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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