Fixing Financial Crises in the 21st Century

By Andrew G. Haldane | Go to book overview

6

Comments on "Private sector involvement in financial crisis resolution: definition, measurement and implementation"

Leonardo Leiderman

Private sector involvement (PSI) in financial crises resolution is certainly one of the central practical and policy topics in the current thinking about the international financial system. William Cline's chapter is very useful as it not only reviews the many issues that are under debate, but also derives some estimates of PSI, starting with the Thai crisis of 1997. Using a narrow definition, the result is that approximately $240 billion were drawn in that context. There can be no doubt that this is a substantial amount which, when put together with official support, delivers an even higher amount of funds aimed at the resolution of these crises.


6.1

What should be the framework for the analysis?

In my view, it would be highly desirable to move one step ahead in the analysis and place PSI and official support within the more general context of debt dynamics and of "adjustment policies required for crisis resolution". Dynamic debt sustainability calculations are, in my view, the main tool being used by the typical emerging market investor in assessing the risk/return trade-offs associated with sovereign debt. Within that framework - which is basically the one discussed by Cline in the context of solvency - crises arise when the country becomes insolvent, or when under reasonable parameters of policy and of the economy's performance, the ratio of debt to GDP can be predicted to be increasing with time.

Within that dynamic framework, crisis resolution would mean having a set of interventions or adjustments at the present time such that, from then on, solvency is regained. Put differently, for crisis resolution these adjustments have to alter something quite fundamental in the key factors entering the debt dynamic analysis - i.e. current and expected future paths of fiscal primary surpluses, the country's growth rate and real interest rate, or the initial debt level - in a way that makes public debt dynamics sustainable. PSI and official support are certainly two major factors in that adjustment, but there are others of no less importance, such as adjustments in

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