,
WHATCANTHEDEVELOPEDWORLDLEARNFROMTHELATINAMERICANDEBTANDMEXICANPESOCRISIS?(Index1Q08¼100).AccordingtotheBIS,ifgovernmentsdonotmakesubstantialfiscalpolicychanges,’;thatofJapan,Spain,theUnitedKingdom,andtheUnitedStates,998percent;andthatofAustralia,Germany,Greece,GermanytheNetherlands,andPortugal,-95ges,thedebt-to-GDPratiowouldgoaboveItaly300percentinJapan,200percentintheUnited93Kingdom,and150percentinBelgium,France,Ireland,Greece,Italy,andtheUnitedStates[Cecchetti,Mohanty,andZampolli2010].,,theUnitedStatesisnotfacinganSource:’,,atleastconceptually,,theunprecedentedlargecreditand/orgovernmentspending(measuredbytotalspendingpropertybubbles,andthesubsequentadjustmentasapercentofGDP),’(September11,,2011),capitalmarketsplummetedwhileun-publicdebtandfiscaldeficitsasapercentageofcertaintycontinuedtogrow,,in2007YettheEuropeanfiscalcrisishasbeenaseriousIreland’,,,,Spain,,whileincountrieslikelossduethemagnitudeoftherecession[InternationalMone-Belgium,France,Italy,andtheUnitedKingdomitrepresentedtaryFund2010].morethan40percentofGDP[WorldBank2011].3
(Index01-Jul-2011¼100)1/,,thereisnodefinedmechanismforbanks’recapitalization,nodebtrestructuringprocedure, ,,-Jul-1118-Jul-114-Aug-1121-Aug-117-Sep-11oftheEuropeancrisiscanbesplitintothreeSource::first,denial;second,recognition;andfinally,implementationandaction. Denial:Duringtheearlystagesofthecrisis,(ECB),theEuropeanpoliticalwork,,authoritiesweretryingtoavoidAlittlebitofhistoryisusefultounderstandanypossibilityofrestructuring,asitspotentialhowthesecountrieshavefoundthemselvesinconsequencesfortheeurosystemwere(,theMaastrichtTreatysetprobablystillare)-countriestoachieveEconomicandMonetaryUnion(EMU):-flation,lowinterestrates,andcontrolledpublicThis,intheend,(SGP) Recognition:,in2003somecountries,,theyhaverealizedthatthelargesteconomiesintheEurozonesuchasweakpublicfinancesinseveralcountriesFranceandGermany,,in2005,,,-resourcetransferstotheperiphery,whiletectureoftheExchangeRateMechanism(ERM) Implementation:Today,Europeanauthoritiespiecesarecrucialforansweringkeyquestionsinthearefinallyfacingtherealityofthecrisis,including4
WHATCANTHEDEVELOPEDWORLDLEARNFROMTHELATINAMERICANDEBTANDMEXICANPESOCRISIS?,LatinAmericawithstrictersanctionsfordeviations(),totheestablishmentofaEur-thelate1970s,LatinAmericaneconomies,likeopeanfinanceministry,totheissuanceofaperipheralEuropeinthe2000s,,alongwitharigidexchangerateregime,,financialmarketswerebuoyedbyultimatesolution,butitwillcertainlytaketime,,inmyview,areclearfromthisprocess:similartothoseofGreece,Ireland,Spain,,theproblemwasinitiallycomparisonoftheLatinAmericanandEuropeancharacterizedasoneofliquidityratherthancountriespriortotheircrises,,whiletheglobaltime,ring-fenceothercountries(especiallyeconomyexpandedandinterestrateswererela-Spain),,’“behindthecurve.”PolicyimplementationLatinAmerica’sgrowthwasmainlydrivenbyhasbeenreactivetomarketstress,andthedy-publicspending,,,interestratesrisen,—(%ofGDP).1/Averageformulatedsofarandthosethatwillbeaddeduntil1981–86forArgentina,1981–85forBrazil,1980–,and1982–-tionisinplace,-110callyemphasizedtheissuesofgrowthand100competitiveness,,inmostcases,apainful50“internaldevaluation”:Reinhart,Rogoff,andSavastano[2003],[2011a].5ArgentinaBrazilChileMexicoPortugalIrelandGreeceSpain
(%ofGDP).2/–82for2010.().1301202501986-19892008-20101102AverageAverage100200Total debt90CARG = 25% 1973-8080150706050Banking100CARG = 30%40305020100019731977198019811982Source:InternationalMonetaryFund[2011aand2011b].Source:DevlinandFrench-Davis[1995].andtheglobaleconomydecelerated,(interestasa%ofGDP).sustainabilityofLatinAmerica’sdebtbecameevident,,,fallinginternationaloilprices,rising5worldinterestrates,’sshort-termdebt,,:-byPrograms;Source:InternationalMonetaryFund[2011a].;,finally,theysoughtdebtreliefthroughtheBradyPlan(describedbelow).institutionsandrefinancingofexistinginterna-tionalbanklending—onasignificantleveloffiscaladjustment,tightermonetarypolicy,andFiscaladjustmentslimmerpublicsectors(includingtheprivatiza-Inthe1980s,thefirstresponsetothedebtcrisistionofstate-ownedenterprises).Inmyview,therewastheimplementationofIMF-sponsoredstabili-wasaclearunderstandingbetweentheIMF,thezationprograms—,—
WHATCANTHEDEVELOPEDWORLDLEARNFROMTHELATINAMERICANDEBTANDMEXICANPESOCRISIS?’sFiscalAdjustmentlending.(Averageprimarybalanceanddebtasa%ofGDP)-to-GDPratioscontinuedtorise,andcred-1983–-1987–,while1991––-1983–:Source:INEGI,Banxico,GFS,-ficienttooffsetthenegativeeffectsoneconomicgrowthofcontinuedcapitaloutflows,deterioratingInordertocontaintheeffectsofitsdebtcrisis,termsoftrade,,theGreekledtoexchangeratepoliciesgearedtopromotegovernmentpresentedapackagethatsoughtaexports,(from ,itwasthroughthe2010to ),,,incountrieslikeMexico,theinitialre-Unfortunately,,,;marketdevelopmentssincetheannouncementindicatethat,tosaytheleast,’sPrimaryBalanceandDebt3successoftheprogramiswidespread.(%ofGDP).,--230economicturmoil,Mexico,forinstance,-6throughextensivetradereforms,theprivatization10ofmostpublicsectorenterprises,-1001977198219871992199720023Editor’snote:AsofNovember13,2011theGreekgov-ernmenthadfallen,andtherewasnoresolutionofwhomorSource:InstitutoNacionaldeEstadisticayGeografiadewhatwouldsolve/,Mexico(INEGI),BancodeMexico,InternationalMonetaryFundItalyhadfallenintoasovereigndebtcrisisandwasforminga[2011b]
,(%)PerCapitaGDP(%)Clearly,therealexchangeratedepreciationhelped,CountrywhichisnotanavenueopentodaytoEuropean1980–-andlong-termdebtsustain-Argentina ,externaldemandconditionsChile ;thisisnottheMexico :;Heston,SummersandsustainabledevelopmentprocesswasasimportantAten[2011].,althoughpolicymakersaregenerallyawarethatdebtsustainabilityisnotachievableintheabsenceofeconomicgrowth,- Anewdisbursementguarantee;plementingstructuralreformsandausteritymea- Andareductionindefaultrisk(andthusasuressimultaneouslymayhavebeenpoliticallyeasierreductionininterestrates).intheLatinAmericaofthe1980s,-Inthelate1980s,“Lostdecade,”—,,negotiatethemenuthatbestsuitedtheirneeds—,aloweraddition,internationalcapitalmarketswerenotinterestrate,,despitetheexpectedfutureIn1988,-present-valueterms,itobtainedtransferofresourcestocreditors,,,yieldonitsexternaldebtplunged,andthehowever,[Wijnbergen,debtreductionallowedthecountrytoregainKing,andPortes1991].,thesepoliciesessentialtothesuccessofthenewstrategy:enabledthegovernmenttoanchorinflation,whichhadbeenrunningabove100percent,and Anadequateburden-sharingmechanism,-Debtrelief,inacontextwherefiscaladjustmentvicethenewdebt;wasalreadyundertaken,waswhatprovidedthepossibilityofsuccesstothedisinflationprogram4thatwasputinplaceatthetimeandwhat,inEvenso,
WHATCANTHEDEVELOPEDWORLDLEARNFROMTHELATINAMERICANDEBTANDMEXICANPESOCRISIS?program,’sRealGDP(annual%change).,—asealofapprovalbytheworldeconomicestablishmentoftheMexican6stabiliza-tionstrategy[Wijnbergen,King,andPortes1991].-calledBradyPlanforGreeceis,inmyview,,theBrady0PlanworkedinLatinAmericabecausefiscaladjust-mentandstructuralreformshadalreadybeenputin-2place,-stantialdebtwrite-offsmaybeneeded(whichisnot-4thecaseinthecurrentversionoftheso-calledBrady-6PlanforGreece),’smissinginEurope?ApartfromtheSource:,Icanthinkofthreekeycomponentsneededforasolutiontothecrisis, Growth-enhancingreforms:Fiscaladjustmentisinordertostabilizedebt-to-GDPratios,asaclearnecessity,,,fiscaladjustmentovershootingwasneededtolikeinthe1980s,-sometime,butthekeyproblemremainsun-to-GDPratiosbacktoprecrisislevelswithinsolved:howwillthiscountryreduceitsdebtfiveyears,forexample,Table4showsthatburdenwithoutbeingabletoengageinfasterGreece,Ireland,Portugal,andSpainwouldeconomicgrowth?-gressiveadjustmentpathof20yearswouldre-ThereisanurgentneedtotransformtheGreekquireanannualprimarysurplusofaround2economyintoamoreproductiveandcompeti-percentofGDPforthecountriesmentionedtiveone,speciallybyreducingthehightaxbutwouldleavegovernmentsexposedtohighburdenonlabor,whichdiscourageshiring,debtratiosintheshortandmediumtermsmakingthejudicialsystemmoreefficient,and[Cecchetti,Mohanty,andZampolli2010].Inremovingbarrierstogrowthinspecificsectorscurrentmarketconditions,frontloadingfiscal[IMFSurveyOnline2011].adjustmentisprobablyneeded,,reformstoimproveefficiencyand Recoveringmarketcredibility:Inthe1980sandrestoregrowtharestartingtodelivertangible1990s,,itwasthechangeofregimethatal-debtmarkets, Persistentfiscaladjustment:EvenaftertheinmarketperceptionsuccessfullyputanendBradyPlan,
’sFiscalAdjustment(Averageprimarybalanceanddebtasa%ofGDP)AverageDebtBradyDealPrimaryBalance1986–89AnnouncementTheyearoftheNextNextAverageupannouncement5years10yearsto2009Panama´´´:ECLACSTAT, :,,“TheFutureofPublicDebt:ProspectsandImplications”,BIS,WorkingPaper300(March2010), Theproblemsofthebankingsystem,-EuropeanOntheeconomicsphere,,especially:Therearealsomedium-termfundamentalissuesto TheGreekprogram,includingtheun-solve:reshapingtheinstitutionalframeworktofostercertaintyofthecontinuedsupportoffurtherintegrationwithacoordinatedfiscalapproach,theIMFafterrepeatedfailurestomeetandapushforstructuralmeasuresthatcouldenhancetargets,thequestionofprivatesectorpar-Europe’,boththeim-ticipation,-valuediscountsaremeaningfuTheEuropeansagahasnowbeengoingonforl,almosttwoyears,-gamein Theissueofcontagion,particularlyinItaly,
WHATCANTHEDEVELOPEDWORLDLEARNFROMTHELATINAMERICANDEBTANDMEXICANPESOCRISIS?:,,Mexico’,theIMFandtoanalyzetoday’sfiscaldilemmas,–95,,.$.$17billion,,.$,parallelnegotiationswiththeItisalsoworthnotingthat,atthetime,in-politicalforcesinMexico(includingthecongressvestorsfromindustrialcountrieswereseekingbet-andtheunions),increasesinenergyinnetcapitalinflows,whichreachedarecordhighprices,.$[LeidermanandThornesubstantialchangeshadtotakeplaceinorderfor1996].Naturally,,asisimpactontheMexicaneconomy;financialdepthalwaysthecase,;bankfinancingtotheprivateThenegotiationswerefraughtwithtension,sectorpostedimpressivegrowth;anddomesticconflict,,byMarch,ademandgrewduetowidelyavailableresources,,,atthetime,itwasfinancialinstitutions,firms,,anumberofvulnerabilitiesbe-bynomeansaneasytask,-termflowsintheFortunately,,end,andbymid-1995,lessthanayearlater,thelargeincreaseincredittotheprivatesectoroc-Mexicowasinapositiontoenterthecapitalcurredatatimeofinadequatefinancialsupervisionmarketsforfinancingonceagain,,,thebankshadlosttrainedandsetinmotioninMexicoasaresponsetothecrisisexperiencedpersonnel,,,,andthefiscalcostoftheinternationalinterestrates,politicalevents,,,abruptlychangedtheirriskperceptions,,helpedbyveryrapidexportgrowthasso-suddeninterruptionofcapitalflowsunleashedaciatedwithNAFTAand,ingeneral,
,,,andabilitytomakedecisions,;,,inspiteofJuly’sEuro-foractivatingtheSecuritiesMarketProgrammetozoneSummit,—orlackofit—intheEuroareahas2014,debtsustainabilityremainshighlyunlikelytodowiththeabsenceofpoliticalmechanisms()designedtotacklesurplusofabout3–4percentofGDPuntiltheendproblemswhich,intheviewofmarketparticipants,,theconcernthatpolicymakingisbutyetinsufficienttoallowGreecetoreturntoineffectivehasmorphedintothequestionofthethemarkets?Topushitsdebtratiofurtherdown,,,thecountrywouldofGreeceandtheothercountrieswithintheneedtorunaprimarysurplusof10percentIMF-EUprogramsisanecessaryfirststep,’,,somebelievedtheyweretrivialgiventhattheadjustmentachievedinthemostambitiousthecountry’sweightintheEuroarea’sGDPisonlyfiscalconsolidationsonrecord[,thefailuretoendthiscrisis2011].Ontopofthat,socialresistancetowageinitsearlystagestriggeredadominoeffect,puttingandexpenditurecutsisescalating,,twowaysoutoftheEurodebtcrisisexist:(1)afiscalunion,or(2),-makingonthefiscalfrontseemstobethenextstepdenedtomorebasicquestionsregardingtheneededtopreservetheMonetaryUnion(accom-effectivenessofEuroareapolicymakingandthepaniedby:(i)debtreliefand(ii)).Regardingthealternative,aTheEuropeanfiscalcrisishasturnedintoabreakdownpolicymakersshouldkeepinmindthatpoliticalcrisis,-confidenceinthepoliticalprocess,asEuropeanormous,:“InterventionsbytheEurosystemshowsomeprogress,theywerestillperceivedtobeinpublicandprivatedebtsecuritiesmarketsintheeuroareatopartofapatternof“toolittle,toolate.”ensuredepthandliquidityinthosemarketsegmentsthatOneofthemainproblemsforEuropeisthataredysfunctional.”
WHATCANTHEDEVELOPEDWORLDLEARNFROMTHELATINAMERICANDEBTANDMEXICANPESOCRISIS?,:ReformAgendaEssentialforGrowth,IMFSurvey:Magazine:Countries&rupturecouldoccurinasimpleandorderlyman-Regions,://,
