Brad Setser

A Balance Sheet Approach to Financial Crisis

The paper lays out an analytical framework for understanding crises in emerging markets based on examination of stock variables in the aggregate balance sheet of a country and the balance sheets of its main sectors (assets and liabilities). It focuses on the risks created by maturity, currency, and capital structure mismatches. This framework draws attention to the vulnerabilities created by debts among residents, particularly those denominated in foreign currency, and it helps to explain how problems in one sector can spill over into other sectors, eventually triggering an external balance of payments crisis. The paper also discusses the potential of macroeconomic policies and official intervention to mitigate the cost of such a crisis.

The Reform of the Sovereign Debt Restructuring Process: Problems, Proposed Solutions and the Argentine Episode

The paper provides an overview of the recent debate on how to reform the sovereign debt restructuring process to make it more orderly. It discusses the market failures that can complicate restructuring and the proposed solutions. These include a sovereign bankruptcy regime, the introduction of collective action clauses in debt contracts and a code of conduct. The current emphasis on the contractual approach is appropriate. But clauses will not resolve all the problems in debt restructurings. Legal reform and litigation are not the central issues that delayed the Argentine restructuring. Thus, the reform agenda should be broadened to make the sovereign debt restructuring process work better.

Debt-Related Vulnerabilities and Financial Crises

The analysis of currency and maturity mismatches in sectoral balance sheets has increasingly become a regular element in the IMF’s tool kit for surveillance in emerging market countries. This paper describes this so-called balance sheet approach and shows how it can be applied to detect vulnerabilities and shape policy advice. It also provides a broad-brushed overview of how balance sheet vulnerabilities have evolved over the past decade and cites a number of case studies.