1. 1 Original Sin The Pain, the Mystery And the Road to Redemption Barry Eichengreen, Ricardo Hausmann & Ugo Panizza UC Berkeley, Harvard, and IDB

2. 2 PART II THE MYSTERY

3. 3 Indexes of Original Sin (the higher the value, the greater the sin) i ii OSIN i countryby issued Securities currencyin countryby issued Securities 11 -= INDEXA i Securities currenciesmajorin Securities + Loans by country i = - = 0)0), countryby issued Securities currency inSecurities (1(1 Max3 i i OSIN i )3,Max (2 ii i OSININDEXAOSIN = + Loans by country i

4. 4 Reacting to yesterday  Several people argued that developing the local market for long-term fixed-rate debt is the key to solving international original sin  Let us look at measures of this domestic ability to borrow at home in own currency (JP Morgan’s “Guide to Local Currency markets”) DLTDDSTFC DSTFC DSIN   

5. 5 Domestic original sin 00.20.40.60.81 1.2 Taiwan India South Africa Slovak Republic Thailand Singapore Israel Hungary Poland Philippines Chile Czech Republic Hong Kong Mexico Greece Brazil Turkey Indonesia Venezuela Malaysia Argentina

6. 6 OSIN DSIN.0109611 0 1 Argentin Brazil Chile Czech Re Egypt, A Greece Hong Kong Hungary India Indonesi Israel MalaysiaMexico Philippnesi Poland Singapore Slovak R South Africa Taiwan TurkeyVenezuel

7. 7 Recent Theories  Underdevelopment of institutions and policies in general  Inadequate monetary credibility  Fiscal profligacy  Weak contract enforcement  Presence or absence of trade sanctions  Political economy stories

8. 8 Original Sin and the level of development (1)(2)(3)(4) Dropping Financial Centers OSIN3 LGDP_PC-0.012-0.036-0.007-0.021 (0.74)(1.23)(0.42)(1.10) SIZE-0.072-0.190-0.083-0.139 (2.37)**(3.83)***(2.50)**(3.25)*** FIN_CENTER-0.767 (7.37)*** EUROLAND-0.239-0.236 (1.94)*(1.93)* OTH_DEVELOPED-0.066-0.069 (0.67)(0.71) Constant1.0611.251.0221.130 (9.17)*** (5.41)***(8.73)***(7.40)*** Observations 75 69

9. 9 e( SIN33_A | X) e( LGDP_PC | X ) -1.723321.2301 -.898761.359822 IND UKR MAR ZWE DOM THA GBR BOL PAK JOR POL TUN MDA LKA MUS CAN FIN KAZ IDN CHL AUS NET ESP NOR LVA SWE AUT SGP EST DEU CZE SVK CRI USA TUR HUN FRA CHE PER DNK ITA KOR LUX MEX GRC SLV ARG COL SVN ISL BEL MLT BHR ZAF ISR CYP

10. 10 coef =.02726463, (robust) se =.08081867, t =.34 e( dsin2 | X) e( GDP_PC | X ) -2.329831.77617 -.53772.426209 IND IDN EGY PHL THA TUR POL MEX VEN SVK ZAF CHL BRA HUN MYS CZE ARG GRC ISR HKG SGP

11. 11 Original Sin and Monetary Credibility  Foreign investors do not want to lend in a unit that the borrower can manipulate  This should not apply as much to private borrowers  Why no inflation indexed debt?  There is a peso problem and borrowers do not want to use their own currency

12. 12 Original sin and monetary credibility (1)(2)(3)(4) Dropping Fin centers OLS same sample as 4 Instrumental Variables OSIN3 AV_INF0.0980.1000.119-0.132 (2.09)**(2.10)**(1.41)(1.57) SIZE-0.104-0.113-0.183 (2.83)***(2.88)***(3.36)***(3.34)*** FIN_CENTER-0.716-0.598-0.595 (7.42)***(5.12)***(5.34)*** EUROLAND-0.146-0.136-0.225-0.222 (1.41)(1.31)(1.57)(1.59) OTH_DEVELOPED-0.070-0.062-0.105-0.102 (0.91) (0.81) (1.31)(0.76) Constant 0.9530.954 1.0551.060 (33.00)***(32.47)*** (19.12)***(22.26)*** Observations 7468 33 R-squared 0.660.37 0.76

13. 13 e( SIN33_A | X) e( INF | X ) -1.586723.08266 -.920488.386774 COL BHR ZAF SLV IDN PAK MEX KOR SVN LKA CZE SVK THA CYP ZWE LUX DOM FRA TUN GRC MDA CRI USA IND EST HUN TUR CHL ITA NOR MAR ESP DNK SWE AUS MLT FIN DEU LVA BEL CAN ISL NET MUS JOR GBR AUT CHE SGP POL ISR KAZ ARG PER BOL UKR

14. 14 e( dsin2 | X) e( AV_INF | X ) -.2428791.08381 -.53772.470317 SGP MYS THA HKG CZE IND PHL IDN ZAF EGY GRC HUN SVK CHL VEN MEX POL ISR TURARG BRA

15. 15 e( dsin2 | X) e( AV_INF | X ) -.150053.313087 -.497336.466594 SGP MYS THA HKG CZE IND PHL IDN ZAF EGY GRC HUN SVK CHL VEN MEX POL ISR TUR

16. 16 Original sin in Euroland 0% 20% 40% 60% 80% 100% 120% ? ? ?

17. 17 Original sin in Euroland 0% 20% 40% 60% 80% 100% 120% Germany Luxembourg ?

18. 18 Original sin in Euroland 0% 20% 40% 60% 80% 100% 120% Germany Luxembourg Italy France Portugal Spain Netherlands Belgium Austria Greece Ireland Finland

19. 19 Original sin and contract enforcement  Investors are reluctant to lend to government if institutions designed to enforce their claims are weak  Weak institutions prevent the creation of sophisticated contracts that could limit moral hazard at the borrower level (Chamon, 2002, Aghion et al., 2002)

20. 20 Original sin and contract enforcement (1)(2 OSIN3 Dropping Financial Centers RULEOFLAW0.038 (0.98)(0.97) SIZE-0.098-0.107 (2.77)***(2.83)*** FIN_CENTER-0.803 (8.81)*** EUROLAND-0.219-0.210 (2.07)**(2.00)* OTH_DEVELOPED-0.152-0.145 (1.73)*(1.67) Constant0.9750.976 (47.90)*** (46.69)*** Observations 7569 R-squared 0.660.37

21. 21 e( SIN33_A | X) e( RULEOFLAW | X ) -.924632.846272 -.924132.391291 SLV COL BEL IDN ZAF MLT SVK MEX GRC CYP CZE KAZ PAK ISL SVN THA FRA LKA LVA CHE EST ITA DEU LUX ESP SWE ZWE NOR PER TUR UKR USA DNK MDA HUN KOR AUS CRI DOM ISR BOL NET CAN BHR TUN GBR AUT JOR FIN SGP ARG POL CHL MUS MAR IND

22. 22 e( dsin2 | X) e( KAUFF | X ) -1.273371.58399 -.520665.443264 IDNVEN MEX ZAF PHL TUR EGY SVK IND ARG THA GRC POL CZE HUN MYS ISR CHL HKG SGP

23. 23 Original sin and fiscal solvency  Governments with weak fiscal account will have incentives to debase their currencies  Lucas and Stokey (1983)  Calvo and Guidotti (1990)  Corsetti and Mackowiak (2002)

24. 24 Original sin and fiscal solvency (1)(2)(3)(4) OSIN3 DE_GDP-0.145 (1.85)* DE_RE-0.035 (1.18) DEFICIT-0.313 (0.49) FISC-0.073 (1.62) SIZE-0.117-0.099-0.126-0.123 (3.32)***(2.75)***(3.20)***(3.22)*** Fin_Cent-0.745-0.759-0.737-0.742 (7.19)***(8.70)***(6.73)***(6.75)*** Euroland-0.152-0.180-0.160-0.154 (1.71)*(1.81)*(1.62)(1.63) Oth_Dev-0.120-0.109-0.121-0.123 (1.80)*(1.39)(1.61) (1.74)* Constant1.0660.9961.056 0.996 (23.28)***(26.20)***(18.41)*** (41.56)*** N.Obs 647457 R-squared 0.670.660.650.66

25. 25 e( SIN33_A | X) e( FISC | X ) -1.297441.39966 -.847888.264978 THA SVK NOR IDN CZE FIN SLV KAZ COL EST CHE DOM LVA UKR KOR SVN CHL GBR SWE DEU ESP AUS ZAF ZWE MLT BOL FRA MEX CRI TUN AUT POL NET MUS USA IND ISL HUN GRC PAK CYP TUR MARDNK PER MDA ARG CAN BEL LKA LUX JOR ITA ISR SGP

26. 26 e( dsin2 | X) e( DE_GDP | X ) -.486835.755834 -.41216.551769 SVK THA CZE CHL MEX TURIDN ZAF POL IND PHL HUN SGP GRC ISR

27. 27 Original Sin and Trade  Countries that trade heavily have more incentives to meet their contractual obligations (Eaton and Gersovitz, 1981)  Should not affect denomination  Trade creates deeper currency markets

28. 28 Original Sin and Trade (1)(2) OSIN3 Dropping Financial Centers OPEN-0.033-0.028 (0.98)(0.85) SIZE-0.087-0.095 (2.25)**(2.34)** FIN_CENTER-0.780 (8.77)*** EUROLAND-0.254-0.244 (2.24)**(2.16)** OTH_DEVELOPED-0.090-0.083 (1.13)(1.05) Constant0.9960.992 (35.46)*** (35.40)*** Observations 7569 R-squared 0.690.34

29. 29 e( SIN33_A | X) e( OPEN | X ) -.4318221.81548 -.943281.241124 ARG CHL COL USA FIN GRC PER MAR ISL IND KOR MDA ZAF AUS BOL ISR TUR SLV CRI CYP DEU PAK POL FRA CHE ESP DNK GBR ZWE NOR AUT TUN ITA SVN LVA HUN KAZ EST MUS SWE LKA DOM IDN MEX THA CAN NET CZE BHR JOR SVK UKR LUX BEL SGP

30. 30 Original sin and political economy  The presence of a domestic constituency of local currency debt-holders may limit the government’s incentives to debase its currency  So original sin arises from the fact that, without a domestic constituency, the government cannot commit to protect foreign bond-holders (Tirole, 2002)

31. 31 Original sin and political economy (1)(2)(3)(4) OSIN3 Dropping Financial Centers DC_GDP-0.084 (0.96) FOR_DOM-0.883 (1.17) SIZE_FIN-0.069-0.298 (0.33)(1.05) SIZE-0.093-0.105-0.095-0.098 (2.70)***(2.75)***(2.69)***(2.71)*** FIN_CENTER-0.700-0.725-0.747 (6.23)***(8.09)***(7.68)*** EUROLAND-0.135-0.170-0.167-0.123 (1.12)(1.68)*(1.53)(1.06) OTH_DEVELOPED-0.082-0.091-0.096-0.078 (1.09)(1.20)(1.28)(1.07) Constant1.0190.9900.9790.971 (25.01)***(45.71)*** (43.91)*** (38.11)*** R-squared 0.66 0.37

32. 32 e( SIN33_A | X) e( SIZE_FIN | X ) -.364298.212954 -.903856.287533 SGP USA MEX CRI TUR DOM DNK NET ITA ARG CAN FIN SVN LKA EST LVA MUS POL PER ISL MDA COL GBR IND SWE FRA NOR ZWE TUN GRC KAZ PAK HUN JOR MAR KOR ESP CZE DEU CHL ISR AUT BEL SLV UKR IDN SVK AUS ZAF CYP MLT BOL THA CHE

33. 33 Putting everything together OSIN3OSIN3_NOIOSIN3 Dropping Financial centers LGDP_PC-0.0220.011-0.056-0.009-0.045 (0.47)(0.23)(1.04)(0.17)(0.93) FISC-0.071-0.097-0.095-0.062-0.069 (1.33)(1.89)*(1.52)(1.04)(1.21) SIZE-0.146-0.157-0.241-0.147-0.148 (3.10)***(3.21)***(3.86)***(2.93)***(2.90)*** SIZE_FIN0.0620.0200.270-0.106-0.158 (0.25)(0.09)(0.53)(0.23)(0.41) RULEOFLAW0.0860.0040.0350.0750.052 (0.98)(0.06)(0.38)(0.85)(0.60) INF0.0400.0130.0540.0370.043 (1.59)(0.70)(1.58)(1.45)(1.52) OPEN-0.136-0.111-0.155-0.095-0.031 (1.39)(1.22)(1.10)(0.78)(0.26) FIN_CENTER-0.746-0.687 (7.11)*** EUROLAND-0.168-0.152-0.148 (1.69)*(1.60) (1.35) OTH_DEVELOPED-0.163-0.173-0.159 (1.68)*(1.81)*(1.65) Constant1.2401.0181.5501.1041.337 (3.50)***(2.85)*** (3.33)***(2.73)***(3.40)*** R-squared 0.680.730.480.450.43

34. 34 e( SIN33_A | X) e( SIZE | X ) -1.247362.16883 -.950572.327155 ISL CYP CHE GRC BOL SLV MDA MLT PER LVA ISR EST COL MUS KAZ ZAF ZWE CRI SVN DEU FIN AUT JOR BEL LKA ARG DNK SVK GBR AUS HUN ESP TUN PAK NOR CHL MAR ITA USA SWE LUX FRA DOM CZE TUR UKR IDN POL NET KOR THA CAN MEX BHR IND SGP

35. 35 coef = -.13523022, (robust) se =.04692612, t = -2.88 e( SIN33_A | X) e( SIZE | X ) -1.249382.18988 -.547786.337008 ISL CYP CHE GRC BOL SLV MDA MLT PER LVA ISR EST COL KAZ MUS ZWE ZAF CRI SVN DEU FIN AUT JOR BEL ARG LKA DNK SVK GBR AUS ESP HUN TUN PAK NOR CHL MAR ITA USA SWE LUX FRA DOM TUR UKR POL IDN NET KOR THA CAN MEX BHR IND SGP

36. 36 Bottom Line  Original sin is not merely a problem of country policies (one need not deny the relevance of these, of course).  It is also a problem with the operation of the international system (given transactions costs, a world of heterogeneous countries, and network effects that lock in the status quo).  Redemption therefore requires international action to overcome the inertia in the system.

37. 37 Original Sin The Pain, the Mystery And the Road to Redemption Barry Eichengreen, Ricardo Hausmann & Ugo Panizza UC Berkeley, Harvard, and IDB