Last week I was one of a handful of speakers at the annual meeting of the Bretton Woods Committee, a non-partisan group that works to promote international economic cooperation and to foster strong, effective Bretton Woods institutions (i.e. the IMF and World Bank). Other speakers at the meeting, which was titled “From Vicious to Virtuous: The Cycle of Debt, Stability, and Growth” included U.S. Rep. Barney Frank; German Ambassador Peter Ammon; World Bank president Robert Zoellick, and Min Zhu, deputy managing director of the IMF.
Given such a distinguished line-up, I was pleased that my remarks about lessons for Europe and the United States from past sovereign debt crises in emerging markets were very favorably received. In the 20 years I have spent studying and watching debt crises unfold, working in multilateral organizations and as the chief economist for Latin America at Deutsche Bank, I have never before seen a situation where lessons from emerging markets were so badly needed in what we until very recently called without irony the “advanced economies.”
Two of the points I made stirred particular interest:
First, how sovereign debt problems can easily turn into banking difficulties and even full-blown banking crises. This has been a well-known problem in emerging markets and is currently a point of deep concern in a number of European countries.
Second, some of the Basel Committee's recommendations for banks' capital and liquidity requirements would actually increase the danger that sovereign debt problems lead to banking crises.
In recent years, emerging markets have avoided both debt and banking crises by maintaining credible access to liquidity; adequately managing public finances, including through the establishment of enforceable fiscal rules; and implementing conservative supervisory practices. There’s a lot there for Europe and the United States to learn. For those who want to pursue this further, I’ve posted a copy of the slides from my talk.