By Fernando Álvarez: Ex IMF Economist
With the debt debate in the Euro-zone heating up, many in Latin America are thinking of ways to shield the region from a crisis that, pretty much like the previous recession, it did not help to create.As part of this worldwide brainstorming, a group of top experts has concluded that more needs to be done to strengthen the current international financial architecture so it allows for seamless debt restructuring should the situation arose.
The likes of Nobel Laureate Joseph Stiglitz, London School of Economics professor Richard Portes and other experts attending a one-day seminar in Buenos Aires, looked at the recent experiences in Europe and other parts of the world to examine the gaps in the current global financial setup. Even though Latin America is not immune to shocks from abroad, it is well positioned to weather a crisis, many experts noted. “Latin America’s experiences provide valuable lessons to share with other regions,” said World Bank director for Argentina, Penelope Brook.
“Several countries in the region were able to cope with the crises of the 90’s and this decade by implementing a variety of policies credited with creating a period of growth and stability that has received much praise around the world,” she said. The gathering offered an open and plural platform for a key discussion in the current economic climate, said Brook. "The value of this conference lies in its capacity to spur a fruitful debate, free of pre-conceptions, to push forward an agenda for global cooperation,” she noted.
Life After Debt
Reassuring the audience that "there's life after debt" economics Nobel Laureate Joseph Stiglitz pointed out that “there is a need for an orderly international financial system, a bankruptcy system, as markets will not take the initiative in terms of debt restructuring.” Austerity and adjustment plans by themselves are not the solution, Stiglitz added. The attending experts focused on the huge economic and social costs that protracted negotiations to restructure unsustainable debts can inflict on countries.
Minister of Economy of Argentina, Amado Boudou; Joseph Stiglitz; President of Central Bank, Mercedes Marcó del Pont and Secretary of Finances, Hernán Lorenzino. Some offered a glimpse of what an overhauled system would look like.
Any attempt to improve the existing financial systems should take into account factors such as a debtor’s repayment capacity, managing the risks of unwillingness to pay when there is capacity, and ways to arbitrate this issue rationally, said World Bank Regional Chief Economist Augusto de la Torre. “A more efficient system should prevent liquidity problems from becoming solvency problems due to public action delays and market hypersensitivity,” de la Torre said. Seminar host and Argentina's Finance Minister Hernan Lorenzino, noted the importance of promoting such discussion under the current circumstances. “Our intention is to promote a debate in view of what we believe is an inadequate reform of the international financial system,” Lorenzino said. “We want to move this issue to the top of the international agenda by calling upon anyone capable of providing different and well founded visions.”
Euro-zone Woes
The LSE's Portes noted that “it is now very clear that there is an issue with liquidity, banks have capital deficits and there is a public debt crisis.”The expert blamed the current crisis on imbalances between Germany and countries in the Euro zone periphery, but not on fiscal management -- with the exception of Greece.Portes recommended that the European Central Bank (ECB) support solvent European countries without an International Monetary Fund (IMF) program, while suggesting a debt restructuring program for Greece, Ireland and possibly Portugal.
Lee Buccheit noted that “something completely different is happening now if we compare it to the last three decades”. “In Europe, the public sector has not forced the private sector to restructure its debt; on the contrary, the public sector is taking on all responsibilities, starting with the Greek rescue package that has to cover debt and fiscal deficit commitments. In fact, debt is transferred from private creditors to the IMF and the European Central Bank, but the underlying issue is not solved,” he warned.
Jointly organized by the Economy and Public Finance Ministry of Argentina and the World Bank, the seminar convened figures of international stature, including from Nobel Laureate Joseph Stiglitz, Professor Richard Portes of the London Business School, US expert on international transactions Lee Buccheit, Swedish professor Axel Lejonhuvud from Los Angeles University in California and Augusto de la Torre, WB Chief Economist for Latin America and the Caribbean.
