ORIGINAL SIN AND DARK MATTER (STILL) MATTER: ASSET COMPOSITION AND SOLVENCY

Ricardo Hausmann Harvard University & Santa Fe Institute Why do we care about deficits?

• Because deficits determine the evolution of net financial assets • Surplus = ΔNet Financial Assets = ΔNFA • Financial income is a function of financial assets and liabilities • Fin.Income= i * NFA • The higher the , the higher the primary surplus needed to be solvent • Steady State Primary Surplus = (i - g) d • Where g is the nominal growth rate and d is the debt to GDP ratio • This is true both for fiscal dynamics as well as balance of payments dynamics For example, let us look at Japan Japan accumulated US$ 3 T in CAS and increased its Fin. Income in US$ B 140 150 3000 100 2000 50 1000 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment 0 0

1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD Japan accumulated ~50% of GDP in CAS and 2.5% in net financial income .6 .03 .4 .02 .2 .01 Investment Income Net, % of GDP of % Net, Income Investment Cumulative Current % Account, GDP of 0 0

1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP Japan: implied is reasonable .07 .06 Implied interest rate interest Implied .05 .04 1990 1995 2000 2005 2010 year But many countries do not look like Japan

Let us look at the US The US accumulated US$ 8 T in CAD, but its fin. income went up by US$ 130B 0 200 150 -2000 100 -4000 50 -6000 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment 0 -8000 1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD The cumulative CAD is 50% of GDP Financial income increased 1% of GDP 0 .015 -.1 .01 -.2 -.3 .005 -.4 Investment Income Net, % of GDP of % Net, Income Investment -.5 Cumulative Current % Account, GDP of 0

1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP The US pays a negative interest rate on its net financial position .02 .01 0 Implied interest rate interest Implied -.01 -.02 1990 1995 2000 2005 2010 year One accounting approach

• Consider that all assets pay a benchmark rate – Say 5% • If you can invest and obtain a higher return, it is as if you own an asset that pays also pays 5% and that represents the difference • If you pay more than 5%, it is as if you borrowed a larger debt that also pays 5% but that represents the same interest payment • We call this asset “dark matter” – Hausmann and Sturzenegger (2006) (2007) US dark matter is 80 percent of GDP .8 .6 .4 .2 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative 0

1980 1990 2000 2010 year Japan’s dark matter is insignificant .1 .05 0 -.05 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative -.1

1980 1990 2000 2010 year How can the US do this?

• Say the US borrowed US$ 8 trillion net • …but in fact it borrowed US$ 20 trillion gross • Say it pays 3% on its gross debt – US$ 600 billion • It uses the extra US$ 12 trillion to invest abroad • Say the return is 7% – US$ 840 billion • Net financial income would go up by US$ 240 billion Why don’t we all do this? • We can all ask Goldman Sachs or JP Morgan to manage our money • But US investments abroad are mostly FDI • They include productive knowledge • The apparent financial return incorporates payment for the use of productive knowledge • When China buys US treasuries, it does not add any knowledge to the investment • Differential returns are an equilibrium phenomenon • If some countries get excess returns, others pay excess returns (they must add to zero worldwide) China’s CAD at US$ 2T Interest income at US$20B 20 2000 10 1500 0 1000 -10 500 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment 0 -20 1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD China’s CAD at 30% of GDP Interest income at 0% of GDP .3 .005 .2 0 .1 -.005 0 -.01 Investment Income Net, % of GDP of % Net, Income Investment Cumulative Current % Account, GDP of -.015 -.1 1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP China’s implied interest rate is negligible 0 -.2 -.4 -.6 Implied interest rate interest Implied -.8 -1 1990 1995 2000 2005 2010 year China imports dark matter to the tune of 30% of GDP .1 0 -.1 -.2 -.3 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative -.4

1980 1990 2000 2010 year Interpretation

• China is running current account surpluses • But it has large FDI inflows – With their embedded knowledge • …and it is buying a lot of international securities – With their normal returns Chile Chile accumulated a CAD of US$15B, but pays a similar amount dividends 0 0 -5 -10 -10 -20 -15 -30 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment -20 -40 1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD Chile’s CAD is small but it pays 8% in “debt service” (160% of GDP at 5%) 0 -.02 -.04 -.2 -.06 -.4 -.08 -.6 -.1 Investment Income Net, % of GDP of % Net, Income Investment Cumulative Current % Account, GDP of -.12 -.8 1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP Chile’s implied interest rate is almost 80% of the cumulative CAD .8 .6 .4 Implied interest rate interest Implied .2 0

1990 1995 2000 2005 2010 year Chile’s dark matter amounts to 150% of GDP 0 -.5 -1 -1.5 -2 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative -2.5 1980 1990 2000 2010 year Interpretation

• Chile has received significant FDI in mining and elsewhere • Good times have dramatically increased the returns on those investments • But the assets that Chile has invested abroad pay much less • The difference is equivalent to a very large Colombia Colombia’s cum. CAD at US$60B Interest payments at US$12B 0 0 -20 -5 -40 -10 -60 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment -15 -80 1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD Colombia’s CAD is at 20% of GDP Interest payments at 3.5% of GDP (not 1 percent at 5%) 0 -.01 -.02 -.1 -.03 -.2 -.04 -.3 -.05 Investment Income Net, % of GDP of % Net, Income Investment Cumulative Current % Account, GDP of -.4 -.06 1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP Colombia’s implied interest rates at ~20 percent .2 .15 .1 Implied interest rate interest Implied .05 0

1990 1995 2000 2005 2010 year Peru Peru accumulated CAD of US$40B Interest payments at US$10B 0 0 -2 -10 -4 -20 -6 -30 -8 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment -40 -10 1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD Peru’s CAD at ~30 percent of GDP Interest payments at 6% 0 -.02 -.04 -.2 -.06 -.4 -.08 -.6 -.1 Investment Income Net, % of GDP of % Net, Income Investment Cumulative Current % Account, GDP of -.12 -.8 1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP Peru’s implied interest rate at 20% .2 .15 .1 Implied interest rate interest Implied .05 0

1990 1995 2000 2005 2010 year Peru’s dark matter is at ~100% of GDP .5 0 -.5 -1 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative -1.5 1980 1990 2000 2010 year Mexico Mexico’s CAD at US$ 270B Interest payments at US$ 18B 0 -5 -10 -100 -15 -200 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment -20 -300 1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD Mexico’s CAD at 25% of GDP Interest payments at less than 2% 0 0 -.1 -.02 -.2 -.04 -.3 -.06 Investment Income Net, % of GDP of % Net, Income Investment Cumulative Current % Account, GDP of -.4 -.08 1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP Mexico’s implied interest rate is reasonable .05 0 Implied interest rate interest Implied -.05 -.1 1990 1995 2000 2005 2010 year Mexico does not have much dark matter debt .2 0 -.2 -.4 -.6 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative -.8 1980 1990 2000 2010 year Brazil Brazil’s CAD at ~US$ 280B Interest payments at ~US$40B 0 -10 -100 -20 -30 -200 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment -40 -300 1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD Brazil’s CAD is at ~10% of GDP Interest payments at 2% of GDP 0 -.01 -.02 -.1 -.03 -.2 -.04 -.3 -.05 Investment Income Net, % of GDP of % Net, Income Investment -.4 Cumulative Current % Account, GDP of -.06 1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP Brazil’s implied interest at ~15% .2 .15 .1 .05 Implied interest rate interest Implied 0 -.05 1990 1995 2000 2005 2010 year Brazil’s dark matter at ~20% of GDP -.1 -.2 -.3 -.4 -.5 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative -.6 1980 1990 2000 2010 year IMPLIED INTEREST RATES - 2010 ImpliedImplied interestinterest raterate 20102010 (Investment income > 0) .6

FRA .4 .2

DNK

CHE Implied interest rate interest Implied JPNDEUFINSWE CHN KOR HKG NLD NOR 0 JOR LBN BELUSA GBR MUS -.2 3.5 4 4.5 5 GDP per capita, logs ImpliedImplied interestinterest raterate (Investment income < 0)

.8 CHL

IRL .6 .4

ISR CZE PER

.2 COL URY ARGBRA TUN PAN POLHRVESTSVK SVN EMU

Implied interest rate interest Implied HUN MKD ZAFBLR SLV ALB BGR LTU PRT GRC ESPITA JAMBIH CRI ROMMEXTUR LVA 0 SRB VEN AUT RUS AZE NAM -.2

3.6 3.8 4 4.2 4.4 4.6 GDP per capita, logs RATINGS AND INVESTMENT INCOME Ratings:Ratings: InvestmentInvestment IncomeIncome matters,matters, cumulativecumulative CACA doesdoes notnot

Debt Rating VARIABLES (1) (2) (3) (4)

real GDP per capita, log 11.93*** 13.62*** 12.11*** 13.63*** (2.236) (2.618) (2.255) (2.614) Total debt to GDP -3.23*** -3.08*** -3.15*** -3.07*** (0.756) (0.733) (0.709) (0.717)

Net Investment Income to GDP 10.75*** 10.64*** (2.936) (3.059) Cumulative CA to GDP 0.43 0.07 (0.439) (0.451) Constant -26.46*** -32.50*** -27.09*** -32.52*** (7.755) (9.210) (7.826) (9.199)

Observations 1,451 1,404 1,451 1,404 Adjusted R-squared 0.343 0.367 0.345 0.367 Year FE Yes Yes Yes Yes Country FE Yes Yes Yes Yes Conclusions

• Assets and liabilities have radically different returns • This means that the evolution of the current account is a poor guide to solvency • The net financial income is a more relevant indicator of solvency • And markets seem to notice • A similar analysis could be done for public debt ORIGINAL SIN Definition

• Eichengreen and Hausmann (1999) defined original sin as "a situation in which the domestic currency is not used to borrow abroad" – Countries that suffer from original sin need to borrow funds dominated in terms of a major foreign currency – If the borrowing country's domestic currency depreciates, the will become more difficult to repay Measurement

• Eichengreen, Hausmann, and Panizza (2001) used BIS data on the currency composition of international securities to build two indexes of original sin

Securities issued by country i in currency i OSIN1 =1− Securities issued by country i Securities issued in currency i OSIN3 = max(1− ,0) Securities issued by country i

• Most research has focused on OSIN3 Causes

• The case of the missing apple – Original sin (at least its international component) does not appear to be correlated with any of the obvious suspects • No correlation with , fiscal deficit, quality of policies, and institutional quality – Policies and predictability do matter for the domestic component of original sin – Only country size seems to matter • Eichengreen, Hausmann, and Panizza (2005b) “The Mystery of Original Sin” Consequences

• The pain of original sin – Original sin leads to “fear of floating,” high GDP volatility, low credit ratings, sudden stops, and limited ability to conduct an independent monetary policy • Eichengreen, Hausmann, and Panizza (2005a) “The Pain of Original Sin” • Hausmann, Panizza, and Stein (2001) “Why Do Countries Float the Way They Float?” Not Everybody Agrees

• Original sin is the outcome of bad policies – Goldstein and Turner (2004) – Burger and Warnock (2006) – Reinhart, Rogoff, and Savastano (2003) • Maybe original sin was a problem in the past but it’s no longer a problem now – The principal emerging markets sales desk pitch of recent years has been the expiation of the "original sin" of governments' borrowing in foreign currencies. (John Dizard, Financial Times, October 21 2008). But original sin has not gone down much

1.00 1,100,000

1,000,000

900,000 0.80

800,000

700,000 0.60 600,000

500,000 Million USD 0.40 400,000

300,000

0.20 200,000

100,000

0.00 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

International bonds issued by developing countries (right scale) International bonds issued in the currency of developing countries (right scale) International bonds issued by developing countries in their own currency (right scale) OSIN1 (left scale) Source: Hausmann and Panizza (2009) OSIN3 (left scale) But original sin has not gone down much

1 0.9 0.8 0.7 0.6 0.5

OSIN3 0.4 0.3 0.2 0.1 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 ALL DEVELOPING LAC EME ASIA Source: Hausmann and Panizza (2009) But original sin has not gone down

10 9 8 7 6 5 4

Nr. of countriesNr. 3 2 1 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 OSIN3<0.75 OSIN1<0.85

Source: Hausmann and Panizza (2009) And yet, things seem to have improved

Monetary policy in EM during the Asian/Russian crises (1996-98) 10

IDN COL 5

VEN HUN BRA SGP HKG THADOM CHL THA PHL PERCZE CZEURY MYS MEX ZAFPAK POL POLARG ZAF 0 ARG PER UKRPAK ARGPHL CHL PAK MEXHKG MYS SGP POLHUN CHLHKGPHL PER COL URYZAFDOM SGP BRA e( RAT3 | | ) X RAT3 e( HUNCZE VEN THA COL -5

IDN -10 -10 -5 0 5 10 e( DGDP | X ) Source:coef Hausmann = -.35318082, (robust) and Panizzase = .10534057, (2009) t = -3.35 And yet, things seem to have improved

Monetary policy in EM around the subprime crisis (2008-09) 4

RUS

TUR CHL PER PAK 2

ZAFPOL COLDOM MEX THA URY CHN BRA HUN SGP IND CZEIDN BGRARG PHL UKR VEN 0 HKG MYS MYS HKG VEN UKR PHL ARGBGR IDNCZE SGP HUN BRA IND CHN

e( RAT3 | | ) X RAT3 e( URY MEX DOMCOL THA POLZAF

-2 CHL PAK TURPER

RUS -4 -5 0 5 e( DGDP | X ) Source:coef Hausmann = .15196862, (robust) and sePanizza = .1111714, (2009) t = 1.37 What has gone down is net external borrowing by developing countries

• Consider the following measure of aggregate mismatches: foreign currency debt international reserves MISM = − + GDP GDP foreign currency debt − (1− OSIN) GDP • So, a country can reduce its aggregate mismatch by – Borrowing less (in gross terms) – Accumulating reserves – Reducing original sin 50.00%

40.00%Developing countries no longer have a net external debt 30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

-30.00%

-40.00% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 EXD/GDP INT RES/GDP OS3C MIS3 Source: Hausmann and Panizza (2009) Lower mismatches and not lower original sin are the explanation for better polices Dependent variable: Policy interest rate (1) (2) (3) L.IR 0.528*** 0.659*** 0.533*** (0.0521) (0.0866) (0.0541) INF 0.398*** 0.280** 0.406*** (0.0688) (0.109) (0.0657) GROWTH -0.281*** 0.157** -0.0457 (0.0769) (0.0706) (0.11) MISM3 2.679 (1.956) MIS3*GR -0.722 (0.466) Constant 2.832*** 0.303 1.639** (0.834) (0.588) (0.78) Observations 270 52 270 R-squared 0.642 0.307 0.649 N. of countries 23 26 23 Period 1993-08 2008-09 1993-08 GROWTH+ 0.28*MIS3*GR -0.248*** p-value 0.00 GROWTH+ 0.09*MIS3*GR -0.111 p-value 0.147

Fixed effects regressions Source: Hausmann and Panizza (2009) Conclusions

• There is limited traction for the redemption story, but countries seem to be doing what we suggested they could do:

If a country …suffers from … original sin.., when it accumulates a net debt, as developing countries are expected to do, it will have an aggregate currency mismatch on its balance sheet. … such a country can take steps to eliminate that mismatch or prevent it from arising in the first place… it can decide not to borrow. A financially autarchic country will have no currency mismatch because it has no external debt, even though it still suffers from original sin… Alternatively, the government can accumulate foreign reserves to match its foreign obligations. In this case the country eliminates its currency mismatch by eliminating its net debt. Eichengreen, Hausmann, Panizza (2005a) RATINGS, INVESTMENT INCOME AND ORIGINAL SIN Ratings,Ratings, InvestmentInvestment IncomeIncome andand OSINOSIN

Debt Rating VARIABLES (1) (2) (3) (4)

real GDP per capita, log 11.99*** 12.12*** 14.25*** 14.25*** (1.621) (1.616) (2.086) (2.097) Total debt to GDP -5.14*** -5.11*** -4.70*** -4.70*** (0.924) (0.957) (0.939) (0.979) Original Sin (3) -2.18*** -2.19*** -2.29*** -2.29*** (0.572) (0.575) (0.580) (0.576) Central Bank Reserves to GDP -0.36 -0.53 -0.53 (1.645) (1.773) (1.772) Net Investment Income to GDP 10.53*** 10.57*** (3.401) (3.207) Cumulative CA to GDP -0.02 (0.512) Constant -25.52*** -25.96*** -33.65*** -33.63*** (5.688) (5.609) (7.404) (7.461)

Observations 897 897 874 874 Adjusted R-squared 0.514 0.514 0.526 0.525 Year Fe Yes Yes Yes Yes Country FE Yes Yes Yes Yes Conclusions

• Countries are borrowing less • They are holding large FOREX reserves • …which lower their net financial income • These may be optimal policies in the presence of original sin • But they are second best policies • The country will not benefit from financial globalization • Reserves are expensive • While reserves give more policy space, they don’t improve perceptions of solvency Thank you!

[email protected] Colombia .2 0 -.2 -.4 -.6 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative -.8 1980 1990 2000 2010 year Germany 80 1500 60 1000 40 20 500 0 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment 0 -20 1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD Germany .4 .02 .3 .01 .2 0 .1 Investment Income Net, % of GDP of % Net, Income Investment Cumulative Current % Account, GDP of 0 -.01 1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP Germany .2 .1 0 -.1 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative -.2

1980 1990 2000 2010 year Germany .2 .1 0 Implied interest rate interest Implied -.1 -.2

1990 1995 2000 2005 2010 year France 40 200 30 150 20 100 10 50 0 0 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment -50 -10 1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD France .15 .015 .01 .1 .005 .05 0 0 Investment Income Net, % of GDP of % Net, Income Investment Cumulative Current % Account, GDP of -.005 -.05 1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP France .3 .2 .1 0 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative -.1

1980 1990 2000 2010 year France .6 .4 .2 Implied interest rate interest Implied 0 -.2 1990 1995 2000 2005 2010 year Cumulative current account and investment income LATIN AMERICA Argentina 0 -2 -20 -4 -40 -6 -60 -8 -80 Cumulative Current Account, Billions Investment Income Net, Billions USD BillionsNet, Income Investment -100 -10 1980 1990 2000 2010 year

Cumulative Current Account, Billions Investment Income Net, Billions USD Argentina 0 0 -.2 -.02 -.4 -.04 -.6 -.06 -.8 Investment Income Net, % of GDP of % Net, Income Investment Cumulative Current % Account, GDP of -1 -.08

1980 1990 2000 2010 year

Cumulative Current Account, % of GDP Investment Income Net, % of GDP Argentina 0 -.5 -1 Cumulative Dark Matter, % of GDP GDP of % Dark Matter, Cumulative -1.5 1980 1990 2000 2010 year Argentina .15 .1 .05 Implied interest rate interest Implied 0 -.05

1990 1995 2000 2005 2010 year

DARK MATTER CumulativeCumulative darkdark mattermatter 20102010

LBN

1 MUS BIH GBR USA JORJAM SRB LVA CHE ALB ROM FRA BGRCRI TUR PRT GRCESP DNK SLVTKM MEX LTU EMU 0 BLR ITA SGP MKD ZAF SVN JPNDEUBELAUT BRA KOR ISR FIN CHNECUDZA URYPOLHRVSVK SWE TUN DOM ARG HUN EST NLD COL VEN THA PAN HKG PER -1 MYS RUS CZE NOR NAM BWA CHL GAB AGO

-2 KAZ AZE TTO Accumulated of % Matter, GDP Dark -3 IRL 3.5 4 4.5 5 GDP per capita, logs

Investment Income> 0 Investment Income< 0 80.00% What has gone down is net external borrowing 60.00% by developing countries

40.00%

20.00%

0.00%

-20.00%

-40.00% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 EXD/GDP INT RES/GDP OS3C MIS3 Source: Hausmann and Panizza (2009) 8,000,000 But, maybe redemption was achieved by

7,000,000 borrowing domestically

6,000,000 Domestic bonds 5,000,000 International bonds 4,000,000

3,000,000 Million USD

2,000,000

1,000,000

0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Countries included in the sample: Argentina, Brazil, Chile, China, Colombia, Croatia, Czech Republic, Hong Kong SAR, Hungary, India, Indonesia, South Korea, Lebanon, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Russia, Singapore, Slovakia, South Africa, Taiwan (China), China, Thailand, Turkey, Venezuela.

Source: Hausmann and Panizza (2009) Possible, but unlikely

Developing countries’ bonds held by US investors

1,800,000 40%

1,600,000 35%

1,400,000 30%

1,200,000 25%

1,000,000

20%

800,000

15% 600,000

10% 400,000

5% 200,000

0 0% 2003 2004 2005 2006 2007

USD EUR YEN GBP OTHER Share Oth. Currencies (right axes) Share not in USD (right axis) Possible, but unlikely

Original sin indexes based on US Treasury data

Mean Median St Dev Min Max N.Obs US SIN1 =1-(OTH+OWN)/TOT 2003 0.94 1 0.16 0 1 69 2004 0.90 1 0.23 0 1 70 2005 0.89 1 0.22 0 1 70 2006 0.83 0.97 0.24 0 1 70 2007 0.81 0.95 0.24 0 1 72 US SIN2 =1-OWN/TOT 2006 0.90 1 0.22 0 1 70 2007 0.90 1 0.21 0.10 1 72

Source: Hausmann and Panizza (2009) Possible, but unlikely

US-SIN2: countries with value of the index lower than 0.9 (2007 survey)

KOR

URY

EGY

ZAF

BRA

TWN

MYS

COL

IDN

ZMB

HUN

POL

CZE

0 0.10.20.30.40.50.60.70.80.91

Source: Hausmann and Panizza (2009) Measurement

• Caveats: – These indexes only include international securities • They don’t include syndicated bank and official (multilateral and bilateral) loans • They don’t capture the activity of foreign investors in the domestic market – They don’t measure the domestic component of original sin