Prominent financial sector experts were in the audience at an IMF Book Forum held on May 10. The lessons of sovereign debt crises of the past decade, the likely contours of future crises, and the Fund’s role in crisis prevention in emerging markets were discussed.
At the forum, the IMF’s Jeromin Zettelmeyer summarized his book, Debt Defaults and Lessons from a Decade of Crises, written jointly with Harvard’s Federico Sturzenegger. The book provides an in-depth account of seven crises since 1998—in Russia, Ukraine, Pakistan, Ecuador, Argentina, Moldova, and Uruguay—and a brief description of the crisis in the Dominican Republic. Each account tackles key questions: How did the crisis develop? What were the costs to the countries? What debt was restructured and on what terms?
The general conclusions were that crises were very costly to countries in terms of output loss and economic dislocation; crises were typically “twin” or even “triple” crises, affecting the currency, debt, and banking; and countries recovered fairly quickly once the debt was restructured. The restructurings themselves were found to be reasonably quick and with high participation rates in almost every case. The size of investor losses—that is, the “haircut”—was estimated to vary from zero to as high as 75 percent in some of the crises. These haircuts notwithstanding, investors have enjoyed much higher returns on emerging market debt since 1990 than the historical average.
The book shows that, contrary to expectations, the shift from syndicated loans to bonds (increasingly, investors are the creditors, and they typically have less enduring business relations with the country) has not slowed debt restructuring; nor has it reduced participation rates or made it necessary for countries to restructure again. Also, in recent years, a number of countries have restructured their debt without going into arrears, a good sign for the prevention of deeper crises.
The book also outlines a comprehensive “tool kit” for the analysis of debt problems: it discusses the main solvency and liquidity indicators and shows how to carry out debt dynamics decompositions and debt sustainability analyses, how to estimate recovery values, and how to assess the financial impact of default.
In a roundtable discussion, experts from the Brookings Institution, the Peterson Institute for International Economics, the private sector, and the International Institute of Finance praised the book, calling it an essential reference work for understanding the crises of the 1990s. William R. Cline of the Peterson Institute also lauded the book but said he wished it had “graded countries on how they handled crises” and been more candid in stating that some countries had “handled the crisis very poorly.”
IMF First Deputy Managing Director John Lipsky described the book as “a very useful compendium” of the experience of sovereign debt crises of the past decade. He noted the book’s “great discussion” of what domestic policymakers have achieved and of how work on the international financial architecture had made the global financial world a safer place. He noted, however, that much more remained to be done. Sturzenegger and Zettelmeyer discussed some of the newer proposals for crisis prevention and resolution. They put forward the notion of “crisis preparation,” partly through the use of “fire walls”—policies that make it more difficult for a crisis in one sector to spread to another. Forum discussant Brad Setser of Roubini Global Economics thought that the idea of crisis preparation held promise.
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