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Debt Vulnerabilities in Developing Countries: a New Debt Trap?

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Debt Vulnerabilities in Developing Countries: a New Debt Trap? UNCTAD UNITEDUNITED NATIONS NATIONS CONFERENCE CONFERENCE ON ON TRADE TRADE AND AND DEVELOPMENT DEVELOPMENT V olume II – DEBTDEBT VULNERABILITIES VULNERABILITIES ININ DEVELOPING DEVELOPING COUNTRIES: COUNTRIES: DEBT VULNERABILITIES IN DEVELOPING COUNTRIES: A NEW TRAP AA NEW NEW DEBT DEBT TRAP? TRAP? VolumeVolume II: II: Policy Policy Options Options and and Tools Tools ? UNITED NATIONS Layout and Printing at United Nations, Geneva – 1801793 (E) – October 2018 – 635 – UNCTAD/GDS/MDP/2017/4 (Vol. II) UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT DEBT VULNERABILITIES IN DEVELOPING COUNTRIES: A NEW DEBT TRAP? Volume II: Policy Options and Tools New York and Geneva, 2018 2 DEBT VULNERABILITIES IN DEVELOPING COUNTRIES: A NEW DEBT TRAP? VOLUME II: POLICY OPTIONS AND TOOLS © 2017, United Nations This work is available open access by complying with the Creative Commons licence created for intergovernmental organizations, available at http://creativecommons.org/licenses/by/3.0/igo/. The findings, interpretations and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the United Nations or its officials or Member States. The designation employed and the presentation of material on any map in this work do not imply the expression of any opinion whatsoever on the part of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. Photocopies and reproductions of excerpts are allowed with proper credits. This publication has not been formally edited. United Nations publication issued by the United Nations Conference on Trade and Development. UNCTAD/GDS/MDP/2017/4 (Vol II) ABOUT THE AUTHORS 3 ABOUT THE AUTHORS David Bicchetti is an Economic Affairs Officer at UNCTAD. He joined UNCTAD’s Macroeconomic Branch in 2010 where he focuses his interest on the interactions between financial markets and information flows and their influence on price discovery mechanisms. Before joining the United Nations in 2009, he worked as a researcher at the Swiss Institute of Technology in Lausanne and is the co-author of several studies on post-Kyoto protocol mechanisms and their impacts on the world economy. David Neto is a Researcher at the Institute of Economics and Econometrics at the Geneva School of Economics and Management, University of Geneva. He has published in leading economics and science journals, including the Oxford Bulletin of Economics and Statistics, Economic Notes and Physica A. Martin Guzman is an Associate Research Scholar at Columbia University Graduate School of Business, and an Associate Professor at the Department of Economics at University of Buenos Aires. He is also a member of the Institute for New Economic Thinking Research Group on “Macroeconomic Efficiency and Stability” (chaired by Prof. Joseph Stiglitz), a co-chair of Columbia Initiative for Policy Dialogue‘s Taskforce on Debt Restructuring and Sovereign Bankruptcy, and a non-resident Senior Fellow at the Centre for International Governance Innovation. His research fields are Macroeconomics, Sovereign Debt, and Economic Development. Jan Kregel is director of research at the Levy Economics Institute, Director of the Levy Institute master’s program in economic theory and policy, and Head of the Institute’s Monetary Policy and Financial Structure program. He also holds the position of professor of development finance at Tallinn University of Technology. In 2009, Kregel served as Rapporteur of the President of the UN General Assembly’s Commission on Reform of the International Financial System. He previously directed the Policy Analysis and Development Branch of the UN Financing for Development Office and was deputy secretary of the UN Committee of Experts on International Cooperation in Tax Matters. His major works include a series of books on economic theory, among them, Rate of Profit, Distribution and Growth: Two Views (1971); The Theory of Economic Growth (1972); Theory of Capital (1976); and Origini e sviluppo dei mercati finanziari (1996). In 2011, Kregel was elected to the Accademia Nazionale dei Lincei, also known as the Lincean Academy, the oldest honorific scientific organization in the world. He is a life fellow of the Royal Economic Society (UK) and an elected member of the Società Italiana degli Economisti. CONTENTS 5 CONTENTS About the authors ���������������������������������������������������������������������������������������������������������������������������������������� 3 Introduction ��������������������������������������������������������������������������������������������������������������������������������������������������� 7 References ������������������������������������������������������������������������������������������������������������������������������������������������� 13 MONITORING FINANCIAL STABILITY IN EMERGING AND FRONTIER MARKETS DAVID BICCHETTI AND DAVID NETO ................................................................................ 15 Introduction ����������������������������������������������������������������������������������������������������������������������������� ������ 16 I� Literature review of financial/economic composite indexes .......................................... ������ 17 A. Existing FCI/FSI for emerging and frontier markets ................................................ ...... 18 B. Existing FCI/FSI for developed markets .................................................................. ...... 18 II� Methodology ��������������������������������������������������������������������������������������������������������������������� ������ 19 III� Data and summary statistics ������������������������������������������������������������������������������������������� ������ 20 VI� Estimation method ����������������������������������������������������������������������������������������������������������� ������ 20 V� Results ������������������������������������������������������������������������������������������������������������������������������ ������ 21 VI� Conclusion ����������������������������������������������������������������������������������������������������������������������� ������ 22 Acknowledgments ������������������������������������������������������������������������������������������������������������������ ������ 22 Notes �������������������������������������������������������������������������������������������������������������������������������������� 29 References ������������������������������������������������������������������������������������������������������������������������������������� 30 CONTINGENT INSTRUMENTS IN SOVEREIGN LENDING MARKETS MARTIN GUZMAN......................................................................................................... 33 Introduction ����������������������������������������������������������������������������������������������������������������������������������� 34 I� Sovereign Credit Default Swaps �������������������������������������������������������������������������������������������� 35 A. Market completion and efficiency gains ........................................................................ 36 B. Interpretation of SCDS contracts ................................................................................... 36 C. Argentina’s litigation dispute and the opaque SCDS markets ....................................... 37 D. The EU ban of naked SCDS ........................................................................................... 38 II� GDP indexed bonds ���������������������������������������������������������������������������������������������������������������� 43 A. The current debate ......................................................................................................... 43 B. The case of Argentina .................................................................................................... 44 III� Conclusions ����������������������������������������������������������������������������������������������������������������������������� 46 Appendix �������������������������������������������������������������������������������������������������������������������������������������� 47 Notes �������������������������������������������������������������������������������������������������������������������������������������� 52 References ������������������������������������������������������������������������������������������������������������������������������� ������ 53 6 DEBT VULNERABILITIES IN DEVELOPING COUNTRIES: A NEW DEBT TRAP? VOLUME II: POLICY OPTIONS AND TOOLS THE CLEARING UNION PRINCIPLE AS THE BASIS FOR REGIONAL FINANCIAL ARRANGEMENTS IN DEVELOPING COUNTRIES JAN KREGEL ................................................................................................................ 57 Introduction ����������������������������������������������������������������������������������������������������������������������������������� 58 A. Evolution of the International Financial System ............................................................. 58 B. Developing Countries and the International Financial System ...................................... 59 C. National and International Monetary Systems ............................................................... 60 I� Bretton Woods and its problems ������������������������������������������������������������������������������������������� 62 A. The Bretton Woods System
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