IDEAS home Printed from https://ideas.repec.org/a/eee/wdevel/v36y2008i9p1514-1530.html
   My bibliography  Save this article

A Cheap Lunch for Emerging Markets: Removing International Financial Market Imperfections with Modern Financial Instruments

Author

Listed:
  • Bauer, Christian
  • Herz, Bernhard
  • Hoops, Stefan

Abstract

Summary This paper develops a market-based procedure to significantly reduce the indebtedness of emerging markets by applying an asset-backed security approach to a pool of emerging market bonds. In an extensive simulation study based on historical data, the cumulated interest savings over a horizon of 10 years amount to about 20% of the credit sum on average (with a standard deviation of 8%) and up to 44% for individual countries--dependent on the internal distribution of the surplus. The theoretical structure of the transaction is explicitly derived in cooperation with professionals from major commercial banks, and it implies only negligible implementation cost. The implementation requires neither institutional reforms nor debt forgiveness, but can supplement or substitute previous measures.

Suggested Citation

  • Bauer, Christian & Herz, Bernhard & Hoops, Stefan, 2008. "A Cheap Lunch for Emerging Markets: Removing International Financial Market Imperfections with Modern Financial Instruments," World Development, Elsevier, vol. 36(9), pages 1514-1530, September.
  • Handle: RePEc:eee:wdevel:v:36:y:2008:i:9:p:1514-1530
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0305-750X(08)00092-2
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
    2. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-484, December.
    3. Nancy Birdsall & John Williamson, 2002. "Delivering on Debt Relief: From IMF Gold to a New Aid Architecture," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 337, July.
    4. Barry Eichengreen & Ashoka Mody, 2003. "Is Aggregation a Problem for Sovereign Debt Restructuring?," American Economic Review, American Economic Association, vol. 93(2), pages 80-84, May.
    5. Akemann, Michael & Kanczuk, Fabio, 2005. "Sovereign default and the sustainability risk premium effect," Journal of Development Economics, Elsevier, vol. 76(1), pages 53-69, February.
    6. Mark L. J. Wright, 2005. "Coordinating Creditors," American Economic Review, American Economic Association, vol. 95(2), pages 388-392, May.
    7. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
    8. Romain Rancière, 2002. "Credit derivatives in emerging markets," Economics Working Papers 856, Department of Economics and Business, Universitat Pompeu Fabra.
    9. Daniel Cohen & Jeffrey Sachs, 1991. "Growth and External Debt Under Risk of Debt Repudiation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472, National Bureau of Economic Research, Inc.
    10. Bauer, Christian & Herz, Bernhard & Karb, Volker, 2007. "Are twin currency and debt crises special?," Journal of Financial Stability, Elsevier, vol. 3(1), pages 59-84, April.
    11. Andrew K. Rose & Mark M. Spiegel, 2004. "A Gravity Model of Sovereign Lending: Trade, Default, and Credit," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 50-63, June.
    12. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, vol. 30(10), pages 1677-1696, October.
    13. Chamon, Marcos, 2007. "Can debt crises be self-fulfilling?," Journal of Development Economics, Elsevier, vol. 82(1), pages 234-244, January.
    14. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2003. "The Unholy Trinity of Financial Contagion," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 51-74, Fall.
    15. Mr. Nigel A Chalk, 2002. "The Potential Role for Securitizing Public Sector Revenue Flows: An Application to the Philippines," IMF Working Papers 2002/106, International Monetary Fund.
    16. Rose, Andrew K., 2005. "One reason countries pay their debts: renegotiation and international trade," Journal of Development Economics, Elsevier, vol. 77(1), pages 189-206, June.
    17. Fosu, Augustin Kwasi, 2007. "Fiscal Allocation for Education in Sub-Saharan Africa: Implications of the External Debt Service Constraint," World Development, Elsevier, vol. 35(4), pages 702-713, April.
    18. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
    19. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-1097, December.
    20. Fernandez, Raquel & Glazer, Jacob, 1991. "Striking for a Bargain between Two Completely Informed Agents," American Economic Review, American Economic Association, vol. 81(1), pages 240-252, March.
    21. Gibson, Clark C. & Andersson, Krister & Ostrom, The late Elinor & Shivakumar, Sujai, 2005. "The Samaritan's Dilemma: The Political Economy of Development Aid," OUP Catalogue, Oxford University Press, number 9780199278855.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alexandra M. D. Hild & Bernhard Herz & Christian Bauer, 2016. "The European Stability Mechanism - bastion of calm or crisis accelerant?," Research Papers in Economics 2016-12, University of Trier, Department of Economics.
    2. Arina Wischnewsky & Matthias Neuenkirch, 2018. "Shadow Banks and the Risk-Taking Channel of Monetary Policy Transmission in the Euro Area," CESifo Working Paper Series 7118, CESifo.
    3. Markus K. Brunnermeier & Sam Langfield & Marco Pagano & Ricardo Reis & Stijn Van Nieuwerburgh & Dimitri Vayanos, 2017. "ESBies: safety in the tranches," Economic Policy, CEPR;CES;MSH, vol. 32(90), pages 175-219.
    4. Alexandra M.D. Hild & Bernhard Herz & Christian Bauer, 2014. "Structured Eurobonds: Limiting Liability and Distributing Profits," Journal of Common Market Studies, Wiley Blackwell, vol. 52(2), pages 250-267, March.
    5. Herz, Bernhard & Bauer, Christian & Hild, Alexandra, 2016. "Designing the ESM—Who Profits, Who Pays?," VfS Annual Conference 2016 (Augsburg): Demographic Change 145709, Verein für Socialpolitik / German Economic Association.
    6. Christian Bauer & Bernhard Herz & Alexandra Hild, 2011. "Structured Eurobonds," Research Papers in Economics 2011-09, University of Trier, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frankel, Jeffrey, 2010. "Monetary Policy in Emerging Markets," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 25, pages 1439-1520, Elsevier.
    2. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-698, September.
    3. Fernando Broner & Alberto Martin & Jaume Ventura, 2010. "Sovereign Risk and Secondary Markets," American Economic Review, American Economic Association, vol. 100(4), pages 1523-1555, September.
    4. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
    5. Emanuel Kohlscheen & Stephen A O'Connell, 2006. "A Sovereign Debt Model with Trade Credit and Reserves," WEF Working Papers 0004, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
    6. Kohlscheen, E. & O'Connell, S. A., 2006. "A Sovereign Debt Model with Trade Credit and Reserves," Economic Research Papers 269636, University of Warwick - Department of Economics.
    7. Jonathan P. Thomas, 2001. "Default Costs, Willingness to Pay and Sovereign Debt Buybacks," International Finance 0103002, University Library of Munich, Germany.
    8. Catão, Luis A.V. & Fostel, Ana & Kapur, Sandeep, 2009. "Persistent gaps and default traps," Journal of Development Economics, Elsevier, vol. 89(2), pages 271-284, July.
    9. Eberhardt, Markus, 2018. "(At Least) Four Theories for Sovereign Default," CEPR Discussion Papers 13084, C.E.P.R. Discussion Papers.
    10. Dias, Daniel A. & Richmond, Christine & Wright, Mark L.J., 2014. "The stock of external sovereign debt: Can we take the data at ‘face value’?," Journal of International Economics, Elsevier, vol. 94(1), pages 1-17.
    11. Michael Tomz & Mark L.J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 247-272, May.
    12. Eduardo Borensztein & Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 683-741, November.
    13. Laura Alfaro & Fabio Kanczuk, 2006. "Sovereign Debt: Indexation and Maturity," Research Department Publications 4459, Inter-American Development Bank, Research Department.
    14. Mohr, Ernst, 1992. "The impact of sovereign intertemporal trade and cross-default clauses on the sustainability and efficiency of environmental treaties," Kiel Working Papers 522, Kiel Institute for the World Economy (IfW).
    15. Filippo Brutti & Philip Sauré, 2016. "Repatriation of Debt in the Euro Crisis," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 145-174.
    16. Ters, Kristyna & Urban, Jörg, 2018. "Intraday dynamics of credit risk contagion before and during the euro area sovereign debt crisis: Evidence from central Europe," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 123-142.
    17. Mauricio Drelichman & Hans-Joachim Voth, 2015. "Risk sharing with the monarch: contingent debt and excusable defaults in the age of Philip II, 1556–1598," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 9(1), pages 49-75, January.
    18. Amnon Levy, 1997. "Sovereign debt: Reputation, seizure and reputation," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 21(1), pages 69-79, March.
    19. Sandeep Kapur & Ms. Ana L Fostel & Mr. Luis Catão, 2007. "Persistent Gaps, Volatility Types, and Default Traps," IMF Working Papers 2007/148, International Monetary Fund.
    20. Catão, Luis A.V. & Milesi-Ferretti, Gian Maria, 2014. "External liabilities and crises," Journal of International Economics, Elsevier, vol. 94(1), pages 18-32.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:wdevel:v:36:y:2008:i:9:p:1514-1530. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/worlddev .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/worlddev .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.