Comments on Mendoza

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Transcript Comments on Mendoza

Comments on Mendoza-Oviedo
• How useful is debt sustainability as a concept?
• In defense of probabilistic approaches: sensitivity analysis as a
non-parametric alternative
• A few comments on original sins, super-sins, numerators and
denominators
How useful is debt sustainability as a concept?
1. Is there anything such as an intrinsically sustainable debt per se?
No: some debts just seem to be more sustainable than others,
according to certain ad-hoc criteria and rules of thumb.
 Willingness to pay is difficult to model
 Senior and subordinated debts might not be equally sustainable
2. A notional concept with lack of empirical validation?
Sustainability -like solvency- is a notional, time-frameless concept
(Buiter [1985]; Blanchard [1990]). Empirical tests are not possible:
realizations of financial crisis always burst as violations of liquidity
constraints.
Sustanability can be better regarded as the VaR of a liquidity
constraint over an  span. The so called vulnerability is a particular
application over a short horizon. Further exploration of this concept
(Barnhill-Kopitz [2003]) seems closer to current market views.
In defense of probabilistic approaches: the use of sensitivity analysis
In defense of probabilistic approaches: the use of sensitivity analysis
FX/GDPdeflator 1993=100
130
110
100
90
80
70
60
50
40
30
20
10
0
120
110
100
90
80
70
Sep-03
FX/GDPdeflator
Dic-02
Dic-01
Dic-00
Dic-99
Dic-98
Dic-97
Dic-96
Dic-95
Dic-94
Dic-93
Debt/GDP
Debt/GDP (in %)
The original sin: crime and punishment
Sustainability vs. liquidity: debt as a stock problem?
Debt/GDP ratios
140
(in %)
120
100
80
60
40
Italy
2002
2001
Germany
Spain
2000
1999
1998
France
Belgium
1997
1996
1995
1994
1993
Netherlands
Greece
(in %)
Sustainability vs. liquidity: debt as a stock problem?
T-bond interest rates
20
18
16
14
12
10
8
6
4
2
0
Italy
2002
2001
Germany
Spain
2000
1999
1998
France
Belgium
1997
1996
1995
1994
1993
Netherlands
Greece
0
Debt/GDP
Sovereign spread
19-Sep-03
16-Jun-03
27-Feb-03
29-Nov-02
16-Sep-02
01-Jul-02
11-Abr-02
21-Ene-02
06-Nov-01
22-Ago-01

3000
2500
80
70
2000
60
1500
50
40
1000
30
500
20
10
0
Debt/GDP (in %)
3500
07-Jun-01
23-Mar-01
08-Ene-01
24-Oct-00
09-Ago-00
25-May-00
10-Mar-00
27-Dic-99
12-Oct-99
28-Jul-99
13-May-99
26-Feb-99
14-Dic-98
29-Sep-98
15-Jul-98
30-Abr-98
bps
Sustainability vs. liquidity: debt as a stock problem?
110
100
90
What changed in 2003?
900
Before exchange
Capital amortizations
800
After exchange
700
600
500
400
300
200
100
-
2033
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
2003
Maturities
Comments on numerators and denominators
D t g

dY
Y
i
Y
min
min
• If the maturity structure and rollover risk are
not considered, why taking min instead of
structural? Min is a short-term, punctual
concept closer to the notion of liquidity risk.
• The variables in the denominator are
nominal, not real: special care to be
given to their respective deflators