Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) EMDB Meeting on Debt Issues July 8, 2009 Alejandro Izquierdo Inter-American Development Bank

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) I.Latin America and the Global Crisis: Initial Resilience II.Macro Dynamics in Latin America Under Two Hypotheses on the Global Economy III.Policy Trade-offs and Policy Proposals: A Liquidity Approach OUTLINE

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) LATIN AMERICA AND THE GLOBAL CRISIS: PREDOMINANT VIEWS  As a result of the global crisis Latin America suffered a drastic deterioration in the external environment:

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) * EU-15 includes Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia and Spain. Source: JPMorgan (GDP, real terms) United States EU-15* Japan Industrial Countries External Factors: Industrial Countries Growth Peak Trough -3,4% May-08 Forecast Current Forecast II08.III08.IV09.I09.II09.III Trough Peak -8,4% Current Forecast May-08 Forecast I08.II08.III08.IV09.I09.II09.III II08.III08.IV09.I09.II09.III09.IV -4,8% Peak Trough May-08 Forecast Current Forecast Peak Trough -4,3% Current Forecast May-08 Forecast II08.III08.IV09.I09.II09.III

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) External Factors: Commodity Prices Source: IMF Oil ( Average = 100) Food Metals US Financial Crisis % Average % US Financial Crisis Average US Financial Crisis % Average Variation Dec.01 – Jul.08: +616% Variation Dec.01 – Jun.08: +133% Variation Dec.01 – Mar.08: +282%

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 Corporate Bond Spreads The End of the Panglossian Period: International Financial Conditions (Latin CEMBI; 01-Jan-07 = 100) Total Variation in bps CEMBI 87 Jan.07- May.08 Jun.08- Mar Jan Mar Corporate Bonds: Issuance (LAC-7, billions of USD) Mar-07 Jun-07 Sep-07Dec-07 Mar-08 Jun-08 Sep-08Dec-08 Mar

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Sovereign Bond Spreads (EMBI+ and Latin EMBI; Spreads, Basis Points) Latin EMBI EMBI+ (EMBI+, Latin EMBI and US AA Corporates; Bond Price Equivalent*, 01-Jan-07 = 100) Latin EMBI EMBI+ US AA Sovereign Bond Prices Total Latin EMBI EMBI+ AA % Variation Jan.07- May.08 Jun.08- Mar Total Variation in bps Latin EMBI EMBI Phase 1Phase Jan Mar Jan-07 Mar-07 May-07 Jul-07 Sep-07Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08Nov-08 Jan-09 Mar Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 *Assumes a coupon of 11% and a 10Y maturity. External Factors: International Financial Conditions

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Sovereign Bonds: Maturity (LAC-7, issuances with maturity less than 1 year, % of total issuance) 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar % 28.6% LAC-7 is the simple sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. External Factors: International Financial Conditions

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)  However, Latin America’s fundamentals were strong enough to withstand (at least initially) the worsening of global conditions… LATIN AMERICA AND THE GLOBAL CRISIS: PREDOMINANT VIEWS  As a result of the global crisis Latin America suffered a drastic deterioration in the external environment

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. Fiscal Balance in Latin America (LAC-7; Overall Balance, % of GDP) Public Debt in Latin America (LAC-7; Public Debt, % of GDP) 30% 32% 34% 36% 38% 40% 42% 44% 46% 48% 50% 52% Russian Crisis Beginning of 2000s Boom US Financial Crisis 50% 33% 52% 35% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% % Russian Crisis Beginning of 2000s Boom Latin America: Fiscal Balance and Public Debt US Financial Crisis

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) International Reserves in Latin America (LAC-7, in billions of USD) Russian Crisis Beginning of the Boom US Financial Crisis Latin America: International Liquidity Indicators LAC-7 is the simple sum (*average) of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. 147

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% Latin America: Financial Dollarization Credit Dollarization in Latin America (LAC-7; Bank Credit in Foreign Currency, % of Total Credit) Beginning of 2000s Boom 23% 50% LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. For bank credit figures, LAC-7 excludes Brazil, Colombia and Venezuela. Public Debt Dollarization in Latin America (LAC-7; Foreign Currency Debt, % of Total Debt) 30% 35% 40% 45% 50% 55% 60% 65% % 35% Beginning of 2000s Boom

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)  …and, thus, the region was better equipped to pursue countercyclical monetary and fiscal policies to mitigate the impact of adverse external shocks LATIN AMERICA AND THE GLOBAL CRISIS: PREDOMINANT VIEWS  As a result of the global crisis Latin America suffered a drastic deterioration in the external environment  However, Latin America’s fundamentals were strong enough to withstand (at least initially) the worsening of global conditions…

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Latin America: Monetary and Fiscal Policy Response Monetary Policy Interest Rate Exchange Rate 8.5% 8.7% 8.9% 9.1% 9.3% 9.5% 9.7% 9.9% Sep-08Oct-08Nov-08Dec-08Jan-09Feb (LAC-7*, Interbank interest rate and Nominal Exchange Rate, in % and Sep-15-08=100) Fiscal Stimulus Announcements in Latin America (% of GDP) Source: Credit Suisse Argentina Brazil Chile Mexico Peru ON - BUDGET OFF – BUDGET TOTAL Revenue-sideExpenditure-side LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. *Excludes Argentina and Venezuela

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. *Excludes Argentina and Venezuela Monetary and Fiscal Policy Response: Russian Crisis vs. Current Crisis 20% 22% 24% 26% 28% 30% 32% 34% 36% 38% 40% Jul-98Aug-98Sep Interest Rate Exchange Rate Interest RateExchange Rate Monetary Policy (LAC-7*, Interbank Interest Rate and Nominal Exchange Rate, in % and Jul-98=100)

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)  Predominant views: The recession in 2009 will be relatively deep but short lived, the region will return to positive growth in 2010… LATIN AMERICA AND THE GLOBAL CRISIS: PREDOMINANT VIEWS  …and thus better equipped to pursue countercyclical monetary and fiscal policies to mitigate the impact of adverse external shocks  However, Latin America has very strong fundamentals to withstand the worsening of global conditions…

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Market Forecasts: Economic Performance LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. *Source: JPMorgan (LAC-7; real GDP, annual variation) -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% Russian CrisisBeginning of the Current Boom US Financial Crisis Current Forecast Apr-08 Forecast Average 71-06: 3.4% 4.9 % -1.9 % Growth Average : 4.6% Growth Average : 0.7% Growth Average: 5.6% Forecasts* 2.7 %

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)  …and liquidity crises and economic collapses, so prevalent in the past, will be largely avoided  Predominant views: The recession in 2009 will be relatively deep but short lived, the region will return to positive growth in 2010… LATIN AMERICA AND THE GLOBAL CRISIS: PREDOMINANT VIEWS  …and thus better equipped to pursue countercyclical monetary and fiscal policies to mitigate the impact of adverse external shocks  However, Latin America has very strong fundamentals to withstand the worsening of global conditions…

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Phase 3 Latin EMBI EMBI Ene-07 Abr-07 Jul-07 Oct-07 Ene-08 Abr-08 Jul-08 Oct-08 Ene-09 Abr-09 Variaction in bps Latin EMBI EMBI Phase 1Phase Phase 3Spreads (EMBI+, Latin EMBI Spread in basis points) Phase 1Phase 2 External Factors Commodity Prices International Financial Conditions World Growth Phase Ene-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Ene-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Ene-09 Mar-09 May % 26% Commodity Prices (S&P GSCI Commodity Index, 03-Jan-07 = 100) Phase 1Phase 2 Phase Ene-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Ene-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Ene-09 Mar-09 Germany Japan USA Manufacturing PMI* (difussion Index, Over 50= expansion) Phase 1Phase 2 * Purchasing Managers Index Impact of Distension of the Financial Crisis in the US on Key External Factors for LAC

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)  Catastrophic scenarios seem to have been ruled out as distension continues, making scenarios covered in our report more relevant.  But: Will recovery be quick (as initially predicted by markets) or will it be more protracted (as experience on financial crisis would tell )?

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) I.Latin America and the Global Crisis: Initial Resilience II.Macro Dynamics in Latin America Under Two Hypotheses on the Global Economy III.Policy Trade-offs and Policy Proposals: A Liquidity Approach OUTLINE

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) ROADMAP  To assess the predominant view on the region in the face of the global crisis, we proceed as follows: i.Go beyond a snapshot of the region and see the motion picture right to the end, tracing the macro- dynamics under alternative hypotheses on how the global recovery unfolds ii.Develop a simple framework emphasizing liquidity issues as a key element in evaluating the region’s risks and policy trade-offs

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Hypotheses on the Global Economy

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) L-Shaped Scenario Sovereign Bond Spread Source: JPMorgan for Bond Spreads Pre- Asian Crisis Levels (EMBI +, bps) V-Shaped Scenario TroughJun-07 PeakJun-09 T-to-P 512 Recovery*Sep-10 V-Shaped *Recovery to Pre-Asian crisis levels L-Shaped Scenario Global Commodity Price Index Source: IMF and Bloomberg* Pre-Crisis Levels (2006 = 100) V-Shaped Scenario *Recovery to Dec-06 levels PeakJun-08 TroughJun-09 P-to-T-47.3% Recovery*Sep-10 V-Shaped Mar-08 Jun % Dec-13 L-Shaped EXTERNAL FACTORS Commodity Prices International Financial Conditions Industrial Countries Growth Two Hypotheses on the Global Economy G7 is the PPP-weighted average of the Canada, France, Germany, Italy, Japan, United States, UK G7 Industrial Production (2006 = 100) V-Shaped Scenario Pre-Crisis Levels V-Shaped PeakMar-08 TroughJun-09 P-to-T-4.3% Recovery*Sep-10 *Recovery to pre-crisis levels of output Source: Own calculations based on WEO and JPMorgan*, Oct-08. L-Shaped Scenario Jun-08 Jun % Dec-13 L-Shaped Jun-07 Jun Dec-13 L-Shaped

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Tequila Crisis Asian / Russian Crises Dot-Com Crisis Beginning of the Boom External Factors -6% -4% -2% 0% 2% 4% 6% 8% 10% Actual Fitted * Izquierdo, A., Romero, R. and Talvi, E. (2008): “Booms and Busts in Latin America: The Role of External Factors”, IADB and CERES Working Paper Growth in Industrial Countries International Financial Conditions Commodity Prices LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. Economic Fluctuations in Latin America: The Role of External Factors * (LAC-7; real GDP, annual growth rate)

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Fiscal Position Under Two Hypotheses on the Global Economy LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. 1.8% 2.3% 2.8% 3.3% 3.8% 4.3% Interest Payments (LAC-7, % of GDP) L-Shaped Scenario V-Shaped Scenario 2.3% 4.1% 2.6% V-ShapedL-Shaped Trough Peak Δ T-to-P 0.4% 1.8% Recovery* n.a. n.a. Fiscal Revenues (LAC-7, 2008 = 100) V-Shaped Scenario L-Shaped Scenario V-ShapedL-Shaped Peak Trough P-to-T -7.2% -13.5% Recovery* 2012 n.a. *Recovery to pre-crisis levels of output Primary Expenditure (LAC-7, 2008 = 100)

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Fiscal Position Under Two Hypotheses on the Global Economy: Are Debt Dynamics Sustainable? Fiscal Balance (LAC-7, % of GDP) -6% -5% -4% -3% -2% -1% 0% 1% 2% V-Shaped Scenario L-Shaped Scenario 1.6% -2.6% -5.0% 0.3% -3.7% Public Debt (LAC-7, % of GDP) 23% 28% 33% 38% 43% 48% 53% V-Shaped Scenario L-Shaped Scenario 34% 27% 49% LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Liquidity Indicators

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) t RtRt B t+1 ST R’ t B t+1 ST Fiscal Effect Effective Level of Reserves Effect Precarization Effect ILR Dynamics Determinants of ILR Dynamics  Initial level of public debt  ‘Effective’ level of international reserves  Time profile of debt amortizations  Dynamics of fiscal deficit and public debt (which will depend on the initial fiscal deficit and the policy response) Liquidity Indicators: A Simple Analytical Framework

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Conclusions  The likelihood of a liquidity crisis as determined by ILRs will depend on external factors (i.e. duration of the global crisis) and idiosyncratic factors (i.e. determinants of ILRs dynamics)  Not every country may hit a critical threshold in the relevant period of the global crisis and for those that do, they will not do so at the same time. Liquidity crises, if they occur, will be sequential rather than simultaneous  Liquidity problems may evolve gradually but materialize suddenly when a critical threshold is hit. Therefore, problems may not be evident until it is too late Threshold t RtRt B t+1 ST ILR Dynamics Country 1 Country 2 Liquidity Crisis Liquidity Indicators: A Simple Analytical Framework

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% NormalInternational FinancialConditions SuddenStop L- V- 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% NormalInternational FinancialConditions SuddenStop Shaped Scenario V- Liquidity Indicators Under Two Hypotheses on the Global Economy ILR Dynamics: Precarization and Fiscal Effects (LAC-7)

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) 80% 90% 100% 110% 120% 130% 140% 150% 160% 170% 180% ILR % 90% 100% 110% 120% 130% 140% 150% 160% 170% 180% ILR % 100% 110% 120% 130% 140% 150% 160% 170% 180% 190% ILR % 110% 120% 130% 140% 150% 160% 170% 180% 190% ILR Dynamics Under L-Shaped Scenario (LAC-7) ILR Dynamics Under V-Shaped Scenario (LAC-7) ILR 1 t = Reserves t / Public Debt Amortizations t+1 ILR 2 t = Reserves t / (Public Debt Amortizations t+1 + Short Term Private External Debt Amortizations) LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. Liquidity Indicators Under Two Hypotheses on the Global Economy Key to consider: ILR Dynamics are before IMF flexible credit line

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)  Under a V-shaped global recovery, the dynamics of key macro fundamentals suggest that the predominant views on the region are largely correct CONCLUSIONS MACRO DYNAMICS IN LATIN AMERICA UNDER TWO HYPOTHESES ON THE GLOBAL ECONOMY  Under the L-shaped scenario, the region could experience negative growth in 2009 and 2010 and average growth will be close to zero in the next five years  A key feature of this scenario is that the deterioration in fundamentals is gradual and therefore problems may not become evident until it is too late  It is crucial to anticipate gathering problems early on to act in a timely fashion,esign a set of policies that prevent countries from entering into financially fragile territory  It is crucial to anticipate gathering problems early on to act in a timely fashion, and to design a set of policies that prevent countries from entering into financially fragile territory

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) I.Latin America and the Global Crisis: Initial Resilience II.Macro Dynamics in Latin America Under Two Hypotheses on the Global Economy III.Policy Trade-offs and Policy Proposals: A Liquidity Approach OUTLINE

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) Confronting the Global Crisis in Latin America: Policy Trade Offs Mitigate Recessionary Pressures Trade - Off Weaken Liquidity Position EXPANSIONARY FISCAL POLICY ILR with expansionary policy GDP with expansionary policy and no liquidity crisis Threshold GDP with no policy ILR t ILR with no policy GDP t 0123 Threshold GDP with expansionary policy and liquidity crisis

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) POLICY PRINCIPLES: MAIN GOALS  Anticipate gathering problems early on to act in a timely fashion  Design a set of policies that prevent countries from entering into financially fragile territory that might expose them to a liquidity crisis and a major economic collapse

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) (Latin EMBI and Latin CEMBI, Yield in %) Sovereign and Corporate Bonds in US (US 10y T-Bonds and US BBB Corporate, Yield in %) Latin EMBI Latin CEMBI Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 Source: Bloomberg US 10Y BBB US 10YBBB Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar Sovereign and Corporate Bonds in LAC POLICY PRINCIPLES: CONSTRAINTS

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)  Precarious access to credit markets for many emerging market governments calls for multilaterals to step in and play a key role as a lenders (and borrowers)-of-last resort, akin to the role that credible governments, such as the US government, play domestically  The question then is not whether multilaterals should play a key role in the current crisis, but which is the most effective way to channel their intervention and at what financial cost POLICY PROPOSALS THE ROLE OF MULTILATERALS

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) 1.Strengthen the role of multilateral institutions. Multilateral support will be vital under precarious access to credit markets. 2.Move away from short-term financing. Multilaterals should avoid short-term emergency financing and only consider medium to long-term financing in order to partially “complete” markets in terms of maturities. 3.Redefine the emphasis of multilateral support. Multilaterals should not only provide medium to long-term financing for fiscal stimulus –when fiscal sustainability is not at stake– but more importantly, they should provide liquidity for refinancing of maturing debt obligations. 4.Ensure that countries work towards sustainable fiscal policy while strengthening social protection. Multilateral support should be complemented with incentive-compatible conditionality, to ensure fiscal sustainability and strengthen social protection. POLICY PRINCIPLES

Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators) EMDB Meeting on Debt Issues July 8, 2009 Alejandro Izquierdo, Inter-American Development Bank FULL REPORT AVAILABLE AT: