11

Original SinThe Pain, the Mystery

And the Road to Redemption

Barry Eichengreen, Ricardo Hausmann & Ugo PanizzaUC Berkeley, Harvard, and IDB

22

PART IIPART II

THE MYSTERYTHE MYSTERY

33

Indexes of Original Sin Indexes of Original Sin (the higher the value, the greater (the higher the value, the greater

the sin)the sin)

i

iiOSIN

i country by issued Securities

currency in country by issued Securities11 -=

INDEXAi Securities

currenciesmajor in Securities + Loans by country i=

-= 0),country by issued Securities

currency in Securities(1Max3i

iOSIN

i

)3,Max (2iii

OSININDEXAOSIN =

+ Loans by country i

44

Reacting to yesterdayReacting to yesterday Several people argued that Several people argued that

developing the local market for long-developing the local market for long-term fixed-rate debt is the key to term fixed-rate debt is the key to solving international original sinsolving international original sin

Let us look at measures of this Let us look at measures of this domestic ability to borrow at home in domestic ability to borrow at home in own currency (JP Morgan’s “Guide to own currency (JP Morgan’s “Guide to Local Currency markets”)Local Currency markets”)

DLTDDSTFC

DSTFCDSIN

55

Domestic original sinDomestic original sin

0 0.2 0.4 0.6 0.8 1Taiwan

IndiaSouth Africa

Slovak RepublicThailand

SingaporeIsrael

HungaryPoland

PhilippinesChile

Czech RepublicHong Kong

MexicoGreece

BrazilTurkey

IndonesiaVenezuela

MalaysiaArgentina

66

OS

IN

DSIN.010961 1

0

1 ArgentinBrazilChile

Czech Re

Egypt, A

Greece

Hong Kong

HungaryIndia IndonesiIsrael MalaysiaMexicoPhilippnesi

Poland

Singapore

Slovak R

South Africa

Taiwan

TurkeyVenezuel

77

Recent TheoriesRecent Theories Underdevelopment of institutions and Underdevelopment of institutions and

policies in generalpolicies in general Inadequate monetary credibilityInadequate monetary credibility Fiscal profligacyFiscal profligacy Weak contract enforcementWeak contract enforcement Presence or absence of trade sanctionsPresence or absence of trade sanctions Political economy storiesPolitical economy stories

88

Original Sin and the level of Original Sin and the level of developmentdevelopment

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

Centers

OSIN3 OSIN3LGDP_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)Constant 1.061 1.25 1.022 1.130

(9.17)*** (5.41)*** (8.73)*** (7.40)***Observations 75 75 69 69

99

e( S

IN33

_A |

X)

e( LGDP_PC | X )-1.72332 1.2301

-.898761

.359822

IND

UKRMARZWEDOM

THA

GBR

BOL

PAK

JOR

POL

TUNMDA

LKA

MUSCAN

FIN

KAZ

IDN

CHL

AUS

NET

ESP

NOR

LVA

SWEAUT

SGP

ESTDEU

CZE

SVKCRIUSA

TURHUN

FRA

CHE

PER

DNK

ITA

KOR

LUX

MEXGRC

SLVARG

COL

SVNISL

BEL

MLTBHR

ZAF

ISR

CYP

1010

coef = .02726463, (robust) se = .08081867, t = .34e

( ds

in2

| X

)

e( GDP_PC | X )-2.32983 1.77617

-.53772

.426209

IND

IDN

EGY

PHL

THA

TUR

POL

MEX

VEN

SVK

ZAF

CHL

BRA

HUN

MYS

CZE

ARG

GRC

ISR

HKG

SGP

1111

Original Sin and Monetary Original Sin and Monetary CredibilityCredibility

Foreign investors do not want to lend in Foreign investors do not want to lend in a unit that the borrower can a unit that the borrower can manipulatemanipulate This should not apply as much to private This should not apply as much to private

borrowersborrowers Why no inflation indexed debt?Why no inflation indexed debt?

There is a peso problem and borrowers There is a peso problem and borrowers do not want to use their own currencydo not want to use their own currency

1212

Original sin and monetary Original sin and monetary credibilitycredibility(1) (2) (3) (4)

DroppingFin centers

OLS samesample as 4

InstrumentalVariables

OSIN3 OSIN3 OSIN3 OSIN3AV_INF 0.098 0.100 0.119 -0.132

(2.09)** (2.10)** (1.41) (1.57)SIZE -0.104 -0.113 -0.183 -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 0.953 0.954 1.055 1.060

(33.00)*** (32.47)*** (19.12)*** (22.26)***

Observations 74 68 33 33

R-squared 0.66 0.37 0.76 0.76

1313

e( S

IN33

_A |

X)

e( INF | X )-1.58672 3.08266

-.920488

.386774

COLBHR

ZAF

SLV

IDNPAK

MEX

KOR

SVN

LKA

CZE

SVK

THA

CYPZWE

LUX

DOM

FRA

TUN

GRC

MDACRIUSA

IND

EST

HUNTUR

CHL

ITA

NORMAR

ESP

DNK

SWE

AUS

MLTFIN

DEULVA

BEL

CAN

ISLNET

MUS

JOR

GBRAUT

CHE

SGP

POL

ISR

KAZARGPER

BOL

UKR

1414

e( d

sin2

| X

)

e( AV_INF | X )-.242879 1.08381

-.53772

.470317

SGP

MYS

THA

HKGCZE

IND

PHL

IDN

ZAF

EGY

GRC

HUN

SVK

CHL

VEN

MEX

POLISR

TUR ARG

BRA

1515

e( d

sin2

| X

)

e( AV_INF | X )-.150053 .313087

-.497336

.466594

SGP

MYS

THA

HKGCZE

IND

PHL

IDN

ZAF

EGY

GRC

HUN

SVK

CHL

VEN

MEX

POLISR

TUR

1616

Original sin in EurolandOriginal sin in Euroland

0%

20%

40%

60%

80%

100%

120%

? ? ?

1717

Original sin in EurolandOriginal sin in Euroland

0%

20%

40%

60%

80%

100%

120%

Germany

Luxembourg

?

1818

Original sin in EurolandOriginal sin in Euroland

0%

20%

40%

60%

80%

100%

120%

Germany

Luxembourg

Italy

France

Portugal

Spain

Netherlands

Belgium

Austria

Greece

Ireland

Finland

1919

Original sin and contract Original sin and contract enforcementenforcement

Investors are reluctant to lend to Investors are reluctant to lend to government if institutions designed government if institutions designed to enforce their claims are weakto enforce their claims are weak

Weak institutions prevent the Weak institutions prevent the creation of sophisticated contracts creation of sophisticated contracts that could limit moral hazard at the that could limit moral hazard at the borrower level (Chamon, 2002, borrower level (Chamon, 2002, Aghion et al., 2002)Aghion et al., 2002)

2020

Original sin and contract Original sin and contract enforcementenforcement

(1) (2OSIN3 OSIN3

DroppingFinancialCenters

RULEOFLAW 0.038 0.038(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)

Constant 0.975 0.976(47.90)*** (46.69)***

Observations 75 69R-squared 0.66 0.37

2121

e( S

IN33

_A |

X)

e( RULEOFLAW | X )-.924632 .846272

-.924132

.391291

SLVCOL

BEL

IDN

ZAF

MLT

SVK

MEXGRC

CYP

CZE

KAZ

PAK

ISLSVN

THA

FRA

LKA

LVACHE

EST

ITA

DEU

LUXESP

SWE

ZWE

NOR

PER

TUR

UKRUSADNK

MDA

HUNKOR

AUS

CRIDOM

ISR

BOL

NETCAN

BHRTUN

GBRAUTJORFIN

SGP

ARG

POL

CHLMUS

MAR

IND

2222

e( d

sin2

| X

)

e( KAUFF | X )-1.27337 1.58399

-.520665

.443264 IDN VEN

MEX

ZAF

PHL

TUR

EGY

SVK

IND

ARG

THA

GRC

POL

CZE

HUN

MYS

ISR

CHL

HKG

SGP

2323

Original sin and fiscal Original sin and fiscal solvencysolvency

Governments with weak fiscal Governments with weak fiscal account will have incentives to account will have incentives to debase their currenciesdebase their currencies Lucas and Stokey (1983)Lucas and Stokey (1983) Calvo and Guidotti (1990)Calvo and Guidotti (1990) Corsetti and Mackowiak (2002)Corsetti and Mackowiak (2002)

2424

Original sin and fiscal Original sin and fiscal solvencysolvency

(1) (2) (3) (4)OSIN3 OSIN3 OSIN3 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)*

Constant 1.066 0.996 1.056 0.996

(23.28)*** (26.20)*** (18.41)*** (41.56)***

N.Obs 64 74 57 57

R-squared 0.67 0.66 0.65 0.66

2525

e( S

IN33

_A |

X)

e( FISC | X )-1.29744 1.39966

-.847888

.264978

THA

SVK

NORIDN

CZE

FINSLVKAZ

COL

EST

CHE

DOM

LVA

UKR

KOR

SVNCHL

GBRSWE

DEUESP

AUS

ZAF

ZWEMLT

BOL

FRA

MEX

CRITUN

AUT

POL

NET

MUS

USA

IND

ISLHUN

GRCPAK

CYP

TUR

MARDNK

PERMDAARGCAN

BEL

LKA

LUX

JOR

ITA

ISR

SGP

2626

e( d

sin2

| X

)

e( DE_GDP | X )-.486835 .755834

-.41216

.551769

SVK THA

CZECHL

MEX

TURIDN

ZAF

POL

IND

PHLHUNSGP

GRC

ISR

2727

Original Sin and TradeOriginal Sin and Trade

Countries that trade heavily have Countries that trade heavily have more incentives to meet their more incentives to meet their contractual obligations (Eaton and contractual obligations (Eaton and Gersovitz, 1981)Gersovitz, 1981) Should not affect denominationShould not affect denomination

Trade creates deeper currency Trade creates deeper currency marketsmarkets

2828

Original Sin and TradeOriginal Sin and Trade

(1) (2)OSIN3 OSIN3

DroppingFinancialCenters

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)

Constant 0.996 0.992(35.46)*** (35.40)***

Observations 75 69

R-squared 0.69 0.34

2929

e( S

IN33

_A |

X)

e( OPEN | X )-.431822 1.81548

-.943281

.241124

ARGCHL

COLUSAFIN

GRC

PERMARISL

INDKOR

MDA

ZAF

AUSBOL

ISRTUR

SLVCRICYPDEU

PAK

POL

FRA

CHE

ESP

DNK

GBR

ZWE

NORAUT

TUN

ITA

SVN

LVA

HUN

KAZESTMUS

SWELKA

DOM

IDNMEX

THA

CANNET

CZE

BHRJOR

SVKUKR

LUX

BEL

SGP

3030

Original sin and political Original sin and political economyeconomy

The presence of a domestic The presence of a domestic constituency of local currency debt-constituency of local currency debt-holders may limit the government’s holders may limit the government’s incentives to debase its currencyincentives to debase its currency

So original sin arises from the fact that, So original sin arises from the fact that, without a domestic constituency, the without a domestic constituency, the government cannot commit to protect government cannot commit to protect foreign bond-holders (Tirole, 2002)foreign bond-holders (Tirole, 2002)

3131

Original sin and political Original sin and political economyeconomy(1) (2) (3) (4)

OSIN3 OSIN3 OSIN3 OSIN3DroppingFinancialCenters

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)

Constant 1.019 0.990 0.979 0.971(25.01)*** (45.71)*** (43.91)*** (38.11)***

R-squared 0.66 0.66 0.66 0.37

3232

e( S

IN33

_A |

X)

e( SIZE_FIN | X )-.364298 .212954

-.903856

.287533 SGP

USA

MEX

CRI

TUR

DOMDNKNET

ITA

ARGCAN

FIN

SVN

LKA

ESTLVAMUSPOL

PERISLMDA

COLGBRINDSWE

FRA

NOR

ZWETUN

GRC

KAZ

PAK

HUNJORMARKOR

ESP

CZE

DEUCHL

ISRAUT

BEL

SLVUKR

IDN

SVK

AUS

ZAF

CYPMLT

BOL

THA

CHE

3333

Putting everything togetherPutting everything togetherOSIN3 OSIN3_NOI OSIN3 OSIN3

Dropping Financialcenters

LGDP_PC -0.022 0.011 -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_FIN 0.062 0.020 0.270 -0.106 -0.158(0.25) (0.09) (0.53) (0.23) (0.41)

RULEOFLAW 0.086 0.004 0.035 0.075 0.052(0.98) (0.06) (0.38) (0.85) (0.60)

INF 0.040 0.013 0.054 0.037 0.043(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)*** (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)

Constant 1.240 1.018 1.550 1.104 1.337(3.50)*** (2.85)*** (3.33)*** (2.73)*** (3.40)***

R-squared 0.68 0.73 0.48 0.45 0.43

3434

e( S

IN33

_A |

X)

e( SIZE | X )-1.24736 2.16883

-.950572

.327155

ISL

CYP

CHE

GRC

BOL

SLVMDA

MLT

PERLVA

ISR

EST

COL

MUSKAZ

ZAF

ZWECRISVNDEU

FINAUTJOR

BEL

LKA

ARGDNK

SVK

GBR

AUS

HUN

ESP

TUN

PAKNOR

CHLMAR

ITA

USA

SWE

LUX

FRA

DOM

CZE

TUR

UKR

IDN

POL

NET

KORTHA

CAN

MEX

BHRIND

SGP

3535

coef = -.13523022, (robust) se = .04692612, t = -2.88e(

SIN

33_A

| X

)

e( SIZE | X )-1.24938 2.18988

-.547786

.337008

ISL

CYP

CHE

GRC

BOL

SLVMDAMLTPER

LVA

ISR

EST

COL

KAZMUS

ZWE

ZAF

CRISVNDEU

FIN

AUT

JOR

BEL

ARG

LKA

DNK

SVK

GBR

AUS

ESP

HUNTUN

PAK

NOR

CHL

MAR

ITA

USA

SWE

LUX

FRA

DOM

TUR

UKR

POL

IDN

NET

KOR

THA

CAN

MEX

BHRIND

SGP

3636

Bottom LineBottom Line

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

It is also a problem with the operation of the It is also a problem with the operation of the international system (given transactions international system (given transactions costs, a world of heterogeneous countries, costs, a world of heterogeneous countries, and network effects that lock in the status and network effects that lock in the status quo).quo).

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

3737

Original SinThe Pain, the Mystery

And the Road to Redemption Barry Eichengreen, Ricardo Hausmann & Ugo Panizza

UC Berkeley, Harvard, and IDB