1. Washington, DC October 26, 2006 Eduardo Borensztein Ugo Panizza

2. Living with Debt Data and Trends International Borrowing
Domestic Debt Markets
Lowering the Risk of Sovereign Finance

3. Data and Trends
Need to focus on total Government Debt (not just external debt).
Total Debt is not going down since the mid-1990s (broadly the same as ratio to GDP).
With some improvement in composition (more local currency debt, but tends to be short term).
New, detailed data base constructed. To be updated and published regularly by IDB.

4. Public debt is not going away…
Public Debt in Latin America and the Caribbean 80 80
Weighted average 70
Median 70 60 60 50 50 40 40 30 30 20 20 10 10
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source
: Authors' calculations based on Cowan et al. (2006).
Note
: Countries included: Argentina, Bahamas, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras,
Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela.

5. Domestic debt is increasing Official borrowing remains important
Composition of Public Debt in Emerging Latin American Countries 70
Domestic debt
External due to private creditors 60
External due to official creditors 50 40 30 20 10
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source
: Authors' calculations based on Cowan et al. (2006).
Note
: Countries included: Argentina, Brazil, Chile, Colombia, Ecuador, El Salvador, Mexico, Panama, Peru, Uruguay, and Venezuela.

6. Domestic Debt is also growing in the smaller markets

7. LAC debt levels are not very high…
Public Debt around the World (weighted averages)
South Asia
M. East & N. Africa
Advanced
Sub-Saharan Africa
L. America & Carib.
2001–2005
Emerging Europe
1996–2000
1991–1995
East Asia 10 20 30 40 50 60 70 80 90
Source
: Authors' calculations based on Jaimovich and Panizza (2006).

8. … but debt structure remains dangerous…
Proportion of Debt that is not Fixed Rate, Domestic Currency Denominated
1.0
0.9
0.8
0.7
0.6
Index of domestic original sin
0.5
Latin America
Asia
0.4
Other emerging markets
0.3
0.2
0.1
0.0
1996
1997
1998
1999
2000
2001
2002
2003
Note
: Original sin is measured as share of domesic debt which is short term, denominated in foreign currency, or indexed to prices or the interest rate. "Latin America" includes: Argentina, Brazil,
Chile, Colombia, Mexico, and Venezuela. "Asia" includes: China, India, Indonesia (from 1998), Korea, Malaysia, Philippines, and Thailand. "Other emerging markets" includes: Czech Republic,
Israel, Hungary, Poland, Russia, and Turkey.
Source
: Authors' calculations based on Jeanne and Guscina (2006) data set.

9. Data and Trends And note
The structure of Debt may be more important than the level of Debt

10. ..and debt structure may matter more than debt level
Public Debt and Sovereign Rating (1995–2005)
Switzerland
Germany
United Kingdom
France
AAA
Norway
Austria
Australia
United States
Ireland
Spain
Luxembourg
New Zealand
Canada
Finland
Denmark
Belgium
Sweden
Portugal
Italy
Japan
Netherlands ? AA
Iceland
Cyprus
Malta
Saudi Arabia
Standard & Poor's sovereign rating
Botswana
Chile
Korea
Czech Republic
Slovenia
Israel ? A
Bahrain
Bahamas
Malaysia
Qatar
Estonia
Latvia
Barbados
Investment grade line
Thailand
China
Oman
Poland
Tunisia
Hungary
Slovak Republic
Trinidad and Tobago
South Africa
BBB
Lithuania
Egypt
Mexico
El Salvador
Colombia
Croatia
Panama
Kazakhstan
Peru
Uruguay
India
Morocco
Costa Rica
Guatemala
Philippines ? BB
Bulgaria
Brazil
Senegal
Jordan
Paraguay
Ukraine
Belize
Russian Federation
Benin
Bolivia
Mongolia
Papua New Guinea
Grenada
Ghana
Jamaica
Turkey
Venezuela
Indonesia
Argentina B
Pakistan
Ecuador 10 20 30 40 50 60 70 80 90
100
110
Public debt (percentage of GDP)
Source
: Jaimovich and Panizza (2006) and Standard & Poor's.

11. Volatility of Debt ratios depends on debt structure
Debt-to-GDP Ratio Distribution
0.7
0.6
0.5
Debt-to-GDP ratio
0.4
0.3
0.2
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Foreign
Foreign currency
–local currency
Foreign currency–
local currency–linked to GDP
currency

12. Data and Trends And Debt is subject to unexpected increases
Largest part of the increases in Debt are extra-budgetary and unexpected: depreciation effects, financial bailouts and other “skeletons”

13. The unexplained part of debt
Decomposition of Debt Growth in LAC7 24
Inflation
Stock flow adjustment
Interest expenditure
Primary balance
GDP growth 12
Percentage of GDP
-12
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source
: Authors' calculations based on data from Campos, Jaimovich, and Panizza (2006).

14. The International Market: Large but Volatile
Has had failures: sudden stops, contagion.
Recently very favorable. Are changes durable?

15. Emerging Markets and Latin American Spreads
2,000
1,800
1,600
Tequila
1,400
crisis
September
1,200
Basis points
11 attacks
Russian
1,000
crisis
800
600
400
Brazil elections
and Enron
scandal
200
Apr-93
Apr-94
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Composite
Latin America

16. Spreads are lower than predicted
1400
1200
1000
800
600
400
200
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Predicted Spreads
Actual Spreads

17. The Domestic Markets: More Stable but Still Small
Natural habitat of local currency instruments
“Spare tire” for the banking system
The role of institutional investors and foreign investors

18. Domestic bond markets in LAC are growing but still small
Percentage of GDP, simple average

19. But in fact it is the whole financial sector that is small10 20 30 40 50 60 70 80
Latin America 1994
Latin America 2004
East Asia 1994
East Asia 2004
Advanced 1994
Advanced 2004
Corporate issuers
Financial institutions
Governments

20. Institutional Investors
Assets of Mutual Funds and Pension Funds
(percentage of GDP) 50
140
Emerging markets (left axis) 45
Latin America (left axis)
120 40
Advanced economies (right axis) 35
100 30 80 25 60 20 15 40 10 20 5
1997
1998
1999
2000
2001
2002
2003

21. Lowering the risks of sovereign finance
Controlling the flow of debt
Managing the inherited stock of debt
Improving the international financial environment

22. Country Policies Strengthen fiscal policies and institutions
Improve debt structure (long-term, local currency and contingent instruments)
Develop local markets

23. International Financial Institutions
Rollover risk. “Country Insurance” facility. Support pooling of reserves
Contagion risk. “Emerging Market Fund”
Currency and real economy risks. Help develop local currency and contingent debt instruments

24. …and much more Latin American sovereign debt in 1820-1913
The role of multilateral lending
The political economy of public debt
Public debt and public investment in human and physical capital
Debt relief, the pros and cons
New approaches to fiscal sustainability
The costs of default

25. Washington, DC October 26, 2006 Eduardo Borensztein Ugo Panizza