989-97

Recent developments in a number of emerging economies have heightened interest in the relationship between macroeconomic management and financial regulation, in an environment of open capital accounts and large-scale movements of private capital. The authors analyze the Turkish experience with capital flows in a macro-economy characterized by chronically high inflation and fiscal deficits. They study the relationship between capital flows, macroeconomic management, and vulnerability in the financial system. Their analysis highlights the importance of fiscal policy in an era of large capital flows. Fiscal imbalances contributed both to real exchange rate appreciation and high real interest rates in Turkey. The high interest rates the government must pay on domestic debt have become one of the key issues of Turkey's macroeconomic management. Only by reducing its interest expenses can fiscal deficits be reduced and greater stability be achieved. The Turkishbanking system, in becoming increasingly integrated with international financial markets, has become vulnerable to shifts in market confidence. Banks borrowed abroad in response to macroeconomic imbalances to benefit from high interest rates on domestic loans and government paper. In the process, the banks have exposed themselves to interest rate risk, to foreign-exchange risk, and to large credit risks. To reduce the Turkish economy's vulnerability to external shocks, financial regulation must be strengthened simultaneously with the achievement of macroeconomic stability.Capital Markets and Capital Flows,Fiscal&Monetary Policy,International Terrorism&Counterterrorism,Economic Theory&Research,Banks&Banking Reform,Macroeconomic Management,Economic Theory&Research,Banks&Banking Reform,Financial Economics,Settlement of Investment Disputes

Inflation Inertia and Credible Disinflation - The Open Economy Case

This paper develops a model of inflation inertia based on optimizing forward looking staggered price setting in a small open economy. Unlike in current models of sticky prices, transitions to a lower steady state inflation rate take time even if they are fully credible, and they are associated with significant output losses. There is a welfare trade-off between these output losses and the gains from smaller inflationary distortions. For reasonable parameter values inflation stabilization improves welfare. The optimal steady state is reached at the Friedman rule. Technical appendices are available at www.nber.org/data-appendix/w9557/ inert-techapp.pdf

Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach

This paper proposes a probabilistic approach to public debt sustainability analy-sis (DSA) using "fan charts." These depict the magnitude of risks-upside and downside-surrounding public debt projections as a result of uncertain economic conditions and policies. We propose a simulation algorithm for the path of public debt under realistic shock configurations, combining pure economic disturbances (to growth, interest rates, and exchange rates), the endogenous policy response to these, and the possible shocks arising from fiscal policy itself. The paper empha-sizes the role of fiscal behavior, as well as the structure of disturbances facing the economy and due to fiscal policy, in shaping the risk profile of public debt. Fan charts for debt are derived from the "marriage" between the pattern of shocks on the one hand and the endogenous response of fiscal policy on the other. Applications to Argentina, Brazil, Mexico, South Africa, and Turkey are used to illustrate the approach and its limitations. Copyright 2006, International Monetary Fund

Exchange Rate Regime Considerations in an Oil Economy

This paper provides a brief overview of the evolution of exchange rate policy in the Islamic Republic of Iran from 1993 to 2002 and reviews the basic criteria for the choice of the exchange rate regime in the medium term. The analysis highlights the merits of an intermediate regime which would allow the authorities to smooth out excessive short-term exchange rate fluctuations while letting nominal exchange rate movements facilitate real exchange rate adjustments called for by major oil price shocks.Iran;Oil;Real effective exchange rates;exchange rate, exchange rate regime, real exchange rate, foreign exchange, exchange rate regimes, exchange rate policy, exchange rate movements, exchange rates, exchange rate risk, oil prices, nominal exchange rate, foreign exchange market, exchange rate volatility, exchange rate flexibility, market exchange rate, oil revenues, exchange markets, domestic prices, exchange rate system, exchange rate fluctuations, exchange rate unification, foreign exchange markets, trade shocks, terms-of-trade shocks, basket of currencies, domestic demand, trading partners, floating exchange rate, real exchange rate appreciations, exchange rate path, exchange rate adjustments, fixed exchange rate, exchange restrictions, output growth, exchange rate appreciations, flexible exchange rates, official exchange rate, flexible exchange rate, output volatility, exchange rate policies, exchange rate peg, exchange rate rigidity, trade liberalization, exchange rate arrangements, price fluctuations, export sectors, import controls, real exchange rate appreciation, fluctuation margins, foreign exchange rate risk, import penetration, exporting countries, multiple exchange rate, open economies, foreign exchange reserves, prevailing exchange rate, multiple exchange rates, exchange arrangements, flexible exchange rate system, adjustable exchange rate, floating exchange rate regime, exchange rate depreciation, fixed exchange rate regime, real exchange rate movements, foreign exchange rate, exchange rate pegs, foreign exchange restrictions, exchange rate depreciations, exchange rate difference, openness to capital flows, bilateral real exchange rate, currency substitution, exchange rate rule, exchange rate adjustment, market exchange rates, equilibrium exchange rate, exchange rate appreciation, tradable goods, freely floating exchange rate, currency basket, commodity exporters, balance of payments, exchange rate pass, domestic market, foreign exchange transactions, exchange rate level, liberalization of trade, oil exporters, floating exchange rate system, exchange reserves, terms of trade, flexible exchange rate regime, nominal exchange rates, import liberalization, fixed exchange rate regimes, exchange transactions, exchange rate management