July 11, 2006

On pushing the merchandise!

Sir, Stephany Griffith-Jones and Robert Shiller in “A bond that insures against instability”, July 11, discuss the possible role of bonds that are linked to the growth of a country’s gross domestic product and, yes, the service of a debt linked to results should be easier than one that is not. That said and as this proposal is clearly aligned with all the current discussions on debt sustainability that are so in vogue we need again to warn that by focusing primarily on how much debt can be served you risk relegating to a remote second place, the far more important issue of what all the contracting of that debt should achieve.

In this respect and since the authors mention the positive experience with Argentine GDP-Warrants, which ironically is only the results of the Argentina economy bouncing back after the crisis, they should also have tried to answer what would have happened if all of Argentina’s debt had been contracted their way. As I see it Argentina would just have been able to contract more debt, and the fall would have been even more severe, some few months later.

There are a couple of truths in life you cannot just structure yourself out of and to try so, could only make things much worse. With respect to developing countries and their public debt, it is high time to leave this “how-much-can-we-load-them-with-before-they-break” thinking and go back to basics, perhaps to the financial “innovation” of contracting debt that repays itself!