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Notwithstanding announcements of progress, “international original sin” (the denomination of external debt in foreign currency) remains a persistent phenomenon in emerging markets. Although some middle-income countries have succeeded in developing markets in local-currency sovereign debt and attracting foreign investors, they continue to hedge their currency exposures through transactions with local pension funds and other resident investors. The result is to shift the locus of currency mismatches within emerging economies but not to eliminate them. Other countries have limited original sin by limiting external borrowing, passing up valuable investment opportunities in pursuit of stability. We document these trends, analyzing regional and global aggregates and national case studies. Our conclusion is that there remains a case for an international initiative to address currency risk in low- and middle-income economies so they can more fully exploit economic development opportunities.

This article introduces the Haitian Independence Debt of 1825 to the odious debt and sovereign debt literatures. We argue that the legal doctrine of odious debt is surprisingly and perhaps indefensibly narrow, possibly because of historical contingency rather than any underlying logic or principle. The story of the Haitian Independence Debt of 1825 serves as an illustrative case study. In the context of telling that story, we provide estimates of the evolution of Haiti’s external debt-to-GDP ratio over 1825–2020, and discuss the implications of the independence debt for the economy of Haiti. We conclude by discussing the implications of Haiti’s Independence Debt for the doctrine of odious debt and the possibilities for Haiti to recover compensation.

The economic harm being caused by the novel coronavirus may soon result in multiple sovereign debtors moving into default territory, but the existing playbook for dealing with multi-sovereign emerging market debt crises is blank. Currently, the only way to deal with a debt crisis is to carry out protracted country-by-country and contract-by-contract negotiated workouts. Expert groups are attempting to design a mechanism to run multiple sovereign debt workouts simultaneously but any design will take time to configure and get international buy-in. This article sets forth some options to provide temporary legal protection to debtor countries while they are diverting resources to respond to the Covid-19 pandemic. This is the notion of ‘legal air cover’. The options we propose involve ex-post state intervention in debt contracts and come with risks, but we show that in the case of Greece, where such an intervention was necessary in 2012, there were no negative spillovers on periphery eurozone debt markets associated with the Greek ex-post modification of contract terms.

Countries with large debts stocks are vulnerable to the vagaries of the markets. Confidence crises can arise out of nowhere, constricting access to the markets. Hence, the question arises as to whether these countries should put in place mechanisms that will help them better prepare for the possibility of crisis. In effect, the choice is whether to buy insurance. The cost of buying such insurance is that the possibility that markets will see the sovereign’s proactive steps to protect against a crisis not as an indication of prudent governance but rather as an indicator that a crisis is imminent. In this article, we use the case of a Euro area country (Italy) with a large debt stock and that has been hit particularly hard by Covid-19 to set forth its options, as of 2020, to anticipate a possible future debt restructuring. It can: do nothing, do a little; or do something substantial.

During the European sovereign debt crisis of 2011–13, some nations faced with rising borrowing costs adopted commitments to treat bondholders as priority claimants. That is, if there were a shortage of funds, bondholders would be paid first. In this article, we analyse the prevalence and variety of these types of commitments and ask whether they impact borrowing costs. We examine a reform that was widely touted at the height of the Euro sovereign debt crisis in 2011, in which Spain enshrined in its constitution a strong commitment to give absolute priority to public debt claimants. We find no evidence that this reform had any impact on Spanish sovereign bond yields. By contrast, our examination of the US Commonwealth of Puerto Rico suggests that constitutional priority promises can have an impact, at least where the borrower government is subject to supervening law and legal institutions.

The conventional paradigm about development banks is that these institutions exist to target well-identified market failures. However, market failures are not directly observable and can only be ascertained with a suitable learning process. Hence, the question is how do the policymakers know what activities should be promoted; how do they learn about the obstacles to the creation of new activities? Rather than assuming that the government has arrived at the right list of market failures and uses development banks to close some well-identified market gaps, we suggest that development banks can be in charge of identifying these market failures through their loan-screening and lending activities to guide their operations and provide critical inputs for the design of productive development policies. In fact, they can also identify government failures that stand in the way of development and call for needed public inputs. This intelligence role of development banks is similar to the role that modern theories of financial intermediation assign to banks as institutions with a comparative advantage in producing and processing information. However, while private banks focus on information on private returns, development banks would potentially produce and organize information about social returns.

This article reviews recent economic and legal literature on sovereign debt in light of the COVID-19 shock. Most of the core theoretical contributions across the two disciplines hinge on immunity, and the sovereign borrower's consequent inability to commit to repay foreign creditors, as the distinguishing attribute of sovereignty. We highlight a persistent gap between sovereign debt theories grounded in immunity and empirical evidence that the governments of low- and middle-income countries borrow far more than theory would predict. On the other hand, the governments of advanced economies, generally viewed as outside the scope of this literature before the euro area debt crisis, have shown themselves to be far more commitment challenged than previously supposed. We conclude that the traditional split between a literature concerned with developing economy sovereigns that repudiate debt and one concerned with advanced economies that do not is no longer appropriate (if ever it was). We argue that shifting some attention away from immunity to a different attribute of sovereignty—authority—could help bridge the gap between the two literatures.

The post-Global Financial Crisis period shows a surge in corporate leverage in emerging markets and a number of countries with deteriorated corporate financial fragility indicators (Altman's Z-score). Firm size plays a critical role in the relationship between leverage, firm fragility and exchange rate movements in emerging markets. While the relationship between firm-leverage and distress scores varies over time, the relationship between firm size and corporate vulnerability is relatively time-invariant. All else equal, large firms in emerging markets are more financially vulnerable and also systemically important. Consistent with the granular origins of aggregate fluctuations in Gabaix (2011) , idiosyncratic shocks to the sales growth of large firms are positively and significantly correlated with GDP growth in our emerging markets sample. Relatedly, the negative impact of exchange rate shocks has a more acute impact on the sales growth of the more highly levered large firms.

On May 26, 2017, Harvard economist Ricardo Hausmann published an Op Ed titled “Hunger Bonds”, urging investors to avoid Venezuelan sovereign bonds on the grounds that the country was prioritizing payments on the bonds over remedying a humanitarian crisis. Contemporaneously, news emerged regarding a suspicious looking bond issue by Venezuela’s oil company that was purchased largely by Goldman Sachs. That bond got tagged with the label “Hunger Bond”, and suffered a price hit. Using both quantitative data and interviews with investors, we examine the causes of the Hunger Bond penalty, its impact on the prices of other outstanding Venezuelan bonds, and how long it was sustained. The primary determinants of the Hunger Bond penalty appear to have been a combination of negative press attention and crowd-sourced disapproval. For instance, we show that a large number of Google searches for “Hunger Bonds” are associated with a 200 basis point increase in the spread of the bond purchased by Goldman Sachs.

The paper shows that international government borrowing from multilateral development banks is countercyclical while international government borrowing from private sector lenders is procyclical. The countercyclicality of multilateral development bank (MDB) lending is mostly driven by the behavior of the World Bank (borrowing from regional development banks tends to be acyclical). The paper also shows that MDB lending to Latin America and East Asia is more countercyclical than MDB lending to other regions. Private sector lending is instead procyclical in all developing regions. While the cyclicality of MDB lending does not depend on domestic or international conditions, private lending becomes particularly procyclical in periods of limited global capital flows. By focusing on both borrower and lender heterogeneity, the paper shows that the cyclical properties of international government debt are mostly driven by credit supply shocks. Demand factors appear to be less important drivers of procyclical international government borrowing. The focus on supply and demand factors is different from the traditional push and pull classification, as push and pull factors could affect both the demand and the supply of international government debt.

For multiple decades, activists have sought to institute an international legal regime that limits the ability of despotic governments to borrow money and then shift those obligations onto more democratic successor governments. The goal of this chapter is to raise the possibility of an alternate legal path to raising the costs of borrowing for despotic regimes. All countries have systems of domestic laws that regulate agency relationships and try to deter corruption; otherwise the domestic economy would not function. Despotic governments are especially likely to engage in transactions that are legally problematic, since by definition, they lack the support of the populace; meaning that there is a high likelihood that actions that they take on behalf of the populace can be challenged as unrepresentative and contrary to the interests of the true principals. The foregoing conditions, if one translates them into the context of an ordinary principal–agent relationship, would constitute a voidable transaction in most modern legal systems. That means that if opposition parties in countries with despotic governments today were to monitor and make public the potential problems with debt issuances by their despotic rulers under their own local laws, it would raise the cost of capital for those despots. To support our argument, we use both the concrete example of the debt issuance shenanigans of the Maduro government in Venezuela and a more general analysis of the relationship between corruption, democracy, and a nation’s borrowing costs.

This article introduces the Haitian Independence Debt of 1825 to the odious debt and sovereign debt literatures. We argue that the legal doctrine of odious debt is surprisingly and perhaps indefensibly narrow possibly because of historical contingency rather than any underlying logic or principle. The story of the Haitian Independence Debt of 1825 serves as an illustrative case study. In the context of telling that story, we provide estimates of the evolution of Haiti’s external debt-to-GDP ratio over 1825-2020, and discuss the implications of the independence debt for the economy of Haiti. We conclude by discussing the implications of Haiti’s Independence Debt for the doctrine of odious debt and the possibilities for Haiti to recover compensation.

This paper studies whether countries benefit from servicing their debts during times of widespread sovereign defaults. Colombia is typically regarded as the only large Latin American country that did not default in the 1980s. Using archival research and formal econometric estimates of Colombia's probability of default, we show that in the early 1980s Colombia's fundamentals were not significantly different from those of the Latin American countries that defaulted on their debts. We also document that the different path chosen by Colombia was due to the authorities' belief that maintaining a good reputation in the international capital market would have substantial long-term payoffs. We show that the case of Colombia is more complex than what it is commonly assumed. Although Colombia had to re-profile its debts, high-level political support from the US allowed Colombia do to so outside the standard framework of an IMF program. Our counterfactual analysis shows that in the short to medium run, Colombia benefited from avoiding an explicit default. Specifically, we find that GDP growth in the 1980s was higher than that of a counterfactual in which Colombia behaved like its neighboring countries. We also test whether Colombia's behavior in the 1980s led to long-term reputational benefits. Using an event study based on a large sudden stop, we find no evidence for such long-lasting reputational gains.

Realizamos una estimación de los déficits de inversión pública en una muestra de países en vías de desarrollo, utilizando una función de demanda de inversión pública. Luego empleamos proyecciones del producto interno bruto (PIB) per cápita, previsiones de transformación estructural y tres metas de los Objetivos de Desarrollo Sostenible (ODS) (pobreza, mortalidad infantil y finalización de la enseñanza secundaria de primer ciclo) para pronosticar las necesidades de inversión pública en 2030 en países de América Latina y el Caribe. Nuestras estimaciones sugieren que en 2015 el déficit total de inversión pública de esos países era de cerca de 170 mil millones de dólares (3,1 % del PIB de la región) y se esperaba que para el año 2030 este superara los 1,4 billones de dólares (12,4 % del PIB de la región) si se alcanzaran los ODS.

The economic harm being caused by the novel coronavirus may soon result in multiple sovereign debtors moving into default territory. But the existing playbook for dealing with multi-sovereign emerging market debt crises is blank. The only debt crisis scenario we know is protracted country-by-country and contract-by-contract negotiated workouts. As of this writing, expert groups are working on the design of a mechanism to run multiple sovereign debt workouts simultaneously. Those designs, however, will take time to configure and get international buy-in. This paper sets forth some options to provide temporary legal protection to the debtor countries in the meantime; while they are in need of diverting resources toward Covid amelioration. This is the notion of "legal air cover". The options we propose involve ex post state intervention in debt contracts. They are extreme and may come with risks. But we show that in the case of Greece, when intervention such as we envision was necessary, there were no negative spillovers on periphery Eurozone debt markets associated with the Greek ex post modification of contract terms.

Unnoticed in the literature on sovereign bonds, an innovation has been taking place over the past decade and a half. Starting with a single issuance in 2006 by Mexico and two issuances by Brazil in 2007, a small number of issuers have been using what are known as “doomsday” or “make whole” call provisions. These are call options set deep out of the money at issuance, and therefore unlikely to ever be triggered. We report the birth and evolution of the clause over the past fifteen years and ask what drove its application to sovereign bonds. We also estimate its cost for the issuing country. It turns out, at least thus far, that it is free.

We use firm-level data from six Central and Eastern European economies to examine whether political connections ease financial constraints faced by firms. We show that politically connected firms are characterized by higher leverage, lower profitability, and lower productivity of capital than unconnected firms. However, we do not find any significant difference in investment rates between them. Politically connected firms, though less productive than unconnected firms, borrow more because they have easier access to credit. Our results are consistent with the idea that political connections distort capital allocation and may have welfare costs.

It is increasingly claimed that unconventional monetary policies are subject to decreasing effectiveness in supporting growth and raising the inflation rate. There are good reasons to believe that the effects of further asset purchases by central banks and of moving the interest rate deeper in negative territory progressively decline. But has it been happening? This paper attempts to provide an answer. Looking at the Eurozone, the UK, the US and Japan, it uses different approaches (local projection and Bayesian VAR) on different sub-samples. The evidence is mixed. Policy interventions proxied by the shadow policy rate seem to be subject to the decreasing effectiveness hypothesis. However, this is not the case for QE announcements.

Cet article examine la litterature empirique sur les liens entre finance et croissance en mettant l'accent sur la litterature empirique qui a montre que la contribution marginale du developpement financier a la croissance economique devient negative dans les pays dotes d'importants secteurs financiers (effet « trop de finance »). Cet article evalue ensuite la validite empirique et theorique de recentes critiques formulees envers cette litterature et conclut en proposant quelques pistes de recherche pour l'avenir en vue d'identifier par quels canaux un secteur financier tres important peut entrainer un ralentissement de la croissance economique.Classification JEL : F36, G10, O16, O40.

This paper reviews the empirical literature on the links between finance and growth with a special focus on the literature that has shown that the marginal contribution of financial depth to economic growth becomes negative in countries with large financial sectors (the “too much finance” result). It then assesses the empirical and theoretical validity of recent criticisms to this literature and concludes by discussing avenues for future research aimed at identifying the channels through which a very large financial sector can slow down economic growth.

Contrary to widespread presumption, a surprisingly large number of countries have been able to finance a significant fraction of their investment for extended periods using foreign finance. While many of these episodes are in countries where official finance is important, we also identify episodes where a substantial fraction of domestic investment is financed by private capital inflows. Although there is evidence of a positive growth effect of such inflows in the short run, that positive impact dissipates after 5 years and turns negative over longer horizons. Many such episodes end abruptly, with compression of the current account and sharp slowdowns in investment and growth. Summing over the inflow (current account deficit) episode and its aftermath, we find that growth is slower than when countries rely on domestic savings. The implication is that financing growth and investment out of foreign savings, while not impossible, is risky and too often counterproductive.

The recurrence of ever more destructive economic crises and patterns of pervasive indebtedness and inequality threaten the social fabric of our societies. Our main responses to these trends have been partial, focusing on symptoms rather than causes, often exacerbating rather than improving the underlying socio-economic dynamics. To reflect on these conditions and on ‘what needs to be done’ this article turns to a similar socio-economic malaise faced by the city-state of Athens in the 6th century BC. Most historical studies dealing with this crisis focus on the comprehensive debt relief policy (seisachteia) implemented by Solon. We argue that this debt relief, although necessary, was the least important of Solon’s reforms. Solon read the problem of debt as a problem of money so he went on to reform the monetary and exchange system. However, he did not think that these reforms alone could restore socioeconomic sustainability. For this, a redefinition of what was counted as valuable economic activity and as income had also to take place. Moreover, for all these to work, citizens had to be involved more in the commons. Far from only achieving socioeconomic sustainability, these reforms gave rise gradually to the demos that we meet in the golden age of Democracy. Such a broad historical horizon may help us grasp better the problems, stakes and challenges of our times.

Governments issue debt for good and bad reasons. While the good reasons—intertemporal tax smoothing, fiscal stimulus, and asset management—can explain some of the increases in public debt observed in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing and budgetary institutions and fiscal rules can play a role in mitigating the tendency to overborrow. While it is difficult to establish a clear causal link from high public debt to low growth, it is likely that some countries might be paying a price in terms of lower growth and greater output volatility because of excessive debt accumulation.

This paper examines whether political connections ease financial constraints faced by firms. Using firm-level data from six Central and Eastern European economies, the paper shows that politically connected firms: (i) have high levels of leverage, (ii) have low levels of profitability, (iii) are less capitalized, (iv) have low marginal productivity of capital, and (v) do not invest more than unconnected firms. Next, the paper shows that connected firms borrow more because they have easier access to credit and that political connections lead to a misallocation of capital. The results are consistent with the idea that political connections distort capital allocation and may have welfare costs.

This paper presents a comprehensive examination of the determination and evolution of inflation expectations, with a focus on emerging market and developing economies (EMDEs). The results suggest that long-term inflation expectations in EMDEs are not as well anchored as those in advanced economies, despite notable improvements over the past two decades. Indeed, in EMDEs, long-term inflation expectations are more sensitive to both domestic and global inflation shocks. However, EMDEs tend to be more successful in anchoring inflation expectations in the presence of an inflation targeting regime, high central bank transparency, strong trade integration, and a low level of public debt.

Governments issue debt for good and bad reasons. While the good reasons—intertemporal tax-smoothing, fiscal stimulus, and asset management—can explain some of the increases in public debt in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing though budgetary institutions and fiscal rules can play a role in mitigating governments’ tendencies to overborrow. While it is difficult to establish a clear causal link from high public debt to low output growth, it is likely that some countries pay a price—in terms of lower growth and greater output volatility—for excessive debt accumulation.

Countries with large debts stocks are vulnerable to the vagaries of the markets. Confidence crises can arise out of nowhere, constricting access to the markets. Hence, the question arises as to whether these countries should put in place mechanisms that will help them better prepare for the possibility of crisis. In effect, the choice is whether to buy insurance. The cost of buying such insurance is that the possibility that markets will see the sovereign’s proactive steps to protect against a crisis not as an indication of prudent governance but rather as an indicator that a crisis is imminent. In this article, we use the case of a Euro area country (Italy) with a large debt stock and that has been hit particularly hard by Covid-19 to set forth its options, as of 2020, to anticipate a possible future debt restructuring. It can: do nothing, do a little; or do something substantial.

In China, between 2006 and 2013 local public debt crowded out the investment of private firms by tightening their funding constraints, while leaving state-owned firms'investment unaffected. We establish this result using a purpose-built dataset for Chinese local public debt. Private firms invest less in cities with more public debt, the reduction in investment being larger for firms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private firms'investment is more sensitive to internal cash flow, also when cash-flow sensitivity is estimated jointly with the probability of being credit-constrained.

During the European sovereign debt crisis of 2011-13, some nations faced with rising borrowing costs adopted commitments to treat bondholders as priority claimants. That is, if there was a shortage of funds, bondholders would be paid first. In this article, we analyze the prevalence and variety of these types of commitments and ask whether they impact borrowing costs. We examine a widely-touted reform at the height of the Euro sovereign debt crisis in 2011, in which Spain enshrined in its constitution a strong commitment to give absolute priority to public debt claimants. We find no evidence that this reform had any impact on Spanish sovereign bond yields. By contrast, our examination of the U.S. Commonwealth of Puerto Rico suggests that constitutional priority promises can have an impact, at least where the borrower government is subject to supervening law and legal institutions.

IMF forecasts and the EU's Fiscal Compact foresee Europe’s heavily indebted countries running primary budget surpluses of as much as 5 percent of GDP for as long as 10 years in order to maintain debt sustainability and bring their debt/GDP ratios down to the Compact’s 60 percent target. We show that primary surpluses this large and persistent are rare. In an extensive sample of high- and middle-income countries there are just three (non-overlapping) episodes where countries ran primary surpluses of at least 5 per cent of GDP for 10 years. Analyzing a less restrictive definition of persistent surplus episodes (primary surpluses averaging at least 3 percent of GDP for five years), we find that surplus episodes are more likely when growth is strong, when the current account of the balance of payments is in surplus (savings rates are high), when the debt-to-GDP ratio is high (heightening the urgency of fiscal adjustment), and when the governing party controls all houses of parliament or congress (its bargaining position is strong). Left wing governments, strikingly, are more likely to run large, persistent primary surpluses. In advanced countries, proportional representation electoral systems that give rise to encompassing coalitions are associated with surplus episodes. The point estimates do not provide much encouragement for the view that high-debt European countries will be able to run a primary budget surplus as large and persistent as officially projected.