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Debt Sustainability, Brazil, and the IMF

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  • Morris Goldstein

    () (Peterson Institute for International Economics)

Abstract

Those who have watched financial crises in emerging economies over the past two years would have noticed two things. First, there has been a high concentration of financial crises in Latin America. Second, debt problems have been at the heart of several recent crises, including the prominent ones in Argentina, Brazil, Turkey, and Uruguay. This paper discusses issues of debt sustainability in emerging economies. After providing in section II a brief account of the hard times that have recently fallen on Latin America, Goldstein presents in section III a few summary debt statistics for several recent crisis economies. Section IV draws attention to a group of pitfalls in the standard framework for assessing government debt sustainability in emerging economies. Section V examines the factors influencing near-term debt dynamics in Brazil. After outlining several positive features of the Brazilian economy that did not exist in Argentina on the eve of the latter's recent crisis, he lays out the arguments for expecting that economic growth in Brazil this year will be slow (only slightly above 1 percent), that the real interest rate on the public debt will be relatively high (about 10-1/2 percent), and that the government is unlikely to deliver a primary surplus in the budget much beyond 4 percent of GDP. Despite the good start made by the new Lula government, the author maintains that the debt situation remains precarious; he argues that the Brazilian authorities should aim for a primary surplus, particularly when the global economy is heading into a period with increased downside risk. He also explains why Brazil's central bank should be granted (de jure) operational independence as soon as possible and why maximum efforts should be made to negotiate trade arrangements that increase Brazil's low level of trade openness. If the recent market rally fizzles and interest rates, capital flows, and the exchange rate again take a significant adverse turn, serious consideration ought to be given to doing a major debt restructuring with the cooperation and support of the International Monetary Fund (IMF). Finally, in section VI, Goldstein draws some implications of these debt issues for the policies of the IMF and of its major shareholders (the G-7 countries). He concludes that IMF surveillance needs to pay much greater attention than it has in the past to the build-up of vulnerable domestic and external debt positions in emerging economies, that the Fund has to adopt a tougher position in making debt sustainability a key condition for IMF lending, and that there would be an important role for IMF financing in easing the adjustment costs of a necessary debt restructuring.

Suggested Citation

  • Morris Goldstein, 2003. "Debt Sustainability, Brazil, and the IMF," Working Paper Series WP03-1, Peterson Institute for International Economics.
  • Handle: RePEc:iie:wpaper:wp03-1
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    References listed on IDEAS

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    1. John D. Burger & Francis E. Warnock, 2003. "Diversification, original sin, and international bond portfolios," International Finance Discussion Papers 755, Board of Governors of the Federal Reserve System (U.S.).
    2. Eduardo Borensztein & Paolo Mauro, 2002. "Reviving the Case for GDP-Indexed Bonds," IMF Policy Discussion Papers 02/10, International Monetary Fund.
    3. Carlo Ambrogio Favero & Francesco Giavazzi, "undated". "Why are Brazil´s Interest Rates so High?," Working Papers 224, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Brad Setser & Nouriel Roubini & Christian Keller & Mark Allen & Christoph B. Rosenberg, 2002. "A Balance Sheet Approach to Financial Crisis," IMF Working Papers 02/210, International Monetary Fund.
    5. Morris Goldstein (ed.), 1999. "Safeguarding Prosperity in a Global Financial System: The Future International Financial Architecture," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 50.
    6. Michael Mussa, 2002. "Argentina and the Fund: From Triumph to Tragedy," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa67, February.
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    Citations

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    Cited by:

    1. Manuela Goretti, 2005. "The Brazilian currency turmoil of 2002: a nonlinear analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 289-306.
    2. Jorge Blázquez-Lidoy & Luciana Taft, 2003. "La sostenibilidad de la deuda externa en economías emergentes," Hacienda Pública Española, IEF, vol. 167(4), pages 157-183, December.
    3. Edwards, Sebastian & Biscarri, Javier Gomez & Perez de Gracia, Fernando, 2003. "Stock market cycles, financial liberalization and volatility," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 925-955, December.
    4. Thomas F. Cosimano & Michael T. Gapen, 2003. "Optimal Fiscal and Monetary Policy with Nominal and Indexed Debt," IMF Working Papers 03/225, International Monetary Fund.
    5. Barry Eichengreen & Kenneth Kletzer & Ashoka Mody, 2003. "Crisis resolution: next steps," Pacific Basin Working Paper Series 03-05, Federal Reserve Bank of San Francisco.
    6. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    7. Hernán Rincón & Jorge Ramos & Ignacio Lozano, 2004. "Crisis Fiscal Actual: Diagnóstico y Recomendaciones," Borradores de Economia 298, Banco de la Republica de Colombia.
    8. Genberg, Hans & Sulstarova, Astrit, 2008. "Macroeconomic volatility, debt dynamics, and sovereign interest rate spreads," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 26-39, February.
    9. Helmut Stix, 2004. "The Impact of ATM Transactions and Cashless Payments on Cash Demand in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 90-105.
    10. Marco Arnone & Luca Bandiera & Andrea Presbitero, 2005. "External Debt Sustainability: Theory and Empirical Evidence," International Finance 0512007, University Library of Munich, Germany.
    11. Nur Keyder, 2003. "Debt Sustainability and the Exchange Rate: The Case of Turkey," ERC Working Papers 0306, ERC - Economic Research Center, Middle East Technical University, revised Jun 2003.
    12. Bjoern Rother & Ivetta Hakobyan & Monica B de Bolle, 2006. "The Level and Composition of Public Sector Debt in Emerging Market Crises," IMF Working Papers 06/186, International Monetary Fund.
    13. Patrick C. Higgins & Owen F. Humpage, 2004. "Walking on a fence: Brazil’s public-sector debt," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb.
    14. Unver, Mustafa & Dogru, Bulent, 2015. "The Determinants of Economic Fragility: Case of the Fragile Five Countries," MPRA Paper 68734, University Library of Munich, Germany, revised 2015.
    15. Fabrizio Onida, 2004. "Crescita e vincolo esterno: quali strategie per promuovere stabilità macroeconomica, competitività e investimenti," KITeS Working Papers 157, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jul 2004.

    More about this item

    Keywords

    Brazil; Latin America; Argentina; Turkey; Debt; Financial Crises; Restructuring;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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