the pain and the mystery of original sin

11

The Pain and the Mystery of Original Sin

Barry Eichengreen Ricardo Hausmann

Ugo Panizza

22

Outline and SummaryOutline and Summary Definition and FactsDefinition and Facts

Most countries do not borrow abroad in their own Most countries do not borrow abroad in their own currencies, a problem we refer to as “original sin”currencies, a problem we refer to as “original sin”

If a country has a net foreign debt, this creates an aggregate If a country has a net foreign debt, this creates an aggregate currency mismatchcurrency mismatch

Of course a country can decide not to have a mismatch by not borrowing Of course a country can decide not to have a mismatch by not borrowing or holding a lot of reservesor holding a lot of reserves

PainPain We show that original sin is associated with limited XR We show that original sin is associated with limited XR

flexibility, high volatility, low credit ratingsflexibility, high volatility, low credit ratings MysteryMystery

We show that standard explanations based on poor policies We show that standard explanations based on poor policies or institutions do not do a good job at explaining original sinor institutions do not do a good job at explaining original sin

33

Work on Original SinWork on Original Sin First papers on the topic:First papers on the topic:

Eichengreen and Hausmann (1999)Eichengreen and Hausmann (1999) Hausmann, Panizza, and Stein (2001)Hausmann, Panizza, and Stein (2001) Hausmann and Panizza (2003)Hausmann and Panizza (2003)

Original Sin book: Original Sin book: Cespedes, Chang and Velasco, Cespedes, Chang and Velasco, Corsetti and Mackowiak,Corsetti and Mackowiak,

Jeanne, Jeanne and Zettelmeyer, Flandreau and Sussman, Jeanne, Jeanne and Zettelmeyer, Flandreau and Sussman, Bordo, Meissner and Redish, Chamon and HausmannBordo, Meissner and Redish, Chamon and Hausmann

Critics:Critics: Goldstein and Turner (2003)Goldstein and Turner (2003) Burger and Warnock (2003)Burger and Warnock (2003) Reinhart, Rogoff, and Savastano (2003)Reinhart, Rogoff, and Savastano (2003) Eichengreen, Hausmann, and Panizza (2003)Eichengreen, Hausmann, and Panizza (2003)

44

DefinitionDefinition Eichengreen and Hausmann (1999) definition: Eichengreen and Hausmann (1999) definition:

“a situation in which the domestic currency is “a situation in which the domestic currency is not used to borrow abroad or to borrow long not used to borrow abroad or to borrow long term even domestically”term even domestically”

Here we mostly focus on “international original Here we mostly focus on “international original sin”sin” Better data on international original sinBetter data on international original sin Domestic original sin seems easier to solve and Domestic original sin seems easier to solve and

some countries are doing progress in this directionsome countries are doing progress in this direction However, we also try to say something on However, we also try to say something on

“domestic original sin”“domestic original sin”

55

A first look at the problem:Distribution of international debt by issuers

and currencies (1999-2001)

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

USA Euroland Japan UK Switzerland Canada Australia

Debt by country

Debt by currency

$4.5 trillion

$5.6 trillion

66

Is this because countries do their Is this because countries do their local currency funding on the local currency funding on the

home market and foreign currency home market and foreign currency funding abroad?funding abroad?

0

10

20

30

40

50

60

70

80

90

100

USA EURO JAPAN CANADA UK

Debt by currency

Debt by country

$473 billion

$632 billion

77

MeasurementMeasurement Measuring original sin is not straightforwardMeasuring original sin is not straightforward In principle, we want to measure external In principle, we want to measure external

liabilities in own currency as a share of total liabilities in own currency as a share of total external liabilitiesexternal liabilities

We use data gathered by the BIS on the currency We use data gathered by the BIS on the currency denomination of bonds and money market denomination of bonds and money market instrumentsinstruments

We also consider BIS data on cross-border bank We also consider BIS data on cross-border bank lending, although the data are less complete lending, although the data are less complete (both in country coverage and currency (both in country coverage and currency breakdown)breakdown)

88

Main index used in the paperMain index used in the paper

0,

country by issued Securitiescurrency in Securities1max3

iiOSIN i

It captures opportunities for hedging through swaps

It recognizes that you cannot hedge more than 100 percent of your debt

99

Alternative indexesAlternative indexes

i

i iOSIN1

country by issued securities

country by issued currencyin securities1

OSIN2 Uses bank loans

OSIN3b Like OSIN3 but can take negative values

1010

Measures of original sin by Measures of original sin by country groupingscountry groupings

00.10.20.30.40.50.60.70.80.91

Financial Centers Euroland Other Developed Developing

OSIN1 OSIN3

1111

Original Sin in Developing Original Sin in Developing CountriesCountries

0.75

0.8

0.85

0.9

0.95

1

LAC ASIA&PAC ME&AFR ECA

1993-1998 1999-2001

1212

Original sin is highly persistent:Original sin is highly persistent: OSIN and Flandreau-Sussman classification

(circa 1850)

00.10.20.30.40.50.60.70.80.9

GoldClauses

MixedClauses

DomesticCurrency

The Pain of Original SinThe Pain of Original Sin

(The consequences)(The consequences)

1414

Exchange rate flexibilityExchange rate flexibility

Output and capital flow volatilityOutput and capital flow volatility

Credit ratingsCredit ratings

1515

Original Sin and Exchange Original Sin and Exchange Rate FlexibilityRate Flexibility

If an original sin country has a net foreign debt, If an original sin country has a net foreign debt, then there is an aggregate currency mismatch. then there is an aggregate currency mismatch. Movements in the RER will have an aggregated Movements in the RER will have an aggregated wealth effectwealth effect

This renders the CB less willing to let the This renders the CB less willing to let the exchange rate move (exchange rate move (fear of floating, fear of floating, Calvo and Calvo and Reinhart, 2002) Reinhart, 2002)

As a consequence, the CB holds more reserves As a consequence, the CB holds more reserves and uses them, together with the interest rate, and uses them, together with the interest rate, to intervene in the foreign exchange market to intervene in the foreign exchange market (Hausmann, Panizza, Stein, 2001)(Hausmann, Panizza, Stein, 2001)

1616


(1) (2) (3) (4) (5) (6) Dropping Financial Centers LYS RESM2 RVER LYS RESM2 RVER OSIN3 1.503 0.248 -0.801 1.112 0.339 -0.598 (3.56)***

(3.74)*** (2.02)** (2.45)** (3.10)*** (1.33)

GDP_PC 0.302 -0.053 0.026 0.285 -0.052 0.025 (2.89)***

(1.85)* (0.61) (2.77)**

* (1.81)* (0.56)

OPEN 0.198 -0.014 1.017 0.153 -0.014 1.021 (0.92) (0.41) (2.88)*** (0.72) (0.41) (2.93)*** EXD/GDP 0.290 -0.036 -0.570 0.297 -0.030 -0.544 (0.96) (0.66) (2.36)** (0.98) (0.54) (2.29)** Constant -2.188 0.531 0.104 -1.644 0.435 -0.084 (1.94)* (1.73)* (0.17) (1.46) (1.35) (0.13) Observations 75 65 65 71 62 62 R-squared 0.37 0.62 0.34 0.65

1717


The results are generally robust to alternative The results are generally robust to alternative definitions of original sin, to dropping weights, and to definitions of original sin, to dropping weights, and to augmenting the regressions with a developing country augmenting the regressions with a developing country dummydummy

Causality is a big issue (Burnside, Eichenbaum, and Causality is a big issue (Burnside, Eichenbaum, and Rebelo, 2001)Rebelo, 2001) IV regressions confirm the results but instrument (SIZE) is IV regressions confirm the results but instrument (SIZE) is

lousylousy We tried to go in the other direction. OSIN on the left and LYS on We tried to go in the other direction. OSIN on the left and LYS on

the right instrumented with openness. We found no correlation the right instrumented with openness. We found no correlation between LYS and OSINbetween LYS and OSIN

Using lagged OSIN in a panel confirms the resultsUsing lagged OSIN in a panel confirms the results Devereux and Lane (2003)Devereux and Lane (2003)

1818

Original Sin, Output and Original Sin, Output and Capital Flow VolatilityCapital Flow Volatility

Original sin limits the scope and Original sin limits the scope and effectiveness of counter-cyclical policies effectiveness of counter-cyclical policies (Cespedes, Chang and Velasco, 2003)(Cespedes, Chang and Velasco, 2003)

Original Sin limits the CB ability of acting as Original Sin limits the CB ability of acting as a LOLR (Chang and Velasco, 2000)a LOLR (Chang and Velasco, 2000)

Dollar liabilities are likely to increase the Dollar liabilities are likely to increase the cost of a currency crisiscost of a currency crisis

Dollar liabilities could be associated with Dollar liabilities could be associated with Sudden Stops in capital flows (Calvo, Sudden Stops in capital flows (Calvo, Izquierdo and Mejia, 2003)Izquierdo and Mejia, 2003)

1919

Original Sin, Output and Original Sin, Output and Capital Flow VolatilityCapital Flow Volatility

(1) (2) (3) (4) Dropping Financial Centers VOL_GROWTH VOL_FLOW VOL_GROWTH VOL_FLOW OSIN3 0.011 7.103 0.015 7.498 (1.96)* (3.58)*** (2.45)** (2.69)** LGDP_PC -0.012 -3.214 -0.012 -3.322 (2.14)** (2.56)** (2.09)** (2.40)** OPEN -0.001 -4.181 -0.000 -4.333 (0.12) (1.20) (0.08) (0.83) VOL_TOT -0.000 0.223 -0.000 0.223 (0.86) (1.08) (0.89) (1.02) SHARE2 -0.014 0.147 -0.015 0.949 (1.72)* (0.04) (1.51) (0.14) Constant 0.135 32.825 0.131 33.282 (2.25)** (2.39)** (2.15)** (2.22)** Observations 77 33 73 29 R-squared 0.40 0.64 0.40 0.62

2020

Original Sin and Credit Original Sin and Credit RatingsRatings

If a country’s debt is denominated in foreign If a country’s debt is denominated in foreign currency, its capacity to pay will not be related to its currency, its capacity to pay will not be related to its LCU GDP but to its dollar GDPLCU GDP but to its dollar GDP Original Sin makes the real exchange rate matter for debt Original Sin makes the real exchange rate matter for debt

service service This is important because in developing countries the This is important because in developing countries the

volatility of dollar GDP is much higher than the volatility of dollar GDP is much higher than the volatility of LCU GDP, and sudden drops of dollar GDP volatility of LCU GDP, and sudden drops of dollar GDP are usually associated with much smaller drops in are usually associated with much smaller drops in real GDPreal GDP

Other things equal, countries with Original Sin should Other things equal, countries with Original Sin should be riskier than countries that borrow in own currencybe riskier than countries that borrow in own currency

2121


(1) (2) (3) (4) RATING RATING RATING RATING Dropping Financial

Centers OSIN3 -5.845 -5.644 -5.214 -4.955 (4.08)*** (4.01)*** (3.31)*** (3.21)*** DE_GDP -2.421 -2.285 (2.50)** (2.32)** DE_RE -0.999 -0.975 (2.49)** (2.39)** LGDP_PC 2.916 2.670 2.976 2.729 (8.48)*** (6.16)*** (8.36)*** (5.97)*** SHARE2 2.187 2.787 1.810 2.405 (1.43) (1.52) (1.09) (1.18) Constant -8.058 -5.962 -9.119 -7.037 (2.12)** (1.28) (2.29)** (1.44) Observations 56 49 53 46

The Mystery of Original SinThe Mystery of Original Sin

(the causes)(the causes)

2323

Key Question from this Point of Key Question from this Point of ViewView

Does the inability to borrow Does the inability to borrow internationally in domestic currency internationally in domestic currency reflect problems with country policies reflect problems with country policies and institutions or systematic problems?and institutions or systematic problems?

We argue that the problem is too We argue that the problem is too pervasive (and too weakly correlated pervasive (and too weakly correlated with country characteristics) to be with country characteristics) to be entirely explicable on the first set of entirely explicable on the first set of grounds.grounds.

2424

Five possible explanationsFive possible explanations Underdevelopment of institutions Underdevelopment of institutions

and policies in generaland policies in general Inadequate monetary credibilityInadequate monetary credibility Fiscal profligacyFiscal profligacy Weak contract enforcementWeak contract enforcement Political economy storiesPolitical economy stories

2525

Original Sin and the Level of Original Sin and the Level of DevelopmentDevelopment

(1) (2) (3) OSIN3 OSIN3 OSIN3 LGDP_PC -0.141 -0.128 -0.170 (1.59) (1.43) (2.99)*** SIZE -0.310 -0.310 -0.415 (3.37)*** (3.33)*** (4.51)*** FIN_CENTER -0.680 (1.99)* EUROLAND -0.126 -0.152 (0.62) (0.74) OTH_DEVELOPED 0.007 -0.021 (0.03) (0.10) Constant 2.522 2.414 2.833 (3.39)*** (3.24)*** (5.46)*** Observations 75 71 75

2626

Original Sin and Monetary Original Sin and Monetary CredibilityCredibility

Lack of monetary credibility is the true Lack of monetary credibility is the true cause of Original Sin (Jeanne, 2002)cause of Original Sin (Jeanne, 2002)

The government has an incentive to inflate The government has an incentive to inflate away domestic currency debt held by away domestic currency debt held by foreigners, and the presence of foreign foreigners, and the presence of foreign currency debt can act as commitment currency debt can act as commitment device and improve credibility (Tirole, device and improve credibility (Tirole, 2002, Calvo and Guidotti, 1990)2002, Calvo and Guidotti, 1990) Why don’t we observe inflation indexed debt? Why don’t we observe inflation indexed debt?

(Chamon, 2002)(Chamon, 2002)

2727


(1) (2) (3) (4) (5) (6) Dropping

Financial Centers

OSIN3 OSIN3 OSIN3 OSIN3 OSIN3 OSIN3 AV_INF 0.306 0.436 (1.19) (0.69) AV_INF2 -0.116 (0.23) MAX_INF 0.067 (0.95) INF 0.085 0.083 0.175 (1.09) (1.07) (2.08)** SIZE -0.318 -0.318 -0.316 -0.318 -0.318 -0.503 (3.57)*** (3.54)*** (3.52)*** (3.55)*** (3.50)*** (5.75)*** FIN_CENTER -0.866 -0.897 -0.857 -0.881 (2.88)*** (2.99)*** (2.83)*** (2.93)*** EUROLAND -0.304 -0.329 -0.296 -0.315 -0.318 (2.12)** (2.31)** (1.99)* (2.21)** (2.21)** OTH_DEVELOPED -0.199 -0.224 -0.192 -0.211 -0.213 (1.47) (1.67)* (1.37) (1.56) (1.57) Constant 1.277 1.310 1.259 1.346 1.347 1.358 (10.87)*** (11.60)*** (8.83)*** (13.56)*** (13.46)*** (13.41)*** Observations 74 74 74 74 70 74

2828


e( O

SIN

3 | X

)

e( AV_INF | X ) -.246179 1.48963

-.893699

.363081

BRB

BHR OMN

MLT BHS CYP PNG JOR

LUX

MUS

TTO

TUN MAR

SGP FIN

LKA GTM

PAK AUT

DNK

MDA

SLV

NOR

CHE

CZE

THA

BEL

NET

SWE

AUS

SVN

ZWE CAN DOM

SVK

PHL

ISL JAM

KOR

IND

PRT

DEU JPN

ESP

FRA ZAF

HUN

GBR

IDN

CRI

CHL GRC

ITA

USA

EST

SUR

COL

ECU LVA

VEN

URY

MEX

POL

ISR

BGR

TUR

BOL

ROM

PER

RUS

ARG

NIC

UKR

2929


Low inflation seems to be a necessary but Low inflation seems to be a necessary but not sufficient condition for escaping not sufficient condition for escaping Original SinOriginal Sin

Results are robust to longer lags (1970s)Results are robust to longer lags (1970s) They are robust to instrumenting inflation They are robust to instrumenting inflation

with an index of CB independencewith an index of CB independence

3030

Original Sin and Fiscal Original Sin and Fiscal SolvencySolvency

A government with weak fiscal accounts A government with weak fiscal accounts has an incentive to debase its currency in has an incentive to debase its currency in order to erode the value of its real order to erode the value of its real obligations (Lucas and Stokey, 1983)obligations (Lucas and Stokey, 1983)

Corsetti and Mackowiack (2002) find that Corsetti and Mackowiack (2002) find that there is a vicious circle in which, in the there is a vicious circle in which, in the presence of weak public finances, a large presence of weak public finances, a large stock of foreign currency debt limits the stock of foreign currency debt limits the ability to borrow in domestic currency ability to borrow in domestic currency

3131

Original Sin and Fiscal Original Sin and Fiscal SolvencySolvency

(1) (2) (3) (4) (5) (6) (7) OSIN3 OSIN3 OSIN3 OSIN3 OSIN3 OSIN3 OSIN3 DE_GDP -0.073 0.050 (0.50) (0.31) DEFICIT 1.777 (0.92) DE_RE 0.014 (0.24) FISC -0.025 -0.024 (0.30) (0.28) DE_GDP*DEV 0.247 (0.88) DE_GDP*IND -0.186 (1.13) SIZE -0.350 -0.327 -0.354 -0.342 -0.345 -0.330 -0.555 (3.71)*** (3.52)*** (3.51)*** (3.42)*** (3.40)*** (3.60)*** (5.92)*** FIN_CENTER -0.825 -0.926 -0.816 -0.839 -0.645 (2.72)*** (3.09)*** (2.57)** (2.66)** (2.01)** EUROLAND -0.344 -0.361 -0.327 -0.348 -0.348 -0.155 (2.61)** (2.66)*** (2.22)** (2.48)** (2.46)** (0.84) OTH_DEVELOPED -0.275 -0.215 -0.245 -0.272 -0.272 -0.094 (2.18)** (1.54) (1.73)* (2.01)** (1.99)* (0.53) Constant 1.426 1.311 1.370 1.382 1.385 1.260 1.374 (11.99)*** (11.46)*** (10.06)**

* (12.04)*** (11.93)*** (8.00)*** (11.66)***

Observations 64 74 57 57 54 64 64

3232

Original Sin and Contract Original Sin and Contract EnforcementEnforcement

Investors are reluctant to lend in countries where Investors are reluctant to lend in countries where the institutions designed to enforce their claims the institutions designed to enforce their claims are weakare weak

Chamon (2002) and Aghion, Bacchetta and Chamon (2002) and Aghion, Bacchetta and Banerjee (2001) show that if depreciation and Banerjee (2001) show that if depreciation and default risk are correlated and, if in case of default, default risk are correlated and, if in case of default, assets are divided among creditors in proportion to assets are divided among creditors in proportion to their nominal claims, domestic currency market their nominal claims, domestic currency market will disappearwill disappear

This problem could be solved if courts could This problem could be solved if courts could enforce complicated contracts that distinguish enforce complicated contracts that distinguish among creditors of different seniorityamong creditors of different seniority

3333

Original Sin and Contract Original Sin and Contract EnforcementEnforcement

(1) (2) (3) OSIN3 OSIN3 OSIN3 RULEOFLAW -0.050 -0.053 -0.182 (0.46) (0.49) (2.33)** SIZE -0.323 -0.322 -0.480 (3.53)*** (3.48)*** (5.32)*** FIN_CENTER -0.883 (2.65)** EUROLAND -0.326 -0.325 (1.81)* (1.79)* OTH_DEVELOPED

-0.203 -0.201

(1.03) (1.01) Constant 1.388 1.390 1.486 (13.17)*** (13.08)*** (12.33)*** Observations 75 71 75

3434

Original Sin and Political Original Sin and Political EconomyEconomy

Original sin could be due to the absence of Original sin could be due to the absence of a domestic constituency of local currency a domestic constituency of local currency debt-holders prepared to penalize a debt-holders prepared to penalize a government that debase the currencygovernment that debase the currency

Tirole (2002) suggests that Original Sin Tirole (2002) suggests that Original Sin may arise from the government’s inability may arise from the government’s inability to commit to protect the rights of to commit to protect the rights of foreignersforeigners

3535

Original Sin and Political Original Sin and Political EconomyEconomy

(1) (2) (3) (6) OSIN3 OSIN3 OSIN3 OSIN3

DC_GDP -0.332 -0.554 (1.49) (2.99)*** FOR_DOM -7.289 7.224 (2.15)** (0.86)

SIZE -0.290 -0.360 -0.323 -0.399 (3.22)*** (4.02)*** (3.72)*** (4.47)*** FIN_CENTER -0.753 -0.843 -0.895 (2.40)** (3.02)*** (3.23)*** EUROLAND -0.226 -0.301 -0.299 (1.37) (2.34)** (2.42)** OTH_DEVELOPED -0.224 -0.223 -0.254 (1.75)* (1.86)* (2.16)** Constant 1.521 1.431 1.291 1.636 (10.13)*** (13.76)*** (11.15)*** (11.32)*** Observations 74 73 72 74

3636

Digression on Domestic Digression on Domestic Original SinOriginal Sin

It may be the case that the previous It may be the case that the previous regressions do not yield any result regressions do not yield any result because we are not able to measure the because we are not able to measure the “real” size of the domestic local “real” size of the domestic local currency marketcurrency market

This would require building a measure of This would require building a measure of domestic original sin and looking at how domestic original sin and looking at how it relates to international original sinit relates to international original sin

3737


We were able to build such a We were able to build such a measure for a small sample of 21 measure for a small sample of 21 developing countriesdeveloping countries

DLTDLTIPDLTIIDSTFCDLTIIDSTFCDSIN

3838


DS

IN2

OSIN30 .25 .5 .75 1

0

.25

.5

.75

1

POL

CZE

ZAF

HKG

TWN

SGP

SVKTHA

EGY

ARG

CHL

HUN

IDN

PHL

MEX

MYS

BRA

TUR

IND

ISR

VENDSIN=0.25+0.37*OSIN3 p value on slope coefficient 0.11 R2=0.13 N= 21

3939


(1) (2) (3) (4) (5) (6) (7) (8) DSIN DSIN DSIN DSIN DSIN DSIN DSIN DSIN LGDP 0.134 (1.63) LGDP_PC 0.029 (0.36) AV_INF 0.134 0.176 0.215 (2.16)** (1.73) (3.75)*** RULEOFLAW -0.142 (1.59) DC_GDP -0.638 -0.263 (1.94)* (0.60) CAPCONTR -0.069 -0.140 (1.18) (3.24)*** Constant -0.064 0.335 0.217 0.607 0.906 0.218 0.576 0.008 (0.17) (0.49) (1.09) (6.38)*** (4.39)*** (0.43) (7.48)*** (0.04) Observations 21 21 21 20 18 18 21 21 R-squared 0.09 0.01 0.15 0.08 0.18 0.28 0.07 0.37

4040


DS

IN2

OSIN30 .25 .5 .75 1

0

.25

.5

.75

1

POL

CZE

ZAF

HKG

TWN

SGP

SVKTHA

EGY

ARG

CHL

HUN

IDN

PHL

MEX

MYS

BRA

TUR

IND

ISR

VEN

CC=0.45

CC=0.69

CC=0.50

Not significantly different

4141


There is some (weak) evidence that There is some (weak) evidence that capital controls may help in reducing capital controls may help in reducing domestic original sindomestic original sin

However, it looks as if capital However, it looks as if capital controls are bad for for international controls are bad for for international original sinoriginal sin

Back to International Back to International Original SinOriginal Sin

4343

Putting Everything TogetherPutting Everything Together (1) (2) (3) (4 ) OSIN OSIN OSIN OSIN SIZE -0.302 -0.325 -0.326 -0.352 (3.32)*** (3.48)*** (3.50)*** (3.88)*** GDP per cap -0.262 -0.127 -0. 248 (2.08)** (1.31) (2.30)** AV_INF 0.288 0.150 0.070 0.274 (0.89) (0.4 9) (0.29) (0.88) DE_GDP -0.003 -0.102 0.044 -0.002 (0.02) (0.60) (0.26) (0.01) RULE of LAW 0.305 0.091

-0.291 (1.88)* (0.70)

(1.25) DC_GDP -0.313 -0.173 -0.403

0.255

(1.05) (0.59) (1.38)

(1.61)

FIN_CENTER -0.492 -0.453 -0.680

(1.45) (1.31) (2.06)**

EUROLAND 0.032 0.010 -0.220

(0.15) (0.04) (1.18) OTH_DEVEL. -0.053 0.030 -0.299 (0.24) (0.14) (1.55) Constant 3.506 2.505 1.516 3.437 (3.54)*** (3.22)*** (7.66)*** (4.03)*** Observations 63 63 63 63

(5 ) OSIN -0.374

(4.05)*** -0. 113

(1.82)* 0.099 (0.36) -0.062 (0.37)

-0.269 (1.14)

3.437 (4.03)***

63

4444

SIZE always significantSIZE always significant When we include one variable at a time, we find that:When we include one variable at a time, we find that:

If we control for country groups there is no other variable If we control for country groups there is no other variable that is significantly correlated with Original Sinthat is significantly correlated with Original Sin

If we do not control for country groups, GDP per capita, If we do not control for country groups, GDP per capita, inflation, rule of law, and size of the financial system are inflation, rule of law, and size of the financial system are correlated with Original Sincorrelated with Original Sin

When we jointly test all the hypotheses, we find that:When we jointly test all the hypotheses, we find that: When country groups are included, only SIZE is robustly When country groups are included, only SIZE is robustly

correlated with Original Sincorrelated with Original Sin When country groups are dropped, GDP per capita is When country groups are dropped, GDP per capita is

marginally significantmarginally significant

4545

Original sin is not merely a problem of country Original sin is not merely a problem of country policies (one need not deny the relevance of these, policies (one need not deny the relevance of these, of course)of course)

It is also a problem with the operation of the It is also a problem with the operation of the international systeminternational system

In a world with transaction costs and decreasing In a world with transaction costs and decreasing returns to diversification, the global portfolio may returns to diversification, the global portfolio may have a limited number of currencyhave a limited number of currency

If larger countries offer better opportunity for If larger countries offer better opportunity for diversification, country size will matter in the choice diversification, country size will matter in the choice of the global portfolio of the global portfolio

Redemption therefore requires international action Redemption therefore requires international action to overcome the inertia in the systemto overcome the inertia in the system

4646

Lessons from outliersLessons from outliers An interesting fact about the international An interesting fact about the international

issuance of bonds in exotic currency is that it issuance of bonds in exotic currency is that it is mostly done by non-residents who then is mostly done by non-residents who then swap the debt-service obligation back to US swap the debt-service obligation back to US dollardollar

4747

Share of local currency Share of local currency international debt issued by non-international debt issued by non-

residentsresidents

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

CzechRepublic

SouthAfrica

NewZealand

Poland Hong Kong Denmark Canada Singapore Australia

4848

Lessons from outliersLessons from outliers An interesting fact about the international An interesting fact about the international

issuance of bonds in exotic currency is that it is issuance of bonds in exotic currency is that it is mostly done by non-residents who then swap the mostly done by non-residents who then swap the debt-service obligation back to US dollardebt-service obligation back to US dollar

They do this to reduce cost of fundingThey do this to reduce cost of funding But, why is this complex operation cheaper But, why is this complex operation cheaper

than borrowing directly in dollar?than borrowing directly in dollar? A possibility is that the market values the A possibility is that the market values the

possibility of separating currency and credit possibility of separating currency and credit riskrisk

The IFIs have a natural hedge and could The IFIs have a natural hedge and could play a role in expanding this marketplay a role in expanding this market

4949

ConclusionsConclusions Original Sin is a widespread phenomenonOriginal Sin is a widespread phenomenon It has costsIt has costs

Limits the ability to conduct monetary policyLimits the ability to conduct monetary policy Increases volatilityIncreases volatility Increases credit riskIncreases credit risk

It cannot be easily explained by weak policies It cannot be easily explained by weak policies or institutionsor institutions

Country size seems to be importantCountry size seems to be important The IFIs could play a role in reducing Original The IFIs could play a role in reducing Original

SinSin

5050

The Pain and the Mystery of Original Sin

Barry Eichengreen Ricardo Hausmann

Ugo Panizza

5151


(1) (2) (3) (4) (5) (6) RATING RATING RATING RATING RATING RATING Original Sin -5.100 -4.751 (3.38)*** (3.32)*** Debt/GDP advanced 4.814 -2.659 -1.553 -2.451 (2.30)** (1.24) (1.31) (2.05)** Debt/GDP developing -8.627 -3.671 -3.557 -2.475 (4.96)*** (2.34)** (2.66)** (1.84)* Developing -9.027 -3.004 (5.78)*** (2.38)** Debt/GDP high rating 5.783 -1.511 (3.10)*** (0.83) Debt/GDP low rating -9.207 -4.438 (5.85)*** (3.36)*** High rating 8.917 (6.60)*** GDP per capita 2.663 1.936 (6.71)*** (4.00)*** Ex Debt/GDP 2.252 1.751 (1.50) (1.22) Constant 13.999 19.757 14.138 11.028 -6.314 1.606 (15.60)*** (15.27)*** (17.51)*** (15.03)*** (1.58) (0.32) Observations 61 61 61 61 56 56 DEG_DEV=DEG_ADV DEG_HR=DEG_LR

F(1,59)=41.31 F(1,58)=0.14 F(1,59)=62.7 F(1,58)=1.69

P=0.000 P=0.705 P=0.000 P=0.199

the pain and the mystery of original sin

Documents

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original sinfirst papers

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