Causality between external debt and capital flight in Sub-Saharan Africa

Over the past few decades, the foreign liabilities of the majority of countries in Sub-Saharan Africa have grown dramatically, propelling most nations into the status of Highly Indebted Poor Countries, when these liabilities reached unsustainable levels in the 1990s. At the same time, increases in capital flight from the region followed a parallel trend, leading scholars to draw on"revolving door"models to explain the apparent positive covariation of external debt and capital flight in the region. This paper investigates the causality between external debt and capital flight in a cross-section of Sub-Saharan African countries using co-integration and error-correction models. Although dual causality, which is consistent with the revolving door hypothesis, cannot be rejected for the majority of countries, empirical evidence highlights the lead of external debt over capital flight. The significance of error-correction terms points to a long-run co-integrating relationship between external debt and capital flight in a large number of countries.Economic Theory&Research,External Debt,Debt Markets,Deposit Insurance,Currencies and Exchange Rates

CREDIT SCORING, LOAN PRICING, AND FARM BUSINESS PERFORMANCE

In light of recent developments in agricultural credit evaluations, this study employs a multiperiod simulation model that endogenizes farm investment decisions, credit evaluations, and loan pricing based on the credit scoring procedures of agricultural lender. Model results show that credit-scored pricing yields time patterns of performance, credits classifications, and interest rates that parallel the firmÂ’s investment, financing, and debt servicing activities. Moreover, the lenderÂ’s price responses dampen growth incentives as credit worthiness diminished, stimulate growth as credit improves, and lead to similar capital structures over time.Agricultural Finance,

Estimating a Risky Term Structure of Uruguayan Sovereign Bonds.

Based on a joint three – factor a¢ ne model, we estimate the term structure of interest rates and default spreads for Uruguay using the reduced - form approach developed by Du¢ e and Singleton. We …nd that Uruguayan average term structure was negatively sloped between 1997 and 2003, as indicated by previous empirical evidence for low –quality debtors. Surprisingly, Uruguayan average yield curve was also negatively sloped between 1997 and 2001, when the country’s foreign –currency denominated debt was considered investment grade by the leading rating agencies. We also …nd that the estimated Uruguayan default spread is able to capture the behavior and dynamics of a more traditional country risk benchmark such as the “Uruguayan Bond Index” (UBI), with observations on a single Uruguayan bond. Finally, we …nd that regional, international and local …nancial crises cause parallel shifts in the Uruguayan yield curve, with higher increases in short –term rates, and that the banking and debt crises experienced by the country in 2002 had the biggest e¤ects on the average Uruguayan term structure.default risk; term structure; reduced-form model; default spread

Developments in sovereign bond issuance in the Central and Eastern European region after the Lehman collapse

This paper focuses on the impact of the financial and economic crisis of 2008–2009 on the issuance of sovereign debt in the Central and Eastern European region and other developing countries. As a result of the fiscal rescue packages, the financing requirement of both developed and emerging countries has increased significantly since 2007, giving rise to substantial changes in risk appetite as well as considerable shifts in demand for the securities of various issuers operating in the global bond markets. During the most severe period of the crisis, only countries with the best credit ratings were able to obtain substantial amounts of funds, while less developed or emerging economies had limited options. In particular, shrinking borrowing opportunities translated into rising yields, weak auction demand and hence unsuccessful auctions. While the market turmoil did not spare less developed euro area countries either; these developments had a particularly negative impact on the government securities markets in the Central and Eastern European region. Although improving risk appetite prompted a parallel rebound in emerging sovereign bond markets, heightened competition for the shrinking financing resources raised the cost of funds in higher-risk economies considerably. Our findings show that – besides developments in risk appetite – demand for the sovereign bonds of emerging countries was also influenced by the crowding-out effect generated by the increased issuance of government papers in developed markets.sovereign debt, risk premium, debt issuance.

Optimal Capital Structure and the Term Structure of Interest Rates

In this paper we study corporate debt values, capital structure, and the term structure of interest rates in a unified framework. We employ numerical techniques to compute the firm's optimal capital structure and the value of its long-term risky debt and yield spreads when the value of the firm's unleveraged assets and the instantaneous default-free interest rate are risk factors. Debt and leveraged firm value are thus explicitly linked to properties of the firm's unleveraged assets, the term structure of default-free interest rates, taxes, bankruptcy costs, payout rates, and bond covenants. The results clarify the relationship between a firm's capital structure and movements in the term structure and other important aspects of the capital structure decisionCapital Structure, Term Structure, Parallel Processing

CHALLENGES, VULNERABILITIES AND WAYS OF APPROACH IN ROMANIA'S EXTERNAL DEBT SUSTAINABILITY

The notion of a country's external debt, measured by a complex system of static and dynamic indicators, knows a lot of approaches and opinions in the literature, more or less convergent, complementary and advanced in terms of factors. Indicators of the external public and private debt on short, medium and long term provide a snapshot of indebtedness of the country and are the most researched domain in the literature, including national and international financial bodies, which adopt a series of classification criteria of countries in terms of size and dynamics of external debt. In this study, we intend to make an analysis of the volume, dynamics and structure of the current Romania's foreign debt, showing the challenges for national economic policies, present and perspective, the internal and external vulnerabilities and ways of approaching the external debt sustainability. According to the definition given by UNCTAD, a sustainable foreign debt is that level of debt which: - allows the indebted country to pay all current and future debt service without resorting to restructuring or rescheduling;- prevents accumulation of arrears and defaults;- in parallel provides an acceptable level of growth in the lending country. Until recently, Romania was considered a country with a low external debt. Currently, the situation has changed, meaning that this debt, somewhat neglected in the early transition period has become a serious threat to present and future sustainability of economic development in Romania. In general, external debt concerns financial and economic interests of all parties especially creditors and debtors, by the formula "win-win", so that, currently, some countries have surplus of balance of payments, usually the most developed and economically healthy, while others have deficits that, in extreme situations, can lead to inability to pay the debt, which means tough measures and policies, especially for the living standards of many generations of taxpayers.

Overcoming the Zero Bound on Nominal Interest Rates: Gesell's Currency Carry Tax vs. Eisler's arallel Virtual Currency

Despite the zero lower bound on the short nominal interest rate in Japan having become a binding constraint, conventional monetary policy in Japan, in the form of generalised open market purchases of government securities of all maturities, has never been pushed to the limit where all outstanding government debt and all current and anticipated future government deficits are (or are confidently expected to be) monetised. Open market purchases of private securities can create serious governance problems. Two ways of overcoming the zero lower bound constraint have been proposed. The first is Gesell's carry tax on currency. The second is Eisler's proposal for the unbundling of the medium of exchange/means of payment function and the numeraire function of money through the creation of a parallel virtual currency. This raises the fundamental issue of who chooses or what determines the numeraire used in private wage and price contracts - an issue that is either not addressed in the literature or addressed incorrectly. On balance, Gesell's proposal appears to be the more robust of the two.zero bound, deflation, carry tax on currency, parallel virtual currency

Debts of Cyprus Households: Lessons from the First Cyprus Survey of Consumer Finances

This paper describes participation of Cyprus households in various debts using data from the first (1999) Cyprus Survey of Consumer Finances. It complements our previous paper that described household participation in various types of assets (Haliassos et al., 2001). Debts considered encompass personal unsecured loans, including credit card debt, and loans secured by housing collateral, mainly mortgage debt. Findings are of policy interest, as they show the extent of household participation in various loans, and the indebtedness of various demographic groups. We document considerable popularity of credit cards as borrowing instruments despite their recent introduction, and a continuing parallel presence of antiquated forms of borrowing (informal store credits). There is surprisingly limited use by the young of mortgages, despite very high homeownership rates, and of car loans, despite high car ownership rates. We find evidence of considerable reliance on family transfers for the financing of education, home acquisition, and car purchase by the young. Particularly problematic for equality of opportunities is the limited ability of the young to take student loans and the reliance on their parents to do so in order to finance their post-secondary education. Finally, we have noted a tendency of Cyprus business owners to take out large loans from their business for personal use.

What Have We Learned from the Reagan Deficits and Their Disappearance?

This paper looks again at the U.S. deficit debate of the 1980s, this time with the benefit of the Commerce Department's newly revised data for that period and also in light of the experience of the 1990s when sizeable budget surpluses replaced chronic large deficits. The familiar conclusion that sustained government deficits at full employment depress private capital formation has stood up well in both regards. By contrast, the more recent experience in particular has sharply contradicted any simple notion that the government balance and the current account balance move in parallel. Other relevant issues include the equilibrium (that is, noninflationary) unemployment rate, the response of private saving to government dissaving, and the role of debt and equity in financing private capital formation.