Sovereign Debt Crises in the US and the Eurozone:Potential Regional Impacts on Asia

Financial volatility has returned to the global marketplace amid escalating sovereign debt problems in the United States (US) and the Eurozone countries. Intense political wrangling over the US' debt ceiling, the subsequent downgrading of the US' credit rating, and fears of contagion in the Eurozone have created significant uncertainties in the market. The World Bank's Robert Zoellick has warned that markets are now entering a "new danger zone," while other analysts have raised the possibility of yet another global recession.

2. The US has recently committed to a fiscal consolidation plan, while the European Union has adopted a comprehensive package that features new financing as well as greater flexibility for the European Financial Stability Facility (EFSF). These efforts notwithstanding, the risk of debt crises and contagion remains very real, particularly with recent developments in Greece and Italy. For as long as concerns about achieving fiscal discipline and restoring growth in these economies persist, markets are likely to remain vulnerable to shocks in the near term.

3. A further deterioration in the debt positions of these economies will have serious regional spillover effects on Asia's macroeconomic management and growth prospects. Even if a full-blown debt crisis were averted, a further contraction in these economies as a result of weak fundamentals and fiscal tightening will have an impact on regional growth.

4. What are the short- and medium-term impacts on Asia of the sovereign debt crises in the US and Eurozone? Can Asia, as a region, withstand another downturn in these economies, and to what extent can Asia rely on its own internal strength for growth? How can Asia strengthen its own drivers of growth and that beyond its own border, for example, by emphasizing on efforts to strengthen trade within Asia (intraregional trade) and with other emerging markets? What are the short- and medium-term policy choices available, and what regional approaches should Asian countries take in mitigating these impacts?

5. This S-PATA will seek to answer these questions from a regional perspective by assessing how debt crises in advanced economies may be transmitted to Asia. While it will also explore national policy options to the extent feasible, it will focus on regional measures for managing the macroeconomic impacts of such crises.

6. This S-PATA will build on research being undertaken by the Office of Regional Economic Integration (OREI) on these issues, as part of its ongoing work on the Asia Economic Monitor and the Asia Capital Markets Monitor, and its research program for 2011 2012 on Growth Rebalancing (attached).

Asian Development Bank.Project Number 45291- 01

Sovereign Debt Crises in the US and the Eurozone: Potential Regional Impacts on Asia :  Regional

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Argentina.International Seminar Will Address Sovereign Debt Restructuring Mechanisms

Press Release No:2012/185/LAC.BUENOS AIRES, December 4, 2011. A select group of experts and policy makers from the Americas and Europe will gather in Argentina December 7 to discuss the hot-button issue of sovereign debt restructuring – a topic close to Latin America’s experience that has now moved up on the region’s radar screen in light of the current debt predicament in the Euro-zone.

The seminar entitled The Missing link in the International Financial Architecture, provides an international platform to spur an open and plural debate about the challenges of countries facing debt restructuring, and about policy options to take into account for an orderly resolution protecting the interests of all parties involved.

Without a clear international consensus on the best response to a sovereign debt crisis, the experts will look at several options including setting up a new institutional mechanism for resolving these types of issues, voluntary marketplace solutions or a combination of the previous two. Particularly, it is of key interest to explore policy options that will allow countries, after a successful restructuring process, to normalize their financial links to the world.

Jointly organized by Argentina’s Minister of Economy and Public Finance and the World Bank, the conference will also address the role of international institutions in this type of processes and other regional experiences in dealing with the debt issue. It would also look at public policy options going forward.

"I think there is value in setting up a plural platform for debating these issues, so all points of views in this critical topic for the international financial architecture are heard. For us the worth of this conference is in spurring a fruitful debate, without pre-conceptions, that is able to push forward an agenda for global cooperation,” said Penelope J. Brook, World Bank Director for Argentina, Paraguay and Uruguay.

It includes the following sessions:

1.Sovereign Debt Crisis: lessons from history and macroeconomic analysis - Richard Portes, Professor of Economics at London School of Economics; Brian Pinto, Senior Adviser in the Poverty Reduction and Economic Management Network of The World Bank Group and Daniel Heymann, Professor at the Universidad de Buenos Aires. Discussant -Eduardo Levy Yeyati, Professor at University of Buenos Aires and UTDT,

2.Debt Restructuring Experiences -  Costas Lapavitsas, Professor of Economics at the School of Oriental Studies, University of London, Thomas Lambert, Director, Sovereign Advisory Team at Lazard Frere; and Sergio Chodos, Director at Central Bank of Argentina. Discussant Carmen Corrales, Partner at Cleary Gottlieb Steen & Hamilton LLP.

3.The missing Link: Gaps in international financial architecture for debt restructuring by Lee Buchheit, Partner at Cleary Gottlieb Steen & Hamilton LLP and Axel Leijonhufvud, Professor of UCLA and Universita degli Studi di Trento. Discussant: Mitu Gulati, Professor at Duke University

4.The Theory and Practice of Sovereign Debt Restructuring by Joseph Stiglitz, 2001 Economic Sciences Nobel Prize winner and Professor at Columbia Business School. Presents Mercedes Marcó del Pont, Central Bank President. 

5.The Way Forward, Policy Options by Augusto de la Torre, Chief Economist for Latin America and the Caribbean, The World Bank; Lee Buchheit, Partner at Cleary Gottlieb Steen & Hamilton LLP; Yuefen Li, Head of Debt and Development Finance Branch, UNCTAD; Axel Kicillof Professor of Economics at Universidad de Buenos Aires; and  Juergen Kaiser, Coordinator and research fellow at the German debt Network. Moderator: Hernán Lorenzino, Secretary of Finance, Ministry of Economy and Public Finance

Attention Editors: Coverage Details 

Place– Hotel Park Hyatt, Posadas 1557. Media Room– 2 Subsuelo Salón Ginkos I y II

Agenda

Opening– 9.00 a 9.30 –Hernán Lorenzino, Secretario de Finanzas y Penélope Brook, Directora del Banco Mundial

Session 1 – 9.30 a 11.00 hs - Sovereign Debt Crisis: lessons from history and macroeconomic analysis

Session 2 – 11.20 a 13.00 hs - Debt Restructuring Experiences

Session 3 – 14.00 a 15.30 hs - The missing Link: Gaps in international financial architecture

Session 4 – 15.30 a 16.30 hs - The Theory and Practice of Sovereign Debt Restructuring by Joseph Stiglitz

Session 5 – 16.45 a 18.00 hs - The Way Forward, Policy Options

Closing – 18.00 hs–Amado Boudou, Minister of Economy and Public Finance

Media Contact / Acreditaciones

The World Bank– Yanina Budkin ybudkin@worldbank.org -15-5484-5769

Ministry of Economy and Public Finance– Daniel Moretti – dmoretti@mecon.gov.ar ,

The Problem that Wasn’t: Coordination Failures in Sovereign Debt Restructurings

Contrary to widespread expectation, debt renegotiations in the era of bond finance have generally been quick and involved little litigation. We present a model that rationalizes the initial fears and offers interpretations for why they did not materialize.

When the exchange offer is sufficiently attractive vis-à-vis holding out, full participation can be an equilibrium. Legal innovations such as minimum participation thresholds and defensive exit consents helped coordinate creditors and avoid litigation.

Unlike CACs, exit consents can be exploited to force high haircuts on creditors, but the ability of creditors to coordinate to block exit consents can limit overly aggressive use

International Monetary Found. Author/Editor: Bi,Ran;Chamon,Marcos;Zettelmeyer,JerominAuthorized for Distribution:November 01, 2011.Working Paper No. 11/265. This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

The Problem that Wasn’t: Coordination Failures in Sovereign Debt Restructurings