Emerging Markets

Steve Clemons is surprised that Bush was not more hostile toward the IMF in a recent pre-Summit of the Americas press gaggle.  I am surprised that Steve Clemons is surprised.After all, as governor of Texas, Bush strongly supported the Clinton Administration's bailout of Mexico.  And his Administration has supported:An IMF bailout loan for Turkey in the spring of 2001 (before 9.11), and additional loans in the fall of 2001 and in 2002.A major augmentation (basically a big cash infusion) of Argentina's IMF program in the summer of 2001.Big IMF bailouts for Brazil and Uruguay in 2002.It is not an accident that IMF loans outstanding peaked in 2003 (see Bailouts and Bail-ins for more), under W's watch.  The big difference between Argentina and the other bailouts that Bush supported?   The 2001 Argentine bailout failed.  I have long argued that rather than lending to Argentina in the summer of 2001 to try to avoid a devaluation and default, the IMF should have lent to "soften the blow" of the necessary devaluation and the unavoidable debt restructuring. That doesn't mean, though, that Bush's comments on the IMF and Argentina were not totally fascinating - and more or less impossible to understand if you did not have deep knowledge of what has happened since 2001.Bush stated the following (via Clemons):First of all, I was more than happy, and my government was more than happy to help Argentina with the IMF crisis.  We became involved with the government in trying to get the issue resolved.  I think any objective observer would say that the U.S. participation was helpful.  And we were more than pleased to do so.  And by the way, our help was justified by the economic recovery of the country.  It's been noteworthy for those who were skeptical about U.S. involvement in the IMF to see that the economy is growing robustly and that the government is stewards of the people's money, and that Kirchner and his government did a good job of negotiating on behalf of the people of Argentina.  So we've got a record of involvement.  Secondly, since he has proven himself to be capable of performing, it seems like to me that the best policy ought to be for the Argentina -- Argentine government to deal directly with the IMF, without the U.S. having to be a middleman.  And so that's what I'll tell -- I guess I just told him what's going to happen in the private meeting -- (laughter) -- is that -- no, we will, of course, listen to any request from a friend.  But it seems like to me that President Kirchner and his economic team, his financial team, has laid the groundwork for being plenty capable of dealing with the IMF directly.So what is Bush talking about? First, as far as I can tell, he is not talking about the 2001 loan - or at least not in a coherent way.  The 2001 was the last time the IMF provided Argentina with net new money, and it didn't work.  It did not stop Argentina's downward spiral.  At best, it delayed Argentina's devaluation and default for a couple of months. It also left Argentina and the IMF with a big problem - namely, Argentina was supposed to make big payments back to the IMF over the past few years.   And Argentina actually has made some net payments to the IMF.  The IMF is less exposed to Argentina now than at the end of 2001.  That has not made Kirchner happy.  Kirchner also thinks that Argentina's recovery has come in spite of the IMF - not because of it.  And Kirchner's is largely right, though I would argue Argentina's recovery also has been helped by Kirchner's fiscally conservative policies.  At least on fiscal policy, he more or less did on his own most every thing the IMF would have wanted -- he just did it more or less on his own.  Argentina has consistently generated larger surpluses than it promised the IMF.So it is a bit strange for Bush to imply that the IMF deserves credit for Argentina's recovery.   Argentina's recovery was "made in Argentina."But Argentina would have had to pay far more back to the IMF if the IMF had not extended new loans to Argentina to basically refinance its existing lending as it came due.  In general, after its default, Argentina has been willing to accept new loans from the IMF, but has been far less willing to accept the IMF's post-default policy advice (in part because the IMF lost credibility when it supported the currency board for so long and the currency board failed). At various points, negotiations between the IMF and Argentina nearly broke down, and the IMF came close to walking away.  Argentina then either would have had to pay the IMF back on its own, without the help of a new IMF loan, or would have defaulted not just on its bonds, but on the IMF.The US generally worked to avoid a breakdown in talks, and sometimes helped patch together deals where Argentina got funding from the IMF even though it committed to do less than the IMF wanted.  I think that is what Bush is talking about.  He is saying that Argentina should no longer need to rely on the US to broker a deal between it and the IMF.  Fair enough.Also interesting: Bush thinks Kirchner did a good job negotiating on behalf of the people of Argentina.  I guess that means he likes the terms Argentina put forward in its debt restructuring?

The potential loss of life from the earthquake in Northern Pakistan is stunning -- a reminder of how precarious life is for many in one of the world's nuclear states.  Not to mention a state where Osama Bin Laden might well be hiding. This is not a time for the US to be stingy, despite our own domestic needs and fiscal deficits.  Fortunately, the Bush Administration seems to be responding to this earthquake a bit more rapidly than it responded to the tsunami.  I would hope, though, that if Pakistan needs heavy lift helicopters, the US has can make more than eight available.

Sovereign bankruptcy is hardly a hot topic right now.   Its fifteen minutes of fame are long gone.But it briefly occupied the attention of top policy makers.  And some of you may be interested in my take on the politics of sovereign bankruptcy.  I don't think it is much of a surprise that the IMF's proposal for a new sovereign bankruptcy regime (the so called SDRM) failed.  The difficulty successfully collecting on a lawsuit on a sovereign government provides the governments of countries that cannot pay their debts de facto protection from litigation while they develop their restructuring proposal even without a bankruptcy regime.  They lack formal protection from litigation, but litigation still is not much of a threat immediately after default.  And multi-instrument exchange offers have proved to be a practical way of restructuring most types of debt.  Muddling through using existing institutions for debt restructuring always offered a viable (if somewhat messy) alternative to a new international treaty ... And it was hard to ever envision the US agreeing to allow international law to supersede US contracts and US law without an overwhelming case that US contracts and US law could not be made to work. For the record, the relevant contracts are overwhelmingly governed by the law of New York state, as interpreted by the US courts.   To me the surprise was not that the IMF's proposal for international bankruptcy failed, but rather that the IMF ever was given political space to develop a serious proposal.  For that the world really can thank one man - Paul O'Neill. But O'Neill, as we now know, was not exactly well positioned to bring the rest of the Bush Administration with him.  For that matter, he never really seemed to bring the rest of the Treasury with him.    Support from a maverick US treasury secretary did not cut it.That is a big part of the story.  It is not, though, the entire story. The IMF's proposal ran into a second problem.   Supporters of "sovereign bankruptcy" were drawn to different aspects of domestic bankruptcy law, and in practice, wanted very different things.  Some liked the aspects of bankruptcy law that provide debtors - particularly municipalities and individuals - with a "fresh start," a chance to clear away their debts and move on.  They believed that the absence of a formal bankruptcy regime for sovereigns tilted the playing field toward creditors.  Others liked aspects of bankruptcy law that allow creditors to assume operation control of the assets of a failed firm.  They believed the absence of a formal bankruptcy regime (or tighter contracts) titled the playing field against creditors.   Some liked the provisions in domestic bankruptcy that allow for "senior" new financing to help support the operation of firms going through a reorganization; they saw such senior private financing as an alternative to IMF financing.  And others (like the IMF) like those aspects of bankruptcy law that allowed creditors to take decisions on the debtor's restructuring proposal by a majority vote.  Supporters of a new sovereign bankruptcy regime never really agreed on what kind of new sovereign bankruptcy regime was needed, or on what precisely a bankruptcy regime should aim to do. One sign of that absence of consensus: the IMF's difficulty deciding whether or not its proposal should include provisions providing the debtor with formal protection from litigation after a default, or just provisions allowing super-majority voting.   For more on the IMF's proposal, see Sean Hagan's article in the Georgetown Journal of International Law.  Or this IMF paper.Finally, of course, the debate over sovereign bankruptcy was never truly separate from the debate over big bailout loans.  Some supporters - I think incorrectly - thought sovereign bankruptcy would allow the IMF to get out of the business of lending big sums to troubled countries.  And others - also incorrectly in my view -- worried that the presence of a sovereign bankruptcy regime lead the IMF to say no to all calls for help, so deserving countries would no longer get a financial lifeline.I could say more - far more.  But this hardly seems the right time or place. 

My answer is no. If the IMF is irrelevant (I don't think it is), it is not because private capital inflows to emerging markets have rebounded to pre-crisis (i.e. 1996/97) levels.  It is because emerging markets hold far more reserves now than they did then. But let's get one thing straight.  Private capital inflows to developing countries right now are not financing "development" in emerging economies, at least not if "financing development" means "making up for a shortage of savings in emerging economies" or "allowing investment in excess of savings in emerging economies."  Right now, private capital inflows to emerging markets lead to higher reserves, and end up supporting the US Treasury market, the US agencies market, the mortgage-backed securities market, the German bund market and the UK gilt market.The argument that private capital is once again financing "development" will be bandied about a lot this weekend.  It already showed up in a recent Bloomberg article, which argued: "Private capital markets are increasingly supplanting it [IMF] as the main source of credit for developing nations" Of course, the IMF was never the main source of credit for developing nations.  Its role was (and is) to step in when private investors - both foreigners and a country's own residents -- suddenly decide they want to get out.   The IMF is not a substitute for private capital flows; it is a substitute for holding more reserves to cover sudden interruptions in private capital flows.   But let's set aside that point, and all the complexities associated with determining when the IMF should lend when private investors will not, and when it should not.  Instead, I want to focus on the argument that private capital flows from investors in advanced (or industrial) economies have become a huge source of financing for development irritates me a bit.  Is it true?  I would say not really, at least not anymore.   Private investors were an important source of development financing back in 1996 or even 1997.  But not in 2005, even though private capital flows to emerging economies have revived.  At least not in aggregate.  Why not?  Simple.  Almost all emerging economies now (Eastern Europe and Turkey are the exceptions) run current account surpluses, and thus save more than they invest.   They don't need foreign savings to finance their current levels of investment.  They would be adding to their reserves - i.e. financing the US and Europe - even without private capital inflows.  Don't get me wrong.  Private capital flows still bring important benefits.  Emerging economies clearly like the technology transfer and know-how that comes with FDI.  And offsetting flows from emerging economies to advanced economies and from advanced economies to emerging economies allow savers in both sets of countries to diversify their portfolios even if there are no net flows. But most emerging economies don't need US and European savings to finance their current levels of investment.  At this point in time, more capital inflows to the emerging world simply means more reserves, and thus more support for the bond markets of industrial countries.  Think of China.  Indeed, many emerging markets are every bit as scared of private markets as they are of the IMF - that is why every dollar in private flows ends up in their reserves.  Setting aside Turkey and Eastern Europe (countries that benefit from being part of Europe's broad sphere of influence), most emerging market economies are reluctant rely on private capital flows from abroad to finance ongoing current account deficits. The IIF's data on the surge in private inflows to emerging markets -- "Private capital flows to 29 of the biggest developing countries will grow to a record $345 billion this year, up from $120 billion three years ago, the bankers' group forecasts" - is a bit misleading when taken out of context.   Inflows are up, and inflows matter, but so do outflows.  And right now, large private capital inflows to emerging markets are matched by even bigger capital outflows from emerging markets.  Rather than using the IIF data, though, I want to use the IMF's data.  It is comparable, but a bit broader and more comprehensive.  And rather than 2005 forecasts, I will use 2004 data - not that much has changed, so the basic point still holds. In 2004, private investors put $574 billion in emerging markets and developing countries.  That is a lot - it lots the previous peak of $516 billion in 1997.  Want to understand why emerging economies don't trust private markets to provide stable development financing in some sense?  $516 billion in 1997 fell to $136b in 1998. But there is one key difference between 2004 and 1997.  In 2004, outflows from emerging economies totaled $941 billion.   That means emerging economies provided $367 billion in (net) financing to the rest of the world.  Compare that to 1997, when outflows from emerging economies were only $401 billion.  Inflows exceeded outflows by $115 billion, meaning the world provided $115 billion in (net) financing to emerging economies.  That key shift in the pattern of capital flows is left out of this Bloomberg article. The "outflows" data includes outflows from reserves.  Let's look at that data in more depth.   In 1997, private capital outflows from emerging markets totaled $296b.  Private inflows were $516b.  The $220 b in (net) private inflows supported two things: a $105 billion increase in reserves, and an (aggregate) current account deficit of $115 billion. In 2004, private capital outflows from emerging markets totaled $424 billion, v private inflows of $574 billion.   Net private inflows were $150 billion, not that much less than in 1997.   What did those inflows finance?  I would say $150 billion in reserves.   Total emerging market reserves increased by $517b.   $150b of that reserve increase was financed by capital inflows; $367 b by the current account surplus of emerging economies.  Data comes from table 1 of the statistical appendix of the IMF's global financial stability report. The real story of the past few years, at least to my mind?   The fact that emerging market reserve accumulation has gone from $116 b in 2001 to $186 b in 2002 to 4365b in 2003 to $517b in 2004 ...  That -- I suspect -- has something to do with current low interest rates in the US and Europe.  I generally agree with Martin Wolf, but I thought he should have at least mentioned the "recycling" of private capital inflows back into industrial country bonds in his recent column. The surge in emerging market reserves does pose some challenges for the IMF.  But this Bloomberg article still overstates the risk that IMF will find itself with nothing to do, even though the reporter saves the article by ending with a (useful) note of warning by Desmond Lachman.  The resilience of emerging markets is not tested when global growth is strong, g3 interest rates are low and capital is flowing in.  It comes when growth slows, interest rates rise and capital starts flowing out.   Most emerging economies seem to have the reserves required to manage most sources of stress - indeed many in Asia have far more than they need.  But some of the IMF's biggest borrowers, namely Turkey and Brazil, are in somewhat different position.  The IMF will retain a role as a source of borrowed reserves for emerging economies.   Look at the IMF's financial statement.   Countries are paying the IMF back big time right now - but the IMF never committed more money than it did in 2002.  And 2002 is not that long ago.  Some things have changed.  But not everything.  Rumors of the IMF's death have been greatly exaggerated.  In April 2005, the IMF had more loans outstanding than it did in April 2001 (see section 2 of the appendix of the IMF's annual report; I love clearly love wonky appendixes ... ) ...  The real challenge to the IMF does not come from the resurgence in private capital flows.  It comes from the fact that many emerging markets now have far more reserves than they know what to do with.  China will have about four times the financial fire power of the IMF by the end of the year.   Korea has about as much financial firepower as the IMF.   Should it want to do so, China has more than enough hard currency stashed away to lend Brazil $50 b - more than the IMF provided in 2002 - should Brazil need it. Yet neither the IMF nor Korea nor China has anywhere near the fire power needed to manage a real crisis in the world's largest economy.  The IMF provided Turkey with a credit line of more than 10% of its pre-crisis GDP.  Anyone got $1.2 trillion for the USA?  Those numbers obviously exaggerate to make a point.  I don't seriously think the US would need $1.2 trillion.  The USA is different from Turkey.   Dollar debt is much less of a problem if you can print dollars.  But it is pretty clear that the IMF is not really designed to help work through the risks created when its largest shareholder, and the world's largest economy, is the country most vulnerable to an interruption in private (or official) capital inflows.  This IIE conference should be interesting.

Emerging Asian economies - as many have pointed out - are more energy-intensive than the US economy.   One reason: the US outsourced energy-intensive manufacturing to Asia, increasing the energy intensity of Asian economies while reducing (in some sense) the energy intensity of the US economy.  Manufacturing heavy economies will tend to be more energy intensive than service-based economies.   But there is more to it than that as well - lots of Asian economies subsidize domestic gasoline and energy more generally, and thus encourage domestic consumption.    The net result: China's terribly energy efficiency.  See this Time article, among others. No matter the cause, Asian economies are more exposed to the oil shock than most.  So any effort to explain the resilience of the global economy in the face of the recent oil shock needs to explain the resilience of Asian economies.Part of the answer is that Asian economies have opted to take the hit  on their budgets (with subsidies) or on the profits of their state oil companies (see China) to reduce the impact on consumers.   But Asian economies are not as dependent on domestic consumption as the US or even most European economies, so that cannot be entire answer.Part of the answer is that the borrow and spend US consumer keeps borrowing and spending, supporting Asia's export engine. But I think part of the answer is also that Asian economies - and indeed many oil importing emerging economies - went into the most recent oil shock with large current account surpluses.   Why does that matter?   Higher oil prices mean a smaller surplus to lend to the rest of the world, not a bigger deficit that needs to be financed.   Asian economies by and large have not had to rely on global markets(or international banks) to recycle the oil exporters petro-dollars into loans (or other forms of credit) to oil-importing emerging economies.  They could adjust by lending less to the rest of the world, not by borrowing more.  They consequently are not as dependent on the mood of the world's financial markets.To take two examples.  According to UBS, in 2006, Korea would run a 4.5% of GDP current account surplus with oil at $30, and a 0.8% of GDP surplus with oil at 70.  Oil needs to rise to $80 or $90 for Korea to need to finance a deficit (which it could easily do).  Taiwan's surplus is estimated to fall from 5% of GDP with oil at $30 to 2.3% of GDP with oil at $70. Some Asian economies have slipped into deficits - Thailand in particular.  UBS estimates that if oil stays around $70, its deficit might reach 4.6% of GDP.  India's deficit would be a bit smaller, 3.1% of GDP.    Of course, both countries have little external debt and tons of reserves.  India in particular should have little trouble financing these kinds of deficits.The outlier?  China.   It is every bit as dependent on oil as the other Asian economies.  But its current account surplus is still set to rise even in the face of $70 a barrel oil.    UBS estimates its surplus would be 6.7% of GDP in 2006 even if oil is at $70 all year long - well above its 2004 level of around 4% of GDP, even if slightly below its likely 2005 surplus (likely to be 7.5-8.0 % of GDP).Right now, China is importing about 2.6 million barrels a day of crude (OPEC produces around 30 mbd by comparison).   If oil averaged say $30 rather than $60 a barrel in 2005, China's oil bill would fall by about $30b.   Its (estimated) current account surplus would be $180 billion rather than $150 billion.Still, that $30b swing in China's oil import bill has to be compared with China's phenomenal export growth.  Say export growth slows just a bit from 30% y/y to 25% y/y.   In dollar terms, China's exports would still grow by something like $150 billion in 2005.  China can afford to import a lot more oil if that kind of export growth continues.To me, that is one more sign that something strange is going on in China - ok, nothing that strange.   The combination of an undervalued RMB, low domestic interest rates and high savings is fueling an enormous expansion of China's export capacity, one that is propelling enormous increases in exports that are overwhelming China's rising oil import bill.    China is not only far more dependent on exports than Japan back when Japan was growing like gangbusters, but its recent pace of export growth has been far faster (30% v 15%). The problem: if the rest of the world has to spend more on oil, at some point, it will have less to spend on Chinese goods.  And China is becoming exceptionally exposed to the global economic cycle.  A consumer slowdown in the US - or Europe for that matter -  should translate into reduced demand for Chinese goods.  Unless China just takes market share away from everyone else, which will make it even harder for them to pay their oil import bill.One barrel of oil buys a lot more computing power now than it did in 1973, or 1980.   It buys a lot more of other goods as well.  As the Economist has pointed out, when oil is adjusted to reflect export prices rather than consumer prices - i.e. the amount of goods the rest of the world has to sell to import a barrel of oil - it is already at a record. There is a reason why China will be the focus of lots of attention in the run-up to the IMF's annual meetings.  China - perhaps alone among major oil importers - has a rising current account surplus.   That puts additional pressure on all the world's other oil importers.

It looks like Iraq is not the only emerging economy that exports crude and imports (at huge cost now) refined diesel and gasoline that it then sells a low price.   Nigeria is in the same position.   Strange.   The national oil company of an oil exporter facing financial problems when oil is almost at $70.   I guess that is what happens if you import refined gasoline and sell it too cheaply. Malaysia is far better managed than Nigeria, but it too has extensive (and costly) fuel subsidies.   And China's state oil companies are fighting (bureaucratic) war with the rest of the Chinese state ...   State cannot get on with Defense here in the US.   Treasury looks down on Commerce.  So forth and so on.  And it seems that the National Development and Reform Commission sets retail oil prices in China, while the State-owned Assets Supervision and Administration Commission actually owns Sinopec and PetroChina.    I guess they don't quite see eye-to-eye. ( Check out the Peking Duck ).   Steve Roach highlight the results of China's energy policy - gas lines and an energy inefficient economy.   The US, alas, is not the only country that has failed to take the policy steps needed to reduce its vulnerability to (further) oil price shocks. There seem to be three fundamental reasons why higher oil prices have not slowed global oil demand much: Lots of countries are subsidizing oil to spare consumers the hit, with the government picking up the tab in various ways. The recycling of petrodollars into the US fixed income markets (through a ton of intermediaries) allows (at least until now) US consumers to borrow against their rising home values, supporting non-oil consumption.  By saving less, the US has been able to avoid "adjusting."  Higher oil has not forced us to spend less on everything else. The world's capital stock doesn't turnover over night.  Those who bought SUVs made a big capital investment.  In the short-run, they have to pay up to reap any benefit from that investment.   The composition of the US auto fleet changes slowly, and that same is true globally.  Moreover, Detroit now makes a lot of SUVs, and it cannot suddenly shift to making hybrids.  Capital investment and sunk costs and the like.  So it is giving the SUVs away at cost, more or less - further delaying the shift in the composition of the US fleet.

Rather than writing a blog of my own, I have been busy discussing one of my favorite topics -- Argentina's crisis -- over in the comments section of Macroblog.    David Altig and I don't always agree, but we are on the same side (more or less) of this debate.  Check it out if you are interested. Also check out Roubini's latest thoughts on oil's impact on the economy.

If you care to head to Baghdad - and are willing to wait in line - you can fill up your car with premium gasoline for 3.3 cents a liter (around 13 cents a gallon).  Basic gasoline goes for just more than a penny a liter, diesel for even less.   The electricity grid is not exactly reliable, and with gas so cheap, it is hardly a surprise that anyone with money in Iraq seems to have a private generator.    I would not be surprised if gasoline smuggling is the leading source of private employment in Iraq. Continues, with discussion of gasoline pricing in Indonesia and China, not just Iraq ... All this has a cost.  The IMF estimates that giving gasoline away at low prices in Iraq rather than selling it on the international market costs the Iraqi government about $8 billion in lost revenue.   $8 billion is 27% of Iraq's estimated 2005 GDP - real money.  Some of that is revenue foregone, but there is also an explicit budgetary cost.  Iraq lacks the capacity to refine premium gasoline, and cannot refine enough diesel or kerosene either.   The IMF estimates Iraq will spend $3.6 billion - about 15% of its GDP - importing refined petrol, petrol that it basically then gives away. If nothing else, cheap petrol in Iraq does support private economic activity of a kind.   The IMF call for higher domestic oil prices is full of understatement: "Such action will not only alleviate damaging market distortions but will also generate substantial resources for the budget - rouses which currently accrue to black market dealers and smugglers."   Read the LA Times article on oil smuggling for a bit more color.  Incidentally, one little warning for anyone who bought dinars thinking that they would do nothing but go up.   The Iraq central bank has been selling more dollars into the market that expected this year - something that it has had to do to keep the dinar from falling. Iraq is not alone.  Indonesia has become a (net) oil importer.  But its domestic petrol prices are still those of an oil exporter.   The growing budget cost of its gasoline subsidies is one reason why Indonesia's central bank is intervening in the foreign exchange market to keep its currency from falling.   China is buying dollars like mad to keep its currency from rising; Indonesia is selling dollars to keep its currency from falling. Speaking of China, it shares one thing with Iraq.  Gasoline lines and petrol shortages.   The pace of increase in China's petroleum imports this year has been remarkably slow - the IEA now estimates the volume of oil China imports will increase by only 5% this year.  There is a big gulf between the rapid increase in China's industrial production (up something like 16% -- see the latest from the World Bank), the rapid increase in its GDP, and the small increase in petroleum imports.   One explanation is that China brought a bunch of coal fired electrical plants on line, reducing the need for plants to rely on petrol for to run generators of their own.    But I suspect James Hamilton (econobrowser) is right.   A big part of the explanation is that China has not allowed domestic petrol prices to rise as fast as international prices. Purely state owned firms that did not care about their profits presumably would keep on importing all the petrol China needs.   If that cut into their profits (after, pumping China's domestic oil, refining it and selling it is still rather profitable), or even led to losses, who cares?  The state-owned banks would certainly keep on lending to firms following state policy.  But China is changing.  The state-owned petroleum firms do seem to care about their profits - and since importing oil to sell inside China at current prices cuts into their profits, they seem to be trying to import as little as possible. Incentives and all.  Via Econobrowser and the Oil Drum comes this gem from Petroleum World: The IEA estimates that at the beginning of July suppliers to the Chinese domestic market were losing 20 dollars per barrel or more on every barrel of gasoil supplied. At least that is one explanation.   Gas lines in China might be the unintended consequences of controlled domestic prices, rising international prices and more commercially oriented state oil companies. Another explanation is that China's government has an intentional policy of keeping petroleum under-priced domestically to keep folks happy, and rationing the available supply to limit demand.  That, after all, clearly is China's approach to allocating bank credit.  Keep it cheap.  And rely on administrative controls to keep credit growth from rising too much, and "window guidance" to try to make sure that the sectors that the government wants to have credit get credit. Americans can at least take comfort that other countries are also struggling to cope with $60 to $70 a barrel oil ...

Pay off the IMF. Argentina is one of the few countries whose reserves have been growing about as fast as China's.  It just started 2003 with about $10 b in reserves (and a ton of debt), while China started 2003 with about $300 b in reserves and very little debt. By the end of 2003 Argentina had about $14 b in the bank. By the end of 2004 it had about $19-20 b in the ban. Now it has about $25 billion ... And yes, Argentina, like China, has an undervalued real exchange rate.  Its central bank is intervening heavily to keep the exchange rate from appreciating, hence the rising reserves. Argentina's holdout bondholders won't be happy if the IMF gets paid in full and they, well ... get nothing.   Moreover, if Argentina doesn't need the IMF, the IMF won't be able to pressure the Argentines to reopen the deal and offer the holdouts -- mostly Italian retail investors -- something.   Nor will the IMF be able to push Argentina to reach agreement on a sensible framework for regulating its privatized - and often foreign owned - utilities. Kirchner (Argentina's President) may be bluffing.  Elections and all. That's what Rafael de la Fuenta of Paribas thinks:   ``We don't want to owe the IMF anymore,'' Kirchner said at a rally in the Buenos Aires province. ``Because of our debt, the IMF wants to impose on us the internal and external policies Argentina should follow.'' The pledge by the leader of a country that just restructured more than $100 billion of defaulted debt is rhetoric designed to please voters, said Rafael de la Fuente, senior Latin America economist at BNP Paribas Securities Corp. in New York. The amount owed represents about 10 percent of the nation's gross domestic product, he said. `It's not realistic,'' de la Fuente said. ``They can't come up with that kind of money.'' But with Argentina you never know. It would be kind of strange if Argentina, which defaulted, ends up paying the IMF back before Turkey, which did not.   Not necessarily good.  Just strange. This will only increase the IMF's angst about its role in an (over) reserved world. Afterall, by the end of the year, the world's emerging economies may hold almost $3 trillion in reserves.  The IMF, by comparison, has about $200 billion to lend out.  

if international investors -- not just local ones -- were not scrambling all over themselves to buy Argentina's most recent dollar-denominated bond issue. Yes -- evey now and again, I do still intend to write about something other than China. Argentina's bond issue was governed by Argentine law, not one governed by foreign law.  So technically, Argentina has not regained access to the international sovereign bond market.  Remember,  holders of around $20 billion (face value) of Argentina's "old" eurobonds did not  participate in its exchange - legally, Argentina has yet to fully put its default behind it. But if you can sell local-law bonds to foreign investors, why bother with a Eurobond issue? No one is forcing international investors to buy Argentine bonds.   Creditors are voluntarily opting to invest in a country that: 1) Defaulted at the end of 2001 -- not so long ago 2) Took its sweet time before it made an offer to its international bondholders 3) Did not "negotiate" with its bondholders, as they bondholders demanded.  Not that I particularly think Argentina should have sat down and negotiated, especially if that meant giving every member of the (not entirely representative) committee a veto over Argentina's ability to launch a deal.  Moreover, in a traded market, the "holders" of the old bonds of a distressed debtor may be very different from the likely market for the country's new bonds.  The notion that Argentina would negotiate an economic adjustment program with bondholders rather than the IMF was always rather far fetched.  4) Sought and obtained more debt relief than has been the norm in previous emerging market sovereign debt restructurings.  I think Argentina also needed substantial relief - more than other sovereigns -- to create a debt structure that offered a chance to escape from the cycle of restructuring and default that has marked Argentina's recent history.  Argentina's external sovereign debt to GDP ratio remains quite high even after its restructuring.  But Argentina still could have made a slightly better offer.   There was scope, for example, for more cash up front to compensate bondholders for an extended period of non-payment.   Even those who believe Argentina needed a fair amount of relief would agree that Argentina did not go out of its way to be nice to its creditors. Yet today, despite its sins, Argentina is raising funds from international investors at an interest rate it could only dream of back in the late 1990s.  And at a rate not much above the rate of countries that have treated their creditors more nicely than Argentina, like Brazil and Uruguay. The current market, with its focus on short-term positioning and trading gains, doesn't seem to worry too much about a sovereign reputation.   At least right now, it cares more about Argentina's strong current growth and manageable payment profile than its past behavior.  Compare Argentina with Ecuador.  Both not only have large amounts of government debt, but have particularly large amounts of external sovereign debt.   Argentina sought a fair amount of debt relief, and is now raising new funds again.  Why?  Because it has a decent (not great) debt profile going forward, its payments profile is not so onerous as to suggest that it is politically unviable, and it arguably has a fairly strong incentive to pay its the debts it is now incurring to sustain its future market access.   That is particularly the case because Argentina opted to give priority to payments on its domestic law dollar debt during its crisis.  More and more of that debt is held abroad, but most of it is still held domestically.  That too has an impact on incentives for payment.  Creditors "buy" - literally in this case - Argentina's argument that it will give priority to domestic payments.  Remember, Argentina raised funds abroad last week by selling "domestic" dollar debt governed by Argentine law  -- not international bonds governed by New York or English law. Ecuador offered its creditors a more generous deal than Argentina back in 2000 (it defaulted in 1999).  Yet Ecuador has not been able to raise money from international investors since.  Why?  Above all because of Ecuador's own politics.  But its debt profile played a role too.  The restructuring provided Ecuador with temporary cash flow relief, but because the new debt carried a very high coupon after it fully stepped up (one bond pays 12%, the other steps up to 10%), no long term relief.   Interest payments in 2006 will be no lower than they would be on the original Brady bonds had LIBOR stayed at its 1999 levels.  Ecuador's continued political willingness to run large primary surpluses to make large interest payments to its existing external creditors is in doubt -- and that makes it difficult for Ecuadorto raise new money.  Ecuador would have been better served if it had put less emphasis on headline debt reduction in 2000 and more emphasis on its future payments profile.  In 2000, it traded face value debt reduction for a very high coupon on its external bonds after 2005. My key points:  Reputation trades off with a good debt profile looking forward.   Incentives to pay are linked to the amount that you have to pay.  Incentives to pay are also strengthened if the debtor expects payment to be rewarded with access to new financing, and right now, market access seems mostly to be a function of payments profile.  Despite my carping about the speed of Argentina's return to the market, the fact that Argentina has regained access to the market supports its incentives to continue to pay its (restructured and newly issued) debt going forward.  It now has something to lose should it stop paying.  But I also suspect the absence of a greater market penalty for "bad past behavior" also may make it harder to convince future borrowers to pay much attention to creditor proposals for good debtor conduct in default.   The market's willingness to forgive and forget may make it hard going forward to convince sovereign borrowers that they should care all that much about their reputation either. I suspect that means private creditors will look more and more to the IMF to try to enforce codes of good debtor conduct in default - and it is not clear to me that the IMF can or should try to do so.  The IMF's limited leverage might be best used if it focused exclusively on defining the macroeconomic adjustment path for the debtor, not judging the quality of its contacts with its creditors. Don't get me wrong: default is still costly.   The question is not whether default is costly, but rather what strategy a country that already has incurred the upfront costs associated with default should pursue, i.e. how much should it offer to pay on its past debts and how should it go about treating its creditors during the restructuring.   And right now, it is kind of hard to make the case that creditors care quite as much about a debtor's past conduct as some of their rhetoric suggests --

The Wall Street Journal oped page clearly has discovered the joys of post-modernism. Facts are a social construction -- and inconvenient facts can be changed to fit your preferred narrative.That is the only way to make sense of the Wall Street Journal ’s Tuesday oped "The IMF’s Debt Ambitions." It is premised on the following argument:" ... investors were conditioned by bailouts in Mexico, Thailand and South Korea, and by the IMF’s ever expanding loan portfolio in Argentina to believe that no matter how many times Buenos Aires broke its promises it would not be allowed to fail. The money poured in, not irrationally, until the Bush Administration ended the bailout habits of the IMF." The Bush Administration ended the bailout habits of the IMF. Hmm. Let us hold that statement up to the standards of the reality-based world. 1. In early 2001 the Bush Administration approved a $10 billion IMF loan to Turkey. That loan was augmented the fall of 2001 and again in 2002. Last I checked, the Bush Administration was in charge of the US government then. All told, Turkey got about $23 billion from the IMF -- a bailout that was far larger, in relation to Turkey’s GDP (total disbursements were equal to 11.5% of pre-crisis GDP), than the Clinton Administration’s bailout of Mexico (total disbursements, including direct disbursements from the US, equal to 7% of pre-crisis GDP). And Mexico paid its loan back far faster than Turkey has been able to repay. Don’t believe me? Check out the IMF’s financial data, which shows its outstanding exposure to Turkey quite clearly (data in SDR). Full disclosure -- I worked for the Treasury in 2001, so I know this story quite well. 2. In the summer of 2001 the Bush Administration supported an IMF loan to Brazil in an effort to protect Brazil from "contagion" from Argentina. That loan was expanded significantly in the summer of 2002 when Brazil came under intense pressure prior to the election of Lula. All told, Brazil received an IMF credit line of $35 billion, and most of that -- $30 billion -- was lent out. That is far more than Brazil received in 1998-99 with the backing of the Clinton Administration (peak lending then was about $17 billion). This bailout has worked pretty well -- Brazil recovered and is now making significant payments back to the Fund. But so did the bailout of Mexico. A successful bailout is still a bailout. Want to verify -- follow this link. 3. Uruguay. It got about $3 billion from the Fund in 2002, along with a (very short-term) bilateral bridge loan from the US. $3 billion does not sound like a lot, but it is about 15% of Uruguay’s small GDP. That’s a big bailout in my book. 4. In the summer of 2001, the Bush Administration backed a $8 billion augmentation of the Argentina’s existing $15 billion IMF package -- a decision that the IIE’s Mike Mussa has called one of the worst in Fund history. That $8 billion -- $5 billion of which was disbursed immediately-- effectively provided about 1/2 of the total net financing that the IMF provided to Argentina from the end of 2000 on. Look at the surge in IMF lending to Argentina in September of 2001 -- a surge that was the direct product of a decision make by the Bush Administration. Remember that part of the initial $15 billion package just refinanced maturing IMF debt, and the $15 billion was more backloaded than the $8 billion augmentation, so not all of it was disbursed. All in all, the Bush Administration consistently backed bigger loans to more indebted countries that the Clinton Administration. Those IMF loans have been repaid more slowly. Those are the facts. Verifiable on the IMF’s web page. Or, if you trust Roubini and Setser, nicely packaged in Bailouts or Bail-ins. Bailouts or Bail-ins? also presents all the data in dollars, not SDR. When will the news side of the Journal manage to divorce itself from the oped page? Or at least require that the oped page hire a fact checker? The Wall Street Journal oped page also conveniently ignored a couple of points about the Clinton Administration’s IMF policy than ran contrary to its preferred "Bush Administration end Clinton-era policy of bailouts" narrative: a) The Clinton Administration pulled the plug on Russia in the summer of 1998 after Russia failed to do take the steps needed to control its fiscal deficit. Robert Rubin took deficits seriously. The IMF program was suspended after only $5 billion of the $15 billion in IMF funding has been disbursed. The Bush Administration, in contrast, refused to cut Argentina off in 2001 even though Argentina repeatedly missed its fiscal targets (in large part because the economy had to deflate to bring about the needed real exchange rate adjustment, and deflation contributed to a broad economic contraction). Indeed, it augmented the IMF program. Saying no to Russia was far harder than saying no to Argentina. Read Rubin’s memoirs. Anyone who bet Russia was "too nuclear" to fail ended up betting wrong. b) The Clinton Administration did not just bailout South Korea, it also bailed-in the banks who had lent to South Korea. The Clinton Administration twisted the arms of international banks with a bit over $20 billion coming due at the end of 1997/ early 1998 to extend the maturity of their loans. The banks -- at least those with claims coming due after December 25 -- did not get out scot free. Compare that with the Bush Administration’s decision to sit passively as the banks massively cut their exposure to Turkey throughout 2001 (the banks’ "exit" was effectively financed by the IMF) and cut their exposure to Brazil in 2002. The Wall Street Journal oped does make one point that I agree with. The IMF should not pressure Argentina to offer holdouts the exact same deal everyone else received in Argentina’s recent exchange. But I don’t think that is what the Fund is demanding under its "lending into arrears policy." I suspect the Fund simply wants Argentina to give the remaining holdouts a chance to come in, presumably at a small penalty. The Journal even seems to say as much: the oped notes that the Fund "says that it is not insisting that Argentina settle with holdouts by offering them the same price they already turned down." Reopening the deal to try to reduce the number of holdouts is nothing more than a reflection of reality. 24% of something like $80b plus about $20 billion in arrears is a big number -- there are lots of Argentine bonds still in default, and their holders retain valid (if unenforceable) legal claims to full payment. Plus, lots of the holdouts were poorly advised Italian retail investors. Realistically, some of these bonds need to be brought into the deal, one way or another.

Oil closed above $58 a barrel on Friday. That’s kind of high. Kevin Drum nicely summarizes the range of explanations that have been put forward to explain oil’s recent rise. I tend to agree with his explanation: rising demand and tight supply. Add in a few market jitters, and the price surges.I am not the best person to talk about oil’s impact on the US economy. I expected $45 a barrel oil -- the 2004 average price for WTI was around $41, but it was far higher in the second half of the year -- to exert a far bigger drag on the US economy. No doubt the fact the oil prices are rising largely because global demand is rising, not because of any major fall in global supply (See this IMF study), has something to do with the United States’ relatively smooth (to date) adjustment to higher oil prices. Oil exporters seem increasingly comfortable with high prices in part because higher prices have not not prompted a major slowdown in the oil consuming countries, though they may be one factor contributing to Europe’s current slowdown. But it is not entirely clear that the oil producers could pump out more oil and lower prices even if they wanted to. On the other hands, with tight global markets and basically no spare capacity, if something ever took Saudi -- or for that matter Iranian -- production off line, god help us all. Saudi Arabia’s capacity to act as the central bank of oil and stabilize global oil markets hinges on its spare production capacity. Current close to all-out production maximizes Saudi income, but it also limits the Saudi’s ability to take steps to prevent oil prices from rising further (the Saudis could, of course, take some production off line if oil prices started to fall). But this post is really not about rising oil prices -- or even the shifting balance of power between oil producing countries and the world’s major oil firms. Rather, it is about the hottest topic in global macroeconomics, Ben Bernanke’s global savings glut -- a debate that Dan Gross has nicely summarized. If you look around and ask where savings are rising, the answer is really in two places. China, which obviously does not produce oil. And, the oil exporting countries. Sure, as their incomes rise, they are consuming more. But oil prices keep increasing even faster than their consumption. By my back of the envelope calculations (assuming OPEC production of 30 mbd and Russian production of @ 9 mbd), every $10 increase in the global oil price adds about $143 billion to coffers of OPEC countries and Russia. Not bad. Oil has gone from around $25 a barrel in 2002 to around $55 a barrel in 2005 -- that works out to an increase in oil revenues for the major oil exporters of around $430 billion. They could increase their spending by $130 b and still save $300 b more than they did in 2002. Want to find the source of the world’s savings glut? Compare the current account deficit of oil and commodity exporting regions in 1998 (when oil was small) to the projected current account of oil and commodity exporting regions surplus in 2005. The 98 deficit: $145 b. The IMF’s forecast for the 2005 surplus (a surplus based on oil prices almost $10 a barrel below current levels): + $262 billion. That’s a swing of $407b. Even if you use the (mostly pre-crisis) 1997 current account deficit in commodity producing regions rather than 98 deficit, the swing is $335 b. (Commodity exporting regions = Russia and the CIS, Middle East, Africa and the "developing" Western Hemisphere) That trumps the swing in the current account surplus of "manufacturing" Asia -- Japan, the Asian NICs, China and the rest of emerging Asia. Their combined surplus went from $110 billion in 97 to $233b in 98 (that Asian crisis, remember). But it has kept on rising, and is forecast to reach $346 b in 2005. That’s a swing of $235b since 1997, and $113 b since 1998 -- a smaller swing than the swing in the oil and commodity exporting regions. My data comes from the IMF. The IMF incidentally, forecasts the US deficit will increase by $590b from its 1997 level, and $515 b from its 1998 level. But the IMF assumes a US current account deficit of only $725 b in 2005, which is far too low. Its estimates of the surpluses of China and the oil exporting regions are also on the low side. No matter. It is pretty clear that the huge surge in oil prices -- and the absence, i gather, of a comparable surge in either consumption or investment in oil exporting countries -- has a little something to do with the apparent glut of global savings. According to the IMF, savings in fuel exporters averaged 22.9% of GDP from 91-98. In 2004 it was 34.2% of GDP. To state the obvious, that is a big swing. There are lots of petrodollars and petroeuros floating around. At least for now. If the rise in oil prices proves permanent -- as proponents of peak oil suggest -- I suspect those petrodollars will start being spent rather than saved. Just look at what is happening in Venezuela, and the impact it is having on other commodity exporters in Latin America.

Some things do change. For the first time in a long time, Argentina is paying its international bonds. It completed its bond exchange last week, delivered the new bonds to its investors, and made the first coupon payment.The ratings agencies upgraded Argentina. And at least for now, Argentina worries more about the amount of money coming in, not money flowing out. Like I said, some things do change. A few holdout creditors challenged the exchange in court, but their complaints were dismissed. The exchange went ahead. Argentina’s legal troubles are not over. Creditors who stayed out of the exchange will try to find a way to stop the payments on the new bonds, arguing that it is illegal for Argentina to pay its restructured debt (the "new" bonds) while still in default on its "old" bonds. That is likely to be an uphill battle. But you never know. More importantly, a large number of retail investors did not go into the deal -- particularly Italian retail investors. That will complicate Argentina’s life for a long time. Argentina may be able to ignore the Darts (a well known holdout creditor) but it cannot entirely ignore the government of Italy. At some point, Argentina will need to reopen the exchange and give the holdouts a chance to come in (maybe at a discount to penalize them for staying out initially, maybe not). This seems as good an occasion as any to note that I have posted a paper that I wrote with Anna Gelpern on the RGE web page (Anna is a rising star of the sovereign debt legal world). Our paper was written well before Argentina concluded its exchange -- but the broad outlines of a deal were still pretty clear a year ago. The focus of the paper, though, is not on the relative treatment of domestic and external sovereign debt during a severe financial crisis. The argument that the paper makes -- international debt is unlikely to be treated the same as domestic debt in a sovereign debt restructuring -- probably won’t endear either of us to some. With the advent of globalization, domestic and foreign investors can and do buy the same debt instruments. But this does not mean that their political and economic interests have converged, or that they have the same political and economic leverage with the government. It should come as no surprise then that the two groups rarely get equal treatment at the hands of a government that has run out of money. But I suspect the smart money in emerging markets understands this reality already. Legally, international bondholders don’t have the capacity to block domestic payments. Argentina has been paying its domestic peso debt for the past three years, but not -- at least until this past week -- its international bonds. Argentina also showed us that even if domestic and international investors both hold international bonds prior to default, nothing prevents a country from convincing its domestic investors to swap their bonds for something different, and then treating that "something different" held by domestic investors better. The legal composition of a sovereign’s debt is increasingly fluid, as targeted debt exchanges can quickly transform the country’s debt. In a crisis, such exchanges can help the sovereign segment its creditors into different groups, making it easier to treat each group differently. Ex-ante risk management must reflect this new, dynamic and flexible character of sovereign borrowing. For example, it would be a mistake to assume that all of a sovereign’s foreign-law debt will be treated alike in distress. The effective status of a single obligation relative to others could change several times in its lifetime as the sovereign dilutes, elevates, and subordinates instruments to suit. Economically, it is not clear that a country should treat domestic and international debt the same, particularly if the domestic debt is held by the domestic banking system. Nor is it clear that the trade off between domestic pain now (writing off domestic debt) and domestic pain later (paying off domestic debt with higher future taxes, less future spending) really determines the recovery rate on defaulted external bonds. What ultimately determines the recovery rate for international debt is the primary surplus (And trade surplus) that the country is willing to devote to external debt service -- not the treatment of its domestic debt. More domestic pain, say big losses for bank depositors, now may generate a pretty strong domestic political consensus to impose more pain on external creditors, not free up resources for external debt service. Politically, citizens vote and international bondholders don’t. A sovereign’s capacity to give priority to debt held by the countries citizens is one of the few ways a country in default can try to limit the domestic "pain" that usually accompanies default. Anna and I can be accused of over-generalizing based on the example of Argentina, but I am pretty confident that our basis conclusion -- that domestic and foreign investors are unlikely to be treated in exactly the same way in a crisis -- will prove to be pretty robust.

Nouriel and I put pen to paper and laid out our take on China. Our paper reflects on the trip we took there last month, along with the reading we did to prepare for the trip. There is nothing new here about the peg; we laid out our assessment of China’s most likely course as soon as we got back. I suspect the real debate in China is not "the current peg" v. "change," but rather "what kind of change." As we indicated before, many technocrats are well aware of the downside of a small move, namely, that "speculators" and ordinary Chinese citizens alike would start to bet on the next move. A small move probably would not have a meaningful impact on China’s overall trade balance, slow capital inflows into China, slow China’s extraordinary reserve accumulation, or provide China with more monetary room to maneuver. However, a big move still might be more than China’s political leadership can stomach at this time -- Our trip report covers far more than just the renminbi peg. China is one of those rare countries that both the right and the left hold up as an example. Someone like Reagan-era guru Arthur Laffer claims that supply-side economics explains China’s success: What China has done since 1978 is unbelievable. They have become a supply side, sound money country. ... China has fixed the yuan to the dollar. They followed sound money and big tax cuts and as a result are really coming out of the development stage as being a very serious and positive power in this world. Joe Stiglitz is not exactly close to Arthur Laffer on most economic questions, but he too sees much to like in China. China, after all, hardly followed "Washington Consensus" policies and it now has the fastest growth in the world. To Martin Wolf and others, China offers the best evidence out there that trade promotes development. Everyone likes a success story. Nouriel and I, however, try to make the case that China’s current growth model is about to run into real limits. In some sense, that is not saying much: try forecasting out 35% y/y export growth with a base of $600 billion; try imagining an economy where 55 cents of every renminbi earned is saved, with roughly 50 cents invested at home and 5 cents invested abroad. China’s government does more than just control the exchange rate; it also regulates lots of other key prices. And the renminbi is not the only thing that is currently too cheap. Gas is too cheap; the government has kept domestic prices from rising as much as world prices (helping the auto industry, and real estate developers building on the sixth ring road around Beijing). Land is too cheap --actually, land is not something that in general you can formally buy; China is still Communist after all. But the right to build an apartment building on former farmland or a traditional neighborhood is worth something. In China, a developer doesn’t have to buy out the person working the land; he has to buy out the local party -- that is a huge source of inequity, and the root cause of much social tension. The close ties between the Communist party (and the Chinese state) and the real estate industry are not hard to explain: the Chinese state controls the two things any real estate developer needs, land and, through the state banks, credit. And credit is very cheap in China. Interest rates are very, very low. 5% nominal is next to nothing in an economy that growing by almost 15% in nominal terms. No wonder demand for credit (at that price) far exceeds supply -- particularly now that the central bank is limiting bank lending to try to cool the economy. And, as Chinese economists like Hu Angang have noted, cheap credit makes it attractive to substitute capital for labor inside China, even though in global terms, labor is still quite cheap in China. Consequently, the overall impact of the peg on employment consequently may be more ambiguous than many argue. The peg supports employment in the export sector, but it also encourages the substitution of capital for labor throughout the economy, and thus reduces, to a degree, overall demand for labor. Consequently, the oft-made argument that China needs an undervalued exchange rate to provide employment growth is incomplete. The undervalued exchange rate is one of the reasons why credit is cheap right now in China. Incidentally, I am not quite sure how Robert Reich came to the conclusion that China’s peg let it "avoid surges of hot money from worldwide speculators." Speculators love nothing more than an easy target like a peg. Right now China is attracting tons of hot money, both from Chinese citizens bringing funds stashed overseas back home and from the "overseas" Chinese seeking to invest in mainland China. And that money has to go somewhere. A domestic credit boom is not the most obvious recipe for financial stability. One of the hardest things to do is to move away from a model that has worked reasonably well to date. But Nouriel and I suspect that is what China now needs to do: China’s massive reserve accumulation is but one of many signs that China’s economy has its own internal "imbalances" -- imbalances that currently seem to be getting worse.

Ecuador is not the most stable country in the Western Hemisphere. The best one can say about its political system is that it is disfunctional.Still, oil is around $50 a barrel and Ecuador exports oil -- perhaps not as much as it could, but still a significant amount. You would think high oil prices would increase the odds an elected President would be able to serve out a full term in office. But not in Ecuador --I have not followed the details of events in Ecuador closely enough to have a clear sense of why this particular "constitutional" coup happened, but I would note the following.Ecuador’s external debt (and external debt service) is high relative to its GDP, and ongoing payments of interest on this external debt generate signficant flows out of the country (particularly now that the coupon on Ecuador’s long bond has almost fully stepped up). Ecuador’s high debt load generally is not the result of recent borrowing: rather it is the consequences of not paying your old debts for extended periods of time and a relatively stagnant economy. No matter. Sustaining the political support needed to make large interest payments on external debt is a real challenge when those payments are large, and they are not offset by consistent external inflows. In my view, "political" risk is not independent of the size of the economic burden associated with payment, and the effective burden is larger for external than domestic debt (there usually is a powerful domestic constituency in favor of continued domestic debt payments too). Ecuador had a policy of trying to get its debt levels down in the hopes of gaining market access at some point in the future -- but sustaining the political consensus behind that strategy would be hard anywhere, let alone in a country as deeply divided by region and class as Ecuador. And the more political noise along the way, the lower the probability that a country like Ecuador will be rewarded for payment on its old debt with access to new funds. Ecuador dollarized its economy back in 1999 (it restructured its debt around then too). I suspect that Ecuador will show the world how to dedollarize -- though it probably won’t do that until oil falls substantially. Think how difficult running Ecuador is when oil is high. Think how much harder it will be when oil falls and the mechanism for real exchange rate adjustment in a dollarized economy (particularly one that lacks access to external credit) is domestic deflation ... Ecuador lacks the systemic importance of the US and China, but it does highlight how many different risks are out there.