Sovereign debt and its restructuring framework in the Euro area. Bruegel Working Paper 2013/05, August 2013

To compensate for the inflexibility of fixed exchange rates, the euro area needs flexibility through a system of orderly debt restructuring. With virtually no room for macroeconomic manoeuvring since the crisis onset, fiscal austerity has been the main instrument for achieving reductions in public debt levels; but because austerity also weakens growth, public debt ratios have barely budged. Austerity has also implied continued high private debt ratios. And these debt burdens have perpetuated economic stasis. Economic theory,history, and the recent experience all call for a principled debt restructuring mechanism as an integral element of the euro area’s design. Sovereign debt should be recognised as equity (a residual claim on the sovereign), operationalised by the automatic lowering of the debt burden upon the breach of contractually-specified thresholds. Making debt more equity-like is also the way forward for speedy private deleveraging. This debt-equity swap principle is a needed shock absorber for the future but will also serve as the principle to deal with the overhang of ‘legacy’ debt

Industrial policy after the East Asian crisis - from"outward orientation"to new internal capabilities?

Before East Asia's financial meltdown in the second half of 1997, there appeared to be prospects for an uneasy consensus on the East Asian"miracle", a consensus that recognized the role of the entrepreneurialstate in accelerating industrial development but emphasized the"market-friendly'nature of the state's interventions. After the financial crisis, East Asian policies and institutions are once again under scrutiny - for their failures rather than for their miracles. The author finds that the prospects for a consensus that incorporated the East Asian experience were ill founded. East Asian policymakers emphasized growth through quantitative targets; price signals played a significant but secondary role. The author illustrates these propositions by examining trade policy, industrial conglomerates, and the provision of physical infrastructure. The evolving international consensus on industrial policy, which predates the Asian crisis, emphasizes a hands-off approach in which an activist government plays a reduced role and competition policy plays an important role. But policies emphasizing greater competition and a level playing field - implicitly thought to require less government action - may require more government expertise, not less. If implementing a ten percent export subsidy is difficult, consider the difficulty of determining whether a firm is exercising market power or restraining trade. So the prospect of governments stepping back may be unrealistic. The new consensus also proposes"deep integration", or the adoption of uniform standards in such areas as competition policy and labor and environmental standards. For East Asia, the shift to the international consensus may be appropriate because government-driven growth has declined in intellectual respectability. Also, it may be time to consolidate the gains from the rapid trade-led growth by focusing on creating a stronger incentive structure for efficiently using resources. The current consensus is based on strong priors rather than on solid empirical evidence, however, and the dangers of international uniformity in policy are evident.Labor Policies,Environmental Economics&Policies,ICT Policy and Strategies,Economic Theory&Research,Decentralization,ICT Policy and Strategies,Environmental Economics&Policies,Economic Theory&Research,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Achieving Shared Growth

Test of the German Resilience

From its early post-war catch-up phase, Germany’s formidable export engine has been its consistent driver of growth. But Germany has almost equally consistently run current account surpluses. Exports have powered the dynamic phases and helped emerge from stagnation. Volatile external demand, in turn, has elevated German GDP growth volatility by advanced countries’ standards, keeping domestic consumption growth at surprisingly low levels. As a consequence, despite the size of its economy and important labor market reforms, Germany’s ability to act as global locomotive has been limited. With increasing competition in its traditional areas of manufacturing, a more domestically-driven growth dynamic, especially in the production and delivery of services, will be good for Germany and for the global economy. Absent such an effort, German growth will remain constrained, and Germany will play only a modest role in spurring growth elsewhere

The response speed of the International Monetary Fund. Bruegel Working Paper 2013/03, 16 July 2013

The more severe a financial crisis, the greater has been the likelihood of its management under an IMF-supported programme and the shorter the time from crisis onset to programme initiation. Political links to the United States have increased programme likelihood but have prompted faster response mainly for ‘major’crises. Over time, the IMF’s response has not been robustly faster, but the time sensitivity to the more severe crises and those related to fixed exchange rate regimes did increase from the mid-1980s. Similarly, democracies had tended to stall programme initiation but have become more supportive of financial markets’ demands for quicker action

Is it necessary to stop HIV infected mothers breastfeeding? We need a clear-cut decision.

I refer to the timely article by Doherty et al. published in the February issue of the Bulletin of World health Organization (1). It has been seen in Southern India that out of 134 HIV-infected mothers, 81% are a potential source of vertical transmission of HIV and this devastating impact on families is alarming (2). We have no further information on this group of HIV-positive mothers, in particular how many infected mothers are giving birth the HIV-positive babies, and also what is the possibility of HIV transmission by breastfeeding in this group. We need a decision regarding the safety of children breastfeeding from a HIV positive mothers. Should those mothers stop feeding their babies to prevent transmission of HIV? Recent studies revealed that HIV type 1 (HIV-1) in breast milk may not necessarily infect a child through breastfeeding. Again, from a review of several recent publications, it has been reported that there is a possible risk to transmit HIV-1 by breastfeeding, but that the risk is not highly significant. The risk is there, of course, but may be cured with timely anti retroviral therapy treatment of the HIV-positive pregnant mother. The fact is that breastfeeding saves many children, mainly in resource-poor countries where the majority of people cannot afford formula milk or a good substitute to mother’s milk. Eventually, breastfeeding not only protects babies by increasing their immunity to infection, breast milk also prevents under-nutrition and starvation. Breastfeeding is still recommended where infectious diseases are a common cause of childhood death, despite the additional risk of HIV transmission. Unfortunately, there is an ambiguous recommendation “In countries where safe alternatives to breast milk exist, HIV-1 positive mothers should not breast feed their infants. On the other hand, in countries where infectious diseases cause considerable infant death, HIV-1 positive mothers should consider breastfeeding.” (3). We need a clear evidence-based opinion on HIV infected breastfeeding: is it safe or not? Chitta Ranjan Choudhury. REFERENCES: Tanya Doherty et al. Effect of the HIV epidemic on infant feeding in South Africa: "When they see me coming with the tins they laugh at me". Bull World Health Organ 2006;84:90-97 Mayer K et al. Marriage, monogamy and HIV: a profile of HIV-infected women in south India International Journal of STD & AIDS, Volume 11, Number 4, 1 April 2000, pp. 250-253(4) Dunn DT, Newell ML, Ades AE, Peckham CS. Risk of human immunodeficiency virus type 1 transmission through breastfeeding. Lancet: 1992 Sep 5;340(8819):585-8. Epidemiology and Biostatistics Unit, Institute of Child Health, London, UK. Professor Chitta Ranjan Choudhury, Coordinator, International Programme for Tropical Oral Health, Poole Hospital NHS and IHCS, Bournemouth University, Longfleet road, Poole, Dorset BH15 JB, England, UK; and Head, Department of Oral Biology, Centre for Oral Disease Prevention & Control, AB Shetty Memorial institute of Dental Sciences, Deralakatte, Mangalore, India (Email: [email protected])

Motivating the construction academic: a conceptual study

The main purpose of this study is to understand factors that motivate and demotivate a construction academic based on existing literature. An extensive examination of published literature failed to reveal any studies on motivation or demotivation of construction academics but for a few studies on motivation of academics in general. These studies revealed over 25 intrinsic and extrinsic factors which were differentiated between factors cited in conceptual and empirical studies. A further distinction was made between factors cited in studies focussed directly on motivation of academics, and factors cited in studies investigating a different topic. Factors so identified, provide a broad base for understanding ‘what’ factors affect motivation and demotivation of academics However, these studies have not taken into account discipline specific, job level, and other contextual issues or prioritised factors based on importance. Moreover, ‘how’ these factors could be used for improving organisational performance focussing on different disciplines and roles within these disciplines have not been studied either. Nevertheless, an examination of these factors revealed that most fall within the control of the university management. As such, there is a need for understanding what management styles could be used for increasing motivation and minimising demotivation, and this is an area that needs investigation focussing on construction specific issues vis-à-vis context and job roles

Lending booms, reserves, and the sustainability of short-term debt - inferences from the pricing of syndicated bank loans

Academics pay little attention to international bank lending, focusing instead on rapidly growing market segments such as the international bond market and derivative credit instruments. The authors argue for paying more attention to international bank lending. Why? Three reasons. First, the syndicated bank loan is one of the workhorses of international capital markets. Second, international bank lending is especially important for private-sector borrowers, whose participation in international capital markets will grow as capital markets are liberalized and state enterprises privatized. Sovereigns and other governmental borrowers rely more on the bond market, while private borrowers are disproportionately important to the market in international bank loans. Private-sector borrowers establish long-term relationships with banks to resolve information problems. The authors find that international banks provide more credit to smaller borrowers (about whom information is least complete) than bond markets do. Bank finance dominates that segment of international financial markets with the greatest information asymmetry. Third, spreads on syndicated bank loans show much less variation than spreads on international bonds. Are bank lenders properly pricing country and credit risk? Does spread compression on syndicated bank loans suggest excessive moral hazard in international bank lending? The authors warn against over-dependence on high levels of domestic debt. While growth in domestic debt reflects improved inter-mediation between savers and investors, rapid increases to high levels are viewed as unsustainable and raise the cost of international borrowing. They find evidence of growing bullishness among bank lenders to East Asia in the first half of the 1990s, which could reflect moral hazard, but the jury is still out on that issue. High external short-term debt can coexist with rapid growth for extended periods but is likely to unravel if perceptions of sustainability shift.Payment Systems&Infrastructure,Economic Theory&Research,Banks&Banking Reform,International Terrorism&Counterterrorism,Financial Intermediation,Housing Finance,Economic Adjustment and Lending,Banks&Banking Reform,Financial Intermediation,Economic Theory&Research

Would Collective Action Clauses Raise Borrowing Costs?

We examine the implications for borrowing costs of including collective-action clauses in loan contracts. For a sample of some 2,000 international bonds, we compare the spreads on bonds subject to UK governing law, which typically include collective-action clauses, with spreads on bonds subject to US law, which do not. Contrary to the assertions of some market participants, we find that collective-action clauses in fact reduce the cost of borrowing for more credit-worthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. In contrast, less credit-worthy issuers pay, if anything, higher spreads. We conjecture that for less credit-worthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions.

Would collective action clauses raise borrowing costs? - an update and additional results

It is easy to say that the International Monetary Fund should not resort to financial rescue for countries in crisis; this is hard to do when there is no alternative. That is where collective action clauses come in. Collective action clauses are designed to facilitate debt restructuring by the principals - borrowers, and lenders - with minimal intervention by international financial institutions. Despite much discussion of this option, there has been little action. Issues of bonds fear that collective action clauses would raise borrowing costs. The authors update earlier findings about the impact of collective action clauses on borrowing costs. It has been argued that only in the past year or so, have investors focused on the presence of these provisions, and that, given the international financial institutions'newfound resolve to"bail in"investors, they now regard these clauses with trepidation. Extending their data to 1999, the authors find no evidence of such changes, but rather the same pattern as before: Collective action clauses raise the costs of borrowing for low-rated issuers, but reduce them for issuers with good credit ratings. Their results hold both for the full set of bonds and for bonds issued only by sovereigns. They argue that these results should reassure those who regard collective action clauses as an important element in the campaign to strengthen international financial architecture.Economic Theory&Research,International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Banks&Banking Reform,Strategic Debt Management,Financial Intermediation,Environmental Economics&Policies,Strategic Debt Management,Economic Theory&Research,Banks&Banking Reform

The usefulness of private and public information for foreign investment decisions

Using a specially designed survey of Japanese firms planning investments in Asia, the authors emphasize the importance of privately held information in making foreign investment decisions. Information on operating conditions based on direct experience in a country is likely to be the most credible information, but for investors new to a country, information inferred from observing others investing in that country may be more influential. Initially, in fact, observing the actions of competitors seems to lead to cascading investments in that country, apparently through herd behavior (as in China and Vietnam). Countries which do not draw a critical mass of investors are in danger of being bypassed for significant periods. Publicly available information is important in helping shape average perceptions about a country,leading potential investors to view particular locations favorably. Privately held information complements that pubic information, and accounts for important variations in investment plans. Subjective perceptions about policy on foreign direct investments are also important. Policy designed to attract investors -for example, special zones for foreign investors- have been successful in many instances, especially in East Asia, but have also been a waste of scarce investment resources when not appropriately planned. And such policy is of little value in attracting those already investing in a country, or those who already perceive rivals to be active there.International Terrorism&Counterterrorism,Environmental Economics&Policies,Labor Policies,ICT Policy and Strategies,Decentralization,Environmental Economics&Policies,International Terrorism&Counterterrorism,ICT Policy and Strategies,Financial Intermediation,General Technology