The Uzbek Growth Puzzle

After the breakup of the Soviet Union, Uzbekistan's output fell less than in any other former Soviet republic, and growth turned positive in 1996/97. Given the country's hesitant and idiosyncratic approach to reforms, this record has surprised many observers. This paper first shows that a standard panel model of growth in transition systematically underpredicts Uzbek growth from 1992-1996, confirming the view that Uzbekistan's performance constitutes a puzzle. It then attempts to resolve the puzzle by extending the model in a way that encompasses competing hypotheses of what makes Uzbekistan's output path unusual. The main result is that Uzbekistan's performance can be accounted for by a combination of low initial industrialization, its cotton production, and its self-sufficiency in energy. Copyright 1999, International Monetary Fund

Making a Voluntary Greek Debt Exchange Work

Within the next couple of months, the Greek government, is supposed to persuade private creditors holding about EUR 200bn in its bonds to voluntarily exchange their existing bonds for new bonds that pay roughly 50 percent less. This may work with large creditors whose failure to participate in a debt exchange could trigger a Greek default, but may not persuade smaller creditors, who will be told that their claims will continue to be fully serviced if they do not participate in the exchange. This paper proposes an approach to dealing with this free rider problem that exploits the fact that with some probability, the proposed exchange might be followed by an involuntary restructuring some time in the future. The idea is to design the new bonds that creditors are offered in the exchange in a way that make them much harder to restructure than the current Greek government bonds. This is easy to do because the vast majority of outstanding Greek government bonds lack standard creditor protections. Hence, creditors would be offered a bond that performs much worse than their current bond if things go according to plan, but much better if things do not. They will accept this instrument if (1) the risk of a new Greek debt restructuring in the medium term is sufficiently high; and (2) there is an expectation that the next restructuring probably will not be voluntary

Engineering an Orderly Greek Debt Restructuring

For some months now, discussions over how Greece will restructure its debt have been constrained by the requirement that the deal be “voluntary” – implying that Greece would continue debt service to any creditors that choose retain their old bonds rather than tender them in an exchange offer. In light of Greece’s deep solvency problems and lack of agreement with its creditors so far, the notion of a voluntary debt exchange is increasingly looking like a mirage. In this essay, we describe and compare three alternative approaches that would achieve an orderly restructuring but avoid an outright default: (1) “retrofitting” and using a collective action clause (CAC) that would allow the vast majority of outstanding Greek government bonds to be restructured with the consent of a supermajority of creditors; (2) combining the use of a CAC with an exit exchange, in which consenting bondholders would receive a new English-law bond with standard creditor protections and lower face value; (3) an exit exchange in which a CAC would only be used if participation falls below a specified threshold. All three exchanges are involuntary in the sense that creditors that dissent or hold out are not repaid in full

Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976-2001

This paper describes the evolution of ideas to apply bankruptcy reorganization principles to sovereign debt crises. Our focus is on policy proposals between the late 1970s and Anne Krueger's (2001) proposed 'Sovereign Debt Restructuring Mechanism," with brief reference to the economics literature on sovereign debt. We describe the perceived inefficiencies that motivate proposals, and how proposals seek to change debtor and creditor incentives. We find that there has been a moving consensus on what constitutes the underlying problem, but not on how to fix it. The range of proposed approaches remains broad and only recently shows some signs of narrowing. . Copyright 2002, International Monetary Fund

The Mussa Theorem (and Other Results on IMF-Induced Moral Hazard)

Using a simple model of international lending, we show that as long as the IMF lends at an actuarially fair interest rate and debtor governments maximize the welfare of their taxpayers, any changes in policy effort, capital flows, or borrowing costs in response to IMF crisis lending are efficient. Thus, under these assumptions, the IMF cannot cause moral hazard, as argued by Michael Mussa (1999 and 2004). It follows that examining the effects of IMF lending on capital flows or borrowing costs is not a useful strategy to test for IMF-induced moral hazard. Instead, empirical research on moral hazard should focus on the assumptions of the Mussa theorem. Copyright 2005, International Monetary Fund

Haircuts

Sovereign Debt, Debt Crises, Debt Restructuring, Investor Losses

The Impact of Monetary Policy on the Bilateral Exchange Rate: Chile Versus the United States

This paper examines the reaction of the bilateral Ch$/US$ exchange rate to monetary policy actions in Chile and the United States. The approach is to regress the variation in the exchange rate following a policy announcement on variations in market interest rates in response to the same announcement. U.S. monetary policy actions that raise the three-month Treasury bill rate by 1 percentage point lead to depreciations of the Chilean peso by about 1.5 to 2 percent. The exchange rate also reacts to monetary policy actions in Chile, but the response appears to be smaller, and cannot be estimated with much precision on the available sample.

The Greek Debt Restructuring: An Autopsy

The Greek debt restructuring of 2012 stands out in the history of sovereign defaults. It achieved very large debt relief—over 50 percent of 2012 GDP—with minimal financial disruption, using a combination of new legal techniques, exceptionally large cash incentives, and official sector pressure on key creditors. But it did so at a cost. The timing and design of the restructuring left money on the table from the perspective of Greece, created a large risk for European taxpayers, and set precedents—particularly in its very generous treatment of holdout creditors—that are likely to make future debt restructurings in Europe more difficult

Financial Integration and Growth -Is Emerging Europe Different?

Using industry-level data, this paper shows that the European transition region benefited much more strongly from financial integration in terms of economic growth than other developing countries in the years preceding the current crisis. We analyze several factors that may explain this finding: financial development, institutional quality, trade integration, political integration, and financial integration itself. The explanation that stands out is political integration. Within the group of transition countries, the effect of financial integration is strongest for countries that are politically closest to the EU. This suggests that political and financial integration are complementary and that political integration can considerably increase the benefits of financial integration.Financial integration; political integration; economic growth; parent banking; European transition economies

A European perspective on overindebtedness. Bruegel Policy Contribution Issue n˚25 | September 2017

The sequence of crisis and policy responses after mid-2007 was a gradual recognition of the unsustainability of the euro-area policy framework. The bank-sovereign vicious circle was first observed in 2009 and became widely acknowledged in the course of 2011 and early 2012. The most impactful initiative has been the initiation of a banking union in mid-2012, but this remains incomplete and needs strengthening