1 / 14

Insuring Emerging Markets: Contingent Debt

This paper discusses the volatility of capital flows in emerging markets and proposes the creation of hedging and insurance markets to strengthen their financial resilience. It compares the experiences of Chile and Australia during financial crises, emphasizing the need for mechanisms that trigger assistance in times of stress. The author suggests integrating long-term put options into external bonds to provide more effective risk management. Additionally, the role of international financial institutions in promoting these markets is explored, highlighting the urgency for innovation in financing structures.

blythe
Télécharger la présentation

Insuring Emerging Markets: Contingent Debt

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Insuring Emerging Markets:Contingent Debt Ricardo J. Caballero, MIT http://web.mit.edu/caball/www IADB, Washington, D.C. April 9, 2003

  2. The Problem • Many structural/macro reforms but Capital Flows remain volatile • IMF / Treasury proposals: • Focus on extreme cases. Bankrupt economies. • Problem is far more widespread and it starts earlier • Sudden stops, costly precautionary measures and recessions • Chile vs Australia during 97-99 • Chile’s response: 10 times larger than it should • HOW CAN WE MAKE EMs MORE LIKE AUSTRALIA (GIVEN THEIR STRUCTURE AND INSTITUTIONS)?

  3. An “Obvious” Answer: Hedging/Insurance Markets • Hedging what? • “Exogenous” Financial constraints • E.g., Chile: fc triggered by Pcu / High yield. (beyond flows and govt. revenues) • Example: Chile could embed in its external bonds a long-term put option yielding 8b if fc-trigger-indicators (e.g. Pcu) fall by more than two sd for six months or more. • “Fair” Price: 1 or 2% of GDP (very cheap compared to current precautionary measures)…

  4. Simulation from “Hedging SS and PS:…”

  5. Sudden Stop estimate from “Hedging…”

  6. The Supply Side • Specialists? • Early on: yes. Medium run: Not ideal. They are needed during difficult times. Don’t want their K to shrink at those times. • US Pension funds, insurance companies, etc. • Need to decouple contingency from emerging markets stuff. • This is harder for “endogenous” variables • And a lot harder for pure-peso-bonds; (domestic banks).

  7. Asset Class Protection Contingent EM - CDO Senior (A+) Contingent EM Contingent Debt Mezzanine Specialists IMF? (conditionality?) Subord. Debt / Equity Toxic waste? Less so…

  8. Why hasn’t it happened? • Markets are slow to develop: • CAT-bonds (act-of-God) • t0 (1997): 9xE[loss]; t0+2: 5xE[loss] • Externalities • Focus: • There are plenty of potentially contractible shocks. Identify -- Liquidity. • The IFIs have a key role in promoting and jump-starting these markets. • Forcing bad cases (e.g. Argentina) • Encouraging good cases (e.g. Mexico, Chile) [CCL] • 2003, a window of opportunity?

  9. Not far… (small/income) • Petrobonds: Mexico 1970s. • Giscards (gold): France 1973 • Corporates • Magma Copper (1988) • Standard Oil of Ohio (1986) • Sunshine Mining [Silver] (1980) • Forest Oil [Natural Gas] (1988) • …

  10. Final Remarks • “IMF” • Crisis Department • Non-contractible shocks: totally unexpected events and domestic misbehavior/blunders • Bankruptcy as Insurance / LLR • (IFIs) Contingent Markets Department • Contractible capital flows volatility • Other policies • Fiscal/monetary rules • Designed to prevent “un-insurance” • Indexed to contingencies

  11. Current Account Deficit Australia

  12. Chile (an advanced EM economy)

  13. External Vulnerability Growth of Industrial Production Interest Rates Data period: 1991 – 2002. Frequency: monthly EMBI+: percentage change in J.P. Morgan Emerging Market Bond Index Plus. Copper: Spot price of copper US$ Interest Rates: Real interest rate (U.F.) Loans (90-365 days), Banco Central de Chile Industrial Production: Annual percentage change Industrial Production Index, Instituto Nacional de Estadisticas

  14. Annex • Caballero, R.J., “The Future of the IMF.” [Also, “On the International Financial Architecture: Insuring Emerging Markets.” ] • _______, “Coping with Chile’s External Vulnerability: A Financial Problem.” • _______ and S. Panageas, “Hedging Sudden Stops and Precautionary Recessions: A Quantitative Framework.” Available at http://web.mit.edu/caball/www

More Related