S O V E R E I G N D E B T R E S T R U C T U R I N G December 2004, Vol. 2, No. 12 Headlines F R A M E W O R K G20 Adopts Code of Conduct for Sovereign Debt Restructuring T R O U B L E D C O U N T R I E S ARGENTINA: Raps Berlusconi for Upsetting Debt Swap Timetable ARGENTINA: Pays Loan Owed to European Bank of Investment ARGENTINA: Debt Profile of Mendoza Province BULGARIA: City of Plovdiv Gets 'BB' Rating; Outlook Stable CAMEROON: Sovereign Ratings Slip to 'CCC' from 'B' CONGO: US$1,680 Million Paris Club Debt Cancelled GREECE: Figures Used to Support E.U. Application Flawed GREECE: Fitch Cuts LT Foreign, Local Currency Ratings to 'A' IRAN: Fitch Elevates Ratings to 'BB-'; Outlook Stable IRAQ: U.S. Asks Other Sovereign Creditors to Follow Lead IRAQ: Clears World Bank Arrears JAMAICA: Outlook of 'B' Sovereign Rating Improves to 'Stable' MONTENEGRO: Gets 'BB/B' Sovereign Credit Ratings from S&P PARAGUAY: IMF Releases Third Installment of US$76 Mln Loan PHILIPPINES: No Downgrade from Fitch, Only Negative Outlook PHILIPPINES: Solons Pledge to Pass Tax Measures in December PHILIPPINES: Congress Passes 'Landmark' Tax Bill PHILIPPINES: Palace in Denial; Keeps Positive Outlook on Debt PHILIPPINES: Argentina-like Crisis not Likely, Says ADB RUSSIA: Offers to Repay German Debt, But at 'Discounted' Rate RUSSIA: Lipetsk's Ratings Outlook Improves to Positive TURKEY: E.U. Accession Prospect Buoys up Credit Ratings UKRAINE: Politically Charged Atmosphere No Bearing on Rating R E S E A R C H & A N A L Y S E S Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, Or Less? Using Gravity to Establish Causality Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries Managing Macroeconomic Crises Hiccups for HIPCs? *********

================= F R A M E W O R K ================= G20 Adopts Code of Conduct for Sovereign Debt Restructuring ----------------------------------------------------------- Save for Argentina, members of the Group of 20 backed the code of conduct for creditor and debtor nations proposed at the group's annual meeting in November. In an official communique released on November 21, German Finance Minister Hans Eichel, who chaired the three-day annual meeting in Berlin, said: "Apart from Argentina, all others have explicitly supported it." The code's main objective is to help countries and creditors avoid crises. "Such principles, which we generally support, provide a good basis for strengthening crisis prevention and enhancing predictability of crisis management now, and as they further develop in future," the communique states. Argentina, which is seeking the restructuring of its US$103 billion defaulted debt, did not send officials from its Economy Ministry to the G20 meeting. The country is believed to oppose some of the clauses included in the code, and was disappointed that the rules could be adopted without a consensus, Dow Jones Newswires said in a November 21 report. U.S. Treasury Secretary John Snow, in an interview with Dow Jones, finds the code appropriate. "We think they are good principles. It will be helpful in working out sovereign debt issues. We are pleased it is primarily a private-sector driven initiative rather than a government-driven initiative." You may view a copy of the communique free of charge at http://www.chapter15.com/G20Communique.pdf CONTACT: GROUP OF 20 Web site: http://www.g20.org/ =================================== T R O U B L E D C O U N T R I E S =================================== ARGENTINA: Raps Berlusconi for Upsetting Debt Swap Timetable ------------------------------------------------------------ President Nestor Kirchner delivered his most scathing attack on Italy to date; ironically, at the opening of an Italian-owned fish-processing factory in the Patagonia region. Mr. Kirchner's speech came less than a week after Consob, Italy's securities and exchange regulator, deferred approval of Argentina's debt restructuring plan until mid-December.

The decision messed up the timetable of Buenos Aires, which had hoped to close the exchange deal by February. "What a different attitude the Italian government has shown towards the [Argentina's] debt-restructuring compared with ours when we opened our hearts and arms to the Italians during their darkest hour," the Financial Times quoted Mr. Kirchner. Asked later on to whom he had directed his tirade, Mr. Kirchner said: "The reprimand is for (Silvio) Berlusconi (Italy's prime minister)." Italy and Argentina share "close cultural ties." In fact, many of the country's 36 million people have Italian surnames and hold Italian passports, the paper said. But since Mr. Kirchner came to power in May last year, bilateral relations have worsen, thanks to the president's insistence to pay no more than 35% of the country's defaulted debt. About 450,000 Italians, mostly widows and pensioners, were among the hardest hit by Argentina's default in December 2001. Italy has also adopted "a particularly hard line towards Argentina in its efforts to seek the largest debt-reduction of any comparable country in history," the FT notes. "It has consistently used its vote on the board of the International Monetary Fund to object to the institution's hitherto lenient approach towards Argentina. Such a stance has not been lost on the Argentine president. In several trips to Europe since taking office, Mr. Kirchner has avoided visiting Italy," said the paper. ARGENTINA: Pays Loan Owed to European Bank of Investment -------------------------------------------------------- The government settled its US$13 million obligation to the European Bank of Investments on December 10, Troubled Company Reporter-Latin America says. The debt is part of the mass of obligations Argentina defaulted on in December 2001. The government settled the obligation in compliance with the IMF's directive to restore its relations with multilateral lenders. ARGENTINA: Debt Profile of Mendoza Province ------------------------------------------- Upon the recommendation of JPMorgan, the Province of Mendoza sought the restructuring of its 'Bono Aconcagua' in July. Issued in August 1997, these 10-year bonds worth US$250 million carry a fixed rate interest of 10%, payable every six months. The province offered bondholders new bonds that fall due on 2018 and carry a 5.5% interest, payable every six months with a grace period of two years. Bondholders accepted the offer on September 15. BULGARIA: City of Plovdiv Gets 'BB' Rating; Outlook Stable ----------------------------------------------------------

Standard & Poor's Ratings Services on December 10 assigned its 'BB' issuer credit ratings to the city of Plovdiv, the second-largest city in Bulgaria (foreign currency BBB-/Stable/A-3, local currency BBB/Stable/A-3). The outlook is stable. "The ratings are supported by the city's diversifying economy, prudent management, and no debt. Although the city plans to borrow in the next two to three years, its debt is only expected to grow moderately," said Standard & Poor's credit analyst Elena Okorotchenko. The ratings are, however, constrained by Plovdiv's significant need to invest in infrastructure, ongoing operating expenditure pressures, and the need to eliminate remaining overdue accounts payable. In addition, the ratings are also weakened by the contingent liabilities related to loss-making municipal companies, and uncertainties related to the intergovernmental reform. The stable outlook reflects Standard & Poor's expectation that in light of its low financial flexibility, the city will demonstrate prudence in financing its large investments and utilizing its debt capacity. The outlook also incorporates the elimination of overdue accounts payable by the city in 2005. Uncertainties and potential pressure related to intergovernmental reform have been incorporated into the 'BB' rating. CONTACT: STANDARD & POOR'S Primary Credit Analyst Elena Okorotchenko (Singapore) Phone: (65) 6239-6375 E-mail: elena_okorotchenko@standardandpoors.com Secondary Credit Analyst Dimitri Popov (London) Phone: (44) 20-7176-3697 E-mail: dimitri_popov@standardandpoors.com Web sites: http://www.ratingsdirect.com (paid) http://www.standardandpoors.com (free) London Ratings Desk Phone: (44) 20-7176-7400 European Press Office E-mail: media_europe@standardandpoors.com CAMEROON: Sovereign Ratings Slip to 'CCC' from 'B' -------------------------------------------------- Standard & Poor’s Ratings Services lowered on December 3 its long-term sovereign credit rating on the Republic of Cameroon to ‘CCC’ from ‘B’ and its short-term sovereign credit rating to ‘C’ from ‘B’, following the deepening disarray of public finances in 2004. The outlook on the long-term rating is stable, indicating that upward and downward pressures on the rating are balanced.

With increasing frequency this year, Cameroon has incurred problems servicing its official external debt and its domestic commercial debt. From September through November, the government was in default to three local banks on Cooperation Financiere en Afrique Centrale (CFA) franc 3 billion (US$6 million) of domestic debt. In addition, the government has been late in paying its official creditors throughout the year, and arrears to suppliers have also recently increased. “The deterioration of public credit has occurred despite the recent rise in oil prices, which has enabled the state oil company to increase sharply its budgeted payments to the central government,” said Standard & Poor’s credit analyst John Chambers. “Cameroon will likely miss its 2004 fiscal targets due weak income tax collection, spending related to the October presidential election, and the need to inject cash into the insolvent state airline and postal savings bank,” he added. Standard & Poor’s expects that the government’s Poverty Reduction and Growth Facility with the International Monetary Fund will lapse without the final two disbursements in December, which in turn will delay and perhaps even thwart Cameroon from achieving its completion point under the Highly Indebted Poor Country (HICP) Initiative. Donor support is flagging and the government’s execution of programs in force, including allocating existing HIPC funds to eligible uses, is running well below rates obtained by other low-income countries. Public finances are further threatened by pending lawsuits from the 20% of creditors that did not participate in Cameroon’s 2003 London Club debt forgiveness. One creditor, Winslow Bank, Bahamas, successfully attached and obtained EUR39 million from the state oil company in satisfaction of its claims on the central government. “The government may seek additional bilateral debt relief, beyond that contained in HIPC terms,” Mr. Chambers noted. “If tax revenue remains weak and if current spending is not contained, the government’s long-term accounts payable will rise further and all government debt service will be at risk. However, if current or future policymakers restore public credit and move forward with structural reform, Cameroon’s ratings could rise over time,” he concluded. Ratings List Republic of Cameroon Sovereign credit ratings To From CCC/Stable/C B/Stable/B CONGO: US$1,680 Million Paris Club Debt Cancelled ------------------------------------------------- Paris Club creditors agreed on December 16, 2004 with the Government of the Republic of Congo to a restructuring of its public external debt, following the approval of an arrangement

under the Poverty Reduction and Growth Facility by the International Monetary Fund on December 6, 2004. This agreement is the result of the economic and financial recovery effort made by the Republic of Congo in the course of the last two years. This agreement treats a total amount of US$3,020 million of debt, canceling US$1,680 million and rescheduling US$1,340 million. This amount consists of arrears (including late interest) as of September 30, 2004 and of maturities falling due from October 1, 2004 up to September 30, 2007. The agreement is concluded under the Naples terms: pre-cut off date ODA credits are to be repaid over 40 years, with 16 years of grace, at interest rates at least as favorable as the original concessional rates applied to those loans; 67% of pre-cut off date commercial credits are cancelled; the remaining amounts are rescheduled over 23 years, with 6 years of grace, at appropriate market rates. On an exceptional basis, this agreement also defers a very substantial part of the moratorium interest due under this rescheduling and reprofiles over 3 years arrears on credits extended since 1986. These measures are expected to reduce debt service (including the arrears) due to Paris Club creditors between October 1, 2004 and September 30, 2007 from around US$3,730 million down to around US$770 million. Paris Club creditors agreed to increase the cancellation rate to 90% (Cologne terms), as soon as the Republic of Congo has reached its decision point under the enhanced Debt initiative for the Heavily Indebted Poor countries. Creditors stressed the importance they attached to the continued satisfactory implementation of the Republic of Congo's economic programme and its poverty reduction strategy. The Government of the Republic of Congo has committed to seek comparable treatment from its other external creditors. Background Notes (1) The Paris Club was formed in 1956. It is an informal group of creditor governments from major industrialized countries. It meets on a monthly basis in Paris with debtor countries in order to agree with them on restructuring their debts. (2) The members of the Paris Club, which participated in the treatment of the Republic of Congo's debt, were representatives of the governments of Belgium, Brazil, Canada, Denmark, France, Germany, Italy, the Russian Federation, Spain, Switzerland, the United Kingdom and the United States of America. Observers at the meeting were representatives of the government of Japan, as well as the International Monetary Fund, the International Bank for Reconstruction and Development, the African Development Bank and the Secretariat of the UNCTAD. The delegation of the Republic of Congo was headed by Mr. Rigobert Roger Andely, Minister of Economy,

Finance and Budget. The meeting was chaired by Mrs. Odile Renaud-Basso, Deputy Secretary at the Treasury Department of the French Ministry of Economy, Finance and Industry, Co Chairman of the Paris Club. Technical Notes (1) An arrangement under the Poverty Reduction and Growth Facility in support of the Republic of Congo's economic program was approved by the International Monetary Fund on December 6, 2004. (2) The total stock of the Republic of Congo's external public sector debt was estimated as of end 2003 to be US$8,570 million (source: IMF documents dated November 22, 2004 published on the IMF Web site -- http://www.imf.org). The stock of debt owed to Paris Club creditors as of September 30, 2004 was estimated to be US$4,690 million. (3) The cut off date (January 1, 1986 for Congo) is used by Paris Club creditors for the sole internal purposes of the Paris Club agreement. When a debtor country first meets with Paris Club creditors, the "cut off date" is defined and is not changed in subsequent Paris Club treatments and credits granted after this cut off date are not subject to rescheduling. GREECE: Figures Used to Support E.U. Application Flawed ------------------------------------------------------- The European Commission is seeking greater power to ensure figures submitted by member countries and those aspiring membership into the union are accurate and credible. This after the new conservative government in Athens exposed the previous administration's deliberate act to mislead the union about its real financial state. A "damning" Commission report, according to The Telegraph, found several misstatements that an E.U. official said would have disqualified Greek from the union. Contrary to Athens' claim, its real deficit was 6.6% instead of 4.0% in 1997 and 4.3% instead of 2.5% in 1998. Last year, the deficit was still running at 4.6%, far above the declared figure of 1.7%, The Telegraph says. The country's spending also exceeded the deficit limit of 3% of gross domestic product every year from 1997, as it prepared to join the monetary union. "Greece would not have joined the euro with the figures that we now have," The Telegraph quotes Commission Spokesman Amelia Torres. According to the report, Greece shaved an average of 2.3% of GDP each year from the real deficit "by fiddling military costs, treating spending on warships, aircraft, tanks, and missiles as a form of off-books debt."

"The Greek government also exaggerated the social security surplus, over-estimated VAT payments, and mis-stated interest costs," The Telegraph added, citing the Commission report. The Commission has already launched a legal action against Athens, but Brussels clarified it does not intend to punish the country. "I don't want to dwell into whether there was bad faith or a lack of co-operation," said Torres. "[The legal action was intended to ensure that Greece] puts its house in order [for the future]." Eurostat, the data agency of the union, has long raised doubts over the veracity of Greece's accounts, but it had no means to act on them. Officially, Brussels says Greece is an isolated case, but E.U. regulators privately admit that data, submitted by Portugal and Italy when they applied to join the eurozone, were unreliable. The commission is now calling for extra powers, especially after Germany and France used their blocking power to evade punishment for breaching the deficit limit over three years. In the meantime, the financial markets have taken the police role. "Private credit rating agencies have downgraded Italian, Greek, and Portuguese debt, while analysts predict that investors will soon start to choose more carefully between eurozone bonds," says The Telegraph. GREECE: Fitch Cuts LT Foreign, Local Currency Ratings to 'A' ------------------------------------------------------------ Fitch Ratings on December 16 downgraded Greece's (the Hellenic Republic's) Long-term foreign and local currency ratings to 'A' from 'A+', thus resolving the Rating Watch Negative assigned on 27 September this year. The Outlook is now Stable. At the same time, the agency affirmed the Short-term rating at 'F1'. As a member of the euro area, Greece has a country ceiling rating of 'AAA'. The downgrade follows a series of large upward revisions to the general government deficit and debt figures for 1997-2003. It is estimated that the ratios of public debt to GDP and to revenues will be 112% and 260% respectively this year, compared to the prior expectation of 100% and 230%. Consequently, the fiscal consolidation challenge facing Greece is greater than previously assessed. A strong and sustained fiscal adjustment is now required just to bring public debt below 100% by the end of the decade. This would have to be maintained over the long run if the fiscal impact of ageing is to be contained, even with further reforms to the pension system. In the face of the immediate challenge to strengthen controls over public expenditure and bring the budget deficit down, the government has decided to delay further reform of the pension system necessary to place public finances on a sustainable path over the longer term.

"The revised figures reveal that there has been virtually no progress in fiscal consolidation since Greece joined the euro area, despite economic growth averaging 4% since 1999. Not only is the initial starting point much worse, but the need to bring the budget under control is delaying much needed reform of the pension system, already one of the most expensive in Europe," said Chris Pryce, Director in Fitch's Sovereign Group. Fitch's assessment of the 2005 budget is that the 2.5 percent of GDP reduction in the deficit to 2.8% next year is achievable, given an almost 1.5 percent of GDP cut in investment expenditure (mostly due to the decline in Olympics-related spending). However, some overshoot is likely if the budget assumption of 3.9% economic growth next year is not realized. Nonetheless, even if the 2.8% deficit target is missed, Fitch does expect the 2005 budget to mark the first step in bringing public finances back under control. This expectation, along with measures to improve the business environment, supports the Stable Outlook on Greece's sovereign rating. Revised figures published by Eurostat in September for 2000-03 and in November for 1997-99 indicate the general government fiscal deficit averaged 4.3% in the seven years to 2003 rather than 2.1% as previously indicated, mostly due to previous under-recording of military spending. Fitch warns that where governments materially misreport public finances - a risk that is rising with the increasing resort to "one-off" measures by European governments to meet the Stability and Growth Pact's fiscal targets - sovereign ratings will be at risk to downgrades. Greece's sovereign rating is underpinned by its relatively high income and diversified economy compared to other single 'A' category sovereigns, as well as membership of the euro area which shelters the economy from external shocks and allows for a gradual adjustment in public finances with little risk of a financial crisis. Investment is also high and combined with the improving financial health and effectiveness of the banking sector suggests that the Greek economy's growth potential remains above the euro area average, with positive implications for public finances. Nonetheless, there is greater uncertainty over the medium-term growth potential of the economy given that Greece's out-performance of the rest of the euro area in recent years has in part been driven by fiscal laxity. This reinforces the importance of further structural reforms to raise productivity and the employment rate. CONTACT: FITCH RATINGS (LONDON) Chris Pryce Phone: +44 (0)20 7417 4342 Sharon Raj Phone: +44 (0)20 7417 6341

Media Relations (London) Campbell McIlroy Phone: +44 20 7417 4327 IRAN: Fitch Elevates Ratings to 'BB-'; Outlook Stable ----------------------------------------------------- Fitch Ratings (UK) Limited upgraded on December 14 the Islamic Republic of Iran's Long-term foreign currency and local currency ratings and Country Ceiling to 'BB-' (BB minus) from 'B+'. The Short-term rating was affirmed at 'B'. Following the upgrade, the Outlook on the Long-term ratings is now Stable. Contentious Majlis elections, open debate regarding economic policy, conflict in neighboring states and an ongoing international dispute regarding Iran's nuclear programme have not detracted from continued improvements in sovereign creditworthiness, according to Fitch. Fundamental credit strengths include the lowest government debt burden of any sub-investment grade sovereign, an exceptionally low gross external debt stock and one of the strongest external liquidity positions of any rated sovereign. High oil prices support public and external finances, and medium-term prospects are enhanced by the underlying commitment of senior leaders to economic reform, as demonstrated by the Expediency Council decision in October to proceed with privatization under the Fourth Five-Year Development Plan that will take effect in March 2005. "Iran's positive credit trends are well established," says James McCormack, Senior Director of Sovereigns at Fitch. "This will be the fifth consecutive year in which the current account is in surplus, gross external financing needs are negative and there is a further accumulation of foreign exchange reserves." The agency also indicates that the effects of more liberalized trade and exchange rate policies are becoming evident. Even with oil exports up sharply this year, their share of total foreign exchange earnings will be lower than in the mid-1990s, as non-oil exports have trebled. Fitch forecasts petroleum sector exports will reach about US$35 billion in 2004, raising government revenue to about one-third of GDP and adding to the Oil Stabilization Fund. However, the agency also expects government expenditure to increase, matching the revenue gain. "The lack of fiscal discipline on the spending side is a disappointment," adds Mr. McCormack. "Such a pro-cyclical policy stance raises concerns about the scale of fiscal adjustment that would be necessary to maintain a balanced budget if oil prices were to decline." There will also be costs associated with economic reforms, such as recapitalizing the banking system before assets are moved to the private sector.

Political risks continue to weigh on Iran's ratings. The sweeping victory of conservative candidates in the Majlis elections earlier this year imbued the parliamentary review of the pending Five-Year Development Plan with nationalist sentiment. This threatened previous policy momentum focused on opening the economy further to international competition and investors as well as reducing the economic role of the state. Fitch suggests these initiatives are essential in achieving economic growth rates sufficient to generate employment for Iran's young and rapidly growing population. It is in this context that the agency considers the Expediency Council's decision on privatization, which will include some of the state-owned banks, to have marked a critical juncture in Iran's economic reform programme. The international dispute surrounding Iran's nuclear programme was diffused in November when an agreement was reached with France, Germany and the United Kingdom, thus avoiding the issue being referred to the U.N. Security Council. Although the agreement provides the opportunity for further non-confrontational engagement and precludes the possibility of U.N.-imposed economic sanctions, which would be a serious setback for the economy with negative implications for the sovereign ratings, Fitch does not believe the nuclear debate has been settled definitively. The agency will continue to focus on risks emanating from Iran's international relations, particularly in light of the unsettled regional security situation and the priority attached by the international community to fully understanding countries' nuclear intentions. CONTACT: FITCH RATINGS (UK) LIMITED James McCormack, London Phone: +44 (0)20 7417 4348 Richard Fox Phone: +44 (0)20 7417 4357 Alex Clelland (Media Relations/London) Phone: +44 20 7862 4084 Campbell McIlroy Phone: +44 20 7417 4327 IRAQ: U.S. Asks Other Sovereign Creditors to Follow Lead -------------------------------------------------------- The U.S. Treasury Department formalized the cancellation of Iraq's debt to the United States on December 17. This debt write-off is on top of the agreement reached in November by Paris Club members, Reuters says. The U.S. Treasury, in a statement, valued the debt at US$4.1 billion, the total amount Baghdad owes Washington. This is apart from the debt forgiveness granted by the Paris Club. That deal cut Iraq's obligation to US$7.8 billion from US$38.9 billion.

At a ceremony held at the State Department to sign the U.S. portion of the Paris Club agreement, Treasury Secretary John Snow pledged to help Iraq seek comparable treatment from other sovereign creditors. Expected to follow the Club's lead are Saudi Arabia, Kuwait and Eastern European states, says Reuters. The ratification of the Paris Club deal by its members will immediately cancel 30% of Iraq's debt. An additional 30 percent waiver would follow in 2005 once an economic program with the International Monetary Fund (IMF) is approved, according to Reuters. A further 20 percent would be pardoned in 2008 after a review of the implementation of the IMF economic program. The Paris Club's 19 members include the Group of Seven industrialized countries -- the United States, Japan, Canada, Germany, Britain, France and Italy -- as well as other Western European states, Russia and Australia. CONTACT: DEPARTMENT OF THE TREASURY 1500 Pennsylvania Avenue NW Washington, D.C. 20220 Phone: (202) 622-2000 Fax: (202) 622-6415 Web site: http://www.ustreas.gov/ THE COALITION PROVISIONAL AUTHORITY Web site: http://www.cpa-iraq.org/ PARIS CLUB Web site: http://www.clubdeparis.org/en/ IRAQ: Clears World Bank Arrears ------------------------------- The Republic of Iraq has cleared all overdue service payments to the International Bank for Reconstruction and Development (IBRD) as of December 16, 2004. Consequently, the country's eligibility for new operations has been reinstated. The Republic of Iraq's arrears to IBRD amounted to around US$110 million, of which approximately US$53 million was overdue principal payments. Clearance of these arrears will raise IBRD's FY05 net income by around US$74 million. This arrears clearance is another key step in the overall process of the Republic of Iraq’s program of economic recovery and reform, which is being strongly supported by the World Bank and other external partners. CONTACT: THE WORLD BANK GROUP 1818 H Street, N.W. Washington, DC 20433 U.S.A. Phone: (202) 473-1000 Fax: (202) 477-6391

Web site: http://www.worldbank.org JAMAICA: Outlook of 'B' Sovereign Rating Improves to 'Stable' ------------------------------------------------------------- Standard and Poor's Ratings Services on December 12 revised its outlook on its 'B' long-term sovereign credit ratings on Jamaica to 'stable', from 'negative' in the previous rating. At the same time, the agency also affirmed its 'B' long- and short-term sovereign credit ratings on Jamaica. The revised outlook was supported by Jamaica's improving fiscal and external liquidity situation, ongoing commitment to the fiscal austerity, and stronger growth prospects -- all of which had resulted in the stabilization of the Jamaican dollar and an increase in the confidence of domestic businesses, the agency's ratings services credit analyst, Olga Kalinina, said. Ms. Kalinina said the signing of a Memorandum of Understanding (MOU) by the trade unions and the emerging Partnership for Progress agreement with the private sector -- both of which added up to "support of fiscal and macroeconomic policies" -- made it more feasible to meet challenging fiscal targets this year and beyond. "It also lowers the risk of social tension in times of austere reform," she added. On the fiscal front, Standard & Poor's said that Jamaica's 2003 central government fiscal deficit stood at 5.8 percent of GDP and with the primary surplus at 12.2 percent of Gross Domestic product (GDP), was within the budgeted target. However, according to Standard & Poor's methodology, which takes into account off-budget expenditure, including Central Bank losses and excluding one-off capital revenue, the central government deficit actually stood at nine per cent of GDP (down from 10.5 per cent in fiscal year 2002). It said the government was committed to lowering the central government deficit to 4.4 percent of GDP in fiscal year 2004, a revision upward from the initially budgeted deficit of four percent due to the impact of Hurricane Ivan, which devastated parts of the island in September. The rationalization of expenditure -- which was on target for the first seven months of fiscal year 2004 -- and higher grant receipts, should help achieve this challenging goal. According to Standard & Poor's definition, the central government deficit is expected at 6.9 percent of GDP in fiscal year 2004, which includes 2.5 percent of off-budget expenditure. More importantly, the agency predicted, the support of both trade unions and the business community was likely to remain unwavering. It said the stable exchange rate since September 2004 was a good indication of this confidence. The external liquidity situation is also improving, reflecting increasing reserves --

US$1.8 billion in November 2004, up from US$1.2 billion at year-end in 2003 -- and a stronger current account performance. The current account deficit is expected to decline to seven per cent of GDP in 2004 from nine per cent in 2003, boosted by robust mining and tourism revenue. "Overall, the stable outlook balances the improvement in the fiscal and debt positions, supported by promising growth prospects and a stronger external liquidity stance, with significant risk stemming from the government's debt size," noted Ms. Kalinina. But she cautioned that "a larger-than-expected deviation" from the fiscal target in 2004 could endanger both public support for reform and macroeconomic stability, as well as foreign investors' sentiment toward the country, all of which would harm Jamaica's creditworthiness. "On the other hand, Jamaica's track record of fiscal prudence (including during the next election period) and a continuing decrease in the government debt burden will support a positive outlook," she said. MONTENEGRO: Gets 'BB/B' Sovereign Credit Ratings from S&P --------------------------------------------------------- Montenegro became the 107th country to be rated by Standard & Poor's on December 20. The other half of the loosely joined republics of Serbia and Montenegro received a 'BB' for its long-term bonds and 'B' for its short-term sovereign credit. "The ratings on Montenegro balance the vulnerability of its narrow and open economy, together with regional political risks, against expectations of continued political stability, prudent fiscal policies underpinning its moderate deficit and debt levels, and further progress in structural reforms," United Press International quoted S&P analyst Beatriz Merino. S&P notes that developments in neighboring Serbia "weigh heavily both on Montenegro's economic prospects, and on the way the country is perceived by foreign investors." CONTACT: MINISTRY OF FOREIGN AFFAIRS State union Assembly Trg Nikole Pasica 13 11100 Beograd Srbija i Crna Gora Phone: (011) 302-62-00 Fax: (011) 322-70-99 Web site: http://www.mfa.gov.yu/ PARAGUAY: IMF Releases Third Installment of US$76 Mln Loan ---------------------------------------------------------- The Executive Board of the International Monetary Fund (IMF) on December 20 completed the third review under an SDR50 million (about US$76.2 million) Stand-By Arrangement for

Paraguay, originally approved on December 15, 2003 for 15 months (see Press Release No. 03/218), and granted an extension of the arrangement by six months, through September 30, 2005. In completing the review, the Executive Board also granted the Paraguay authorities' request for waivers of the nonobservance of two quantitative performance criteria and two structural performance criteria, and the modification of four performance criteria. The remaining amounts available under the arrangement were also rephased in four equal tranches in an amount equivalent to SDR3 million each (about US$4.6 million). However, Paraguay has not made any drawings under the arrangement so far, and the authorities have indicated that they continue to treat the arrangement as precautionary. Following the Executive Board's discussion of Paraguay's economic performance, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated: "Paraguay's macroeconomic performance has improved significantly under the program supported by the Stand-By Arrangement. Economic growth has been sustained in 2004 despite a drought, inflation has declined significantly, international reserves have increased, and the exchange rate has stabilized. "Overall, Paraguay has performed well under the program. On the structural side, the authorities have approved key pieces of economic legislation over the last 12 months, including the fiscal adjustment law, the customs code, the bank resolution law, and the public pension reform law. The authorities will need to press ahead with the reform agenda in order to reduce unemployment and poverty, which remain stubbornly high. "Reform of public banks remains a critical component of the program. It is important that this process move forward expeditiously, and that the authorities carefully monitor lending by the public banks in the run-up to their reform in order to prevent the resumption of unsustainable lending practices. "Fiscal policy has been placed on a sustainable path and the authorities' 2005 program is aimed at maintaining this improved performance. The fiscal outlook has improved significantly following the improvements in tax administration and the approval of the fiscal adjustment law. Tax collections have increased while expenditures have been kept in check, although capital outlays remain low. The government has eliminated sizable arrears and taken decisive steps toward normalizing relations with all creditors. The stock of public debt is now on a declining trend. For 2005, the authorities intend to pursue a balanced overall budget, with higher projected revenues allowing for a significant increase in capital expenditure in needed infrastructure. It will be important to have mechanisms in place to limit expenditure to

programmed levels, and to ensure that investment spending supports high quality projects. "Monetary policy has been effective in containing inflation while allowing for rapid reserve accumulation. However, monetary management has been complicated by large capital inflows, which threatened to generate rapid monetary expansion or a sharp appreciation of the currency. In order to minimize these risks, the central bank has pursued an active sterilization policy while accumulating international reserves. In 2005 the authorities intend to use interest rate and exchange rate policies more flexibly in order to stabilize inflation," Mr. Kato said. CONTACT: IMF EXTERNAL RELATIONS DEPARTMENT International Monetary Fund 700 19th Street, NW Washington, D.C. 20431 USA Public Affairs Phone: 202-623-7300 Fax: 202-623-6278 Media Relations Phone: 202-623-7100 Fax: 202-623-6772 PHILIPPINES: No Downgrade from Fitch, Only Negative Outlook ----------------------------------------------------------- London-based credit rating agency, Fitch Ratings, on December 7 merely changed the outlook of the Philippines to "negative" and "stable", affording it enough time to right its course. Manila had been dreading a downgrade since July, when President Gloria Arroyo admitted the country was in deep trouble. Prior to her admission, a group of economists at the country's premiere university had predicted an Argentina-like debt default in two years. Fitch said it had affirmed the country's long-term foreign currency and long-term local currency ratings of 'BB' and 'BB+,' respectively. "The outlook revision reflects increased concerns about prospects for fiscal policy adjustment," a Fitch statement reads. "These come against a backdrop of sharply diminishing fiscal flexibility that leaves the public finances vulnerable to shocks, including from domestic interest rate increases, exchange rate pressures or contingent liabilities emanating from the wider public sector or from banking system weaknesses." U.S.-based credit rating agency Moody's Investors Services is expected to announce by January whether or not it will downgrade the Philippines in view of the weak fiscal position, Agence France-Presse says.

A downgrade would raise borrowing costs for the government, which relies on debt to plug a national budget deficit that it hopes to keep at no more than PHP198 billion or 4.2 percent of gross domestic product (GDP) this year. The Palace hailed Fitch decision, which accordingly manifests confidence in the country's ability to reverse its course. "We will continue our active engagement and dialogue with Fitch, the other rating agencies and foreign and local investors so that they continue to be fully informed and updated on our progress," Agence France-Presse quoted Press Secretary Ignacio Bunye at a press briefing in Malacanang. Central Bank Governor Rafael Buenaventura said the "negative" outlook effectively gives the Philippines more time to address the deteriorating fiscal position, particularly for Congress to pass tax measures into law. "Fitch knows that at least we are not denying what our problems are. . . They're giving us time to put in place what we said we would do," he told Agence France-Presse. "If we don't deliver, we would get a two-notch downgrade," he warned. PHILIPPINES: Solons Pledge to Pass Tax Measures in December ----------------------------------------------------------- Congress must pass at least three critical tax measures within the year or the country will suffer a ratings cut, the central bank and the National Economic and Development Authority warn. According to the two agencies, it is important to show credit rating agencies that the country is capable of addressing its fiscal problems. Both Moody's and Standard & Poor's have warned in recent months of a potential downgrade, noting the country's widening budget deficit and burgeoning debt burden. In response, Malacanang has drafted eight proposed tax measures aimed at broadening the tax base and increasing revenues. During the Legislative-Executive Development Advisory Council meeting on November 26, congressional leaders promised to pass four of the proposed fiscal measures. Finance Secretary Juanita Amatong hopes this commitment from Congress is enough to avert a downgrade. They have to understand our legislative process before inferring that the chance of having the fiscal measures passed was dim, she told The Philippine Daily Inquirer, referring to Moody's representatives who were expected in Manila first week of December. She said Congress could have tackled the tax measures much earlier if only its calendar had allowed solons to organize themselves earlier than October. The local legislative year starts in July, but during an election year like 2004, the

reorganization of the House and the Senate usually takes months to complete. So far, the House has passed the sin taxes bill and the lateral attrition bill, both of which are now being deliberated in the Senate, the Inquirer says. Both legislative chambers have agreed to hold joint hearings on the bills seeking to impose a franchise tax on telecommunication companies and to reduce value-added tax exemptions. Other measures being pushed by the Arroyo administration include a tax amnesty, an increase in the value-added tax rate, higher excise tax for petroleum, and a simplified net income tax system. Sec. Amatong says a credit-rating downgrade not only will result in higher borrowing cost for the government, but it will also adversely affect the private sector. Accordingly, private companies cannot be rated higher than the sovereign credit rating. Moody's currently rates the Philippines Ba2, or two notches below investment grade. S&P gives the country 'BB/Stable/B' foreign currency issuer credit ratings. CONTACT: DEPARTMENT OF FINANCE DOF Bldg., BSP Complex, Roxas Blvd., 1004 Metro Manila, Philippines Phone: + 632 404-1774 or 76 Fax: + 632 521-9495 E-mail: hotline@dof.gov.ph Web site: http://www.dof.gov.ph BANGKO SENTRAL NG PILIPINAS A. Mabini St. cor. P. Ocampo St., Malate Manila, Philippines 1004 Phone: (632) 524-7011 Fax: (632) 523-1252 E-mail: bspmail@bsp.gov.ph Web site: http://www.bsp.gov.ph/ NATIONAL ECONOMIC AND DEVELOPMENT AUTHORITY 12 Saint Josemaria Escriva Drive, Ortigas Center, Pasig City, 1605 Philippines Web site: http://www.neda.gov.ph/ OFFICE OF THE PRESIDENT Malacanang Palace JP Laurel Street, San Miguel, Manila NCR 1005 Fax: (632) 929-3968 Web site: http://www.op.gov.ph/ PHILIPPINES: Congress Passes 'Landmark' Tax Bill ------------------------------------------------ Solons finally got their acts together and pass one of the tax measures that President Gloria Arroyo has been urging them to pass since July.

According to The Wall Street Journal, both Houses of Congress ratified on December 16 a bill raising taxes on tobacco and alcohol products. The president was expected to sign it into law on December 20. Although surprisingly tougher than the original version, the bill is seen as a token measure to impress international credit agencies, which have threatened to downgrade the country. At least one agency does not see it that way. "This [passage of the sin-tax bill] isn't a major surprise... we've already factored this in," Brian Coulton, senior director of Fitch's Sovereign Group in Asia told Dow Jones Newswires. "The key issue is making progress early next year in big-ticket items like removing exemptions in the value added tax." Fitch gave the country's US$65 billion sovereign debt a negative outlook in December, a move that follows Moody's, which a month ago, also placed its Ba2 rating on review for a possible downgrade. Other observers like Luz Lorenzo, an economist at ATR-Kim Eng Securities Inc. in Manila, see the passage of the bill as a positive step. "The sin taxes were a test of the government's [political] resolve. If the lawmakers can hurdle that obstacle, passing other tax-raising measures should be much easier," he told Dow Jones. The new law will increase annual government revenue by PHP18 billion (US$320 million), more than double the PHP7 billion proposed by an earlier version of the bill, the newswire says. The bill allows for tax rates to increase every two years until 2011. Earlier, several observers, including rating agencies, questioned the political resolve of Congress to pass necessary measures to rein in debt, citing the original draft of the bill passed by the lower house in October. To them that bill not only showed that the tobacco lobby remains influential, but also that Congress is unwilling to take painful steps needed to avoid deeper financial problems. Agost Benard, associate director for sovereign ratings at Standard & Poor's, told Dow Jones the new version of the bill would help alleviate disappointment with the earlier legislation. A severely divided political landscape that makes it very difficult to pass any meaningful legislation and poor tax collection rate are two of the many concerns that credit agencies have repeatedly raised in recent months. Manila's tax collections last year were roughly equivalent to 12% of gross domestic product, one of the lowest rates in Asia, Dow Jones says. The budget deficit is projected at 4.2% of GDP this year.

Government officials and private economists blame years of weak tax collection for the Philippines' budget deficit problems, which have in turn promoted an unhealthy dependence on foreign debt, Dow Jones adds. Sameer Goel, an economist at Bank of America in Singapore, shares the opinion of those who view the landmark legislation as a step in the right direction. "They are clearly paying a lot more attention to the fact that the fiscal situation needs to be solved sooner rather than later," Mr. Goel told Dow Jones. "But with one tax measure out of eight proposals passed in the last six months, I think the jury is still out on whether passing the sin-tax bill is enough to appease the ratings agencies." PHILIPPINES: Palace in Denial; Keeps Positive Outlook on Debt ------------------------------------------------------------- Malacanang insists the national debt remains manageable even if it ballooned to PHP3.73 billion at end-September, up 2.8% from August. According to the finance department, PHP1.77 trillion of this amount are foreign debt; the rest are owed to local creditors. About 15% are short-term debt, or debt maturing in one year or less. "Our debt is manageable through a wide range of options and there is a working consensus between the executive and Congress on how best this can be done, while strengthening our economy, putting our fiscal house in order and ensuring the steady implementation of our pro-poor agenda," Press Secretary Ignacio Bunye said during a press briefing at Malacanang Palace, the official residence of the president. President Gloria Macapagal-Arroyo, who commenced her second term in July, has called on Congress to pass eight new tax measures to ease the country's budget deficit and burgeoning debt. Lawmakers, however, will likely end the year having approved only one measure: a bill that would increase the taxes levied on tobacco and liquor products. The country's debt is expected to rise even further next year when the national government assumes PHP200 billion of the outstanding obligations of National Power Corp., the country's power supplier. Several leading credit agencies have already warned the Palace of a downgrade. The country's debt is so huge that almost a third of its budget is automatically allotted to debt payments. PHILIPPINES: Argentina-like Crisis not Likely, Says ADB -------------------------------------------------------

The Philippines has the highest fiscal deficit in Asia, but it is not as bad as it looks, according to a latest study of the Asian Development Bank. In its latest “Asia Economic Monitor,” the ADB noted that while the budget deficit improved over the past two years, it still accounted for 4.1 percent of the GDP of the Philippines. The report said that fiscal sustainability is now a major source of concern in the country. "The government has made modest progress over the past two years. The deficit in the first three quarters was 4.1 percent of GDP, compared with 4.7 percent a year earlier, and a budget projection of 4.3 percent. The outturn reflected both lower spending and a marginal increase in revenues," the ADB study states. The study also debunked comparisons with Argentina: "The situation in the Philippines is not as dire as that of Argentina." According to the bank, the Philippines manages its debt well, with a good level of serviceability. It noted that the country’s debt portfolio is characterized by a low proportion (about 11 percent) of short-term debt, concessional official development assistance accounting for a high proportion (about 17 percent) of debt, current average debt maturity of about 19 years, and avoidance of severe bunching of maturities. A copy of the ADB report is available free of charge at http://www.chapter15.com/ADBReport.pdf RUSSIA: Offers to Repay German Debt, But at 'Discounted' Rate ------------------------------------------------------------- Russia is taking advantage of the fiscal problems of Germany and Italy, according to the Financial Times. Under pressure to conform its budget deficit level to eurozone standards, Germany and Italy, two of the largest creditors of Russia, badly need the US$10 billion Moscow has allocated for early payments of debt next year. As much as US$6 billion of this amount would paid to Germany. The catch is: Moscow is demanding a discount. "The Federal Republic of Germany as well as the other members of the Paris Club are interested in this, because if we repay the debt early then we are hoping firstly for a discount and secondly, we will then save ourselves the interest payments," Russian President Vladimir Putin said after his meeting with German counterpart, Gerhard Schroder, in Schleswig, northern Germany. Finance Minister Alexei Kudrin says the early payment will save Russia US$700-900 million in interest. Russia's offer requires the approval of all Paris Club member governments, according to the Financial Times. Russia's total debt

obligations to the Paris Club are expected to stand at US$46.1 billion on January 1, 2005. Owed about US$18 billion, Germany is Russia's biggest bilateral creditor, followed by Italy, which is owed US$6 billion. Germany has been violating the provisions of the European Stability and Growth Pact for three years now. Italy has also been warned against a possible violation of the pact this year. Under the pact's terms, euro-zone countries should not run a budget deficit of over 3% of GDP. If this happens, they are expected to remedy the situation within a year. If they fail to do so, they will have to pay a fine of 0.5% of their GDP. "Russia's public finances have improved rapidly since the country's US$40 billion domestic debt default in 1998," the paper said. "A windfall from high prices for oil, Russia's main export, has fuelled a surge in the central bank's foreign exchange reserves." Russia aims to earn an investment grade credit rating from all ratings agencies by 2006, when it is due to chair the Group of Eight industrial nations, the paper adds. Currently, Standard & Poor's has a speculative credit rating on Russia. RUSSIA: Lipetsk's Ratings Outlook Improves to Positive ------------------------------------------------------ Fitch Ratings on December 14 changed the Russian Region of Lipetsk's Long-term rating Outlook to Positive from Stable. The ratings are affirmed at Long-term foreign and local currency 'BB-' (BB minus) and Short-term 'B'. The National Long-term rating is also affirmed at 'A+(rus)'. The Positive Outlook reflects the continued sound budgetary performance of the region and its capacity to fully fund its capital expenditure without resorting to debt. A rating upgrade will be triggered by a continuation in the current trend, and the region's capacity to cope with the future changes posed by re-distribution of competencies in the line with the budget reform and further diversification in the local economy. However, the ratings also take into account Lipetsk's high dependence on a single taxpayer in the form of the Novolipetsk steel smelter, which leads to volatility in the region's revenue stream. This dependence also creates uncertainty about the region's ability to balance its budget beyond 2006, when competences are substantially re-distributed between the regions on one hand, and the Federation and municipalities on the other. Lipetsk accounts for 0.9% of GDP (2003) and 0.8 % of the population of the Russian Federation (2002). The region's steady growth since 1999 has influenced positively local finances, as taxes make the largest contribution to the regional budget (2003: 88% of current revenue). The region's

economy is very much weighted towards the ferrous metal industries, as it has the third-largest steel smelter plant in Russia, the Novolipetsk steel smelter. It is the largest single employer and a major tax-payer to the regional budget. As the plant is export-oriented, its vulnerability to world commodity prices causes Lipetsk's revenue to be volatile. The local economy has potential for diversification, thanks to the rapid development of machinery building and food-processing. This has helped the region, so far, to avoid a high rate of unemployment. The region has recorded sound operating balances stemming from buoyant fiscal growth (taxes rose by over 41% year-on-year in 2003) and good control over operating expenditure. This surplus has enabled Lipetsk to fully fund its capital expenditure from own resources and also to pay down debt. It is projected that results for 2004 will record a continuation of this trend. Lipetsk's total risk, at a low 2.9% of current revenue in 2003, is made up of only guarantees to local agricultural companies, following the region's full repayment of its financial obligations in 2000. The Region of Lipetsk is situated in the South-West of European Russia and is populated by 1.2 million inhabitants. CONTACT: FITCH RATINGS (MOSCOW) Andrei Piskunov Phone: +7 095 9569901 Elzbieta Kaminska (Warsaw) Phone: +48 22 338 62 84 Alex Clelland (Media Relations/London) Phone: +44 20 7862 4084 Campbell McIlroy Phone: +44 20 7417 4327 TURKEY: E.U. Accession Prospect Buoys up Credit Ratings ------------------------------------------------------- Standard & Poor's Rating Services affirmed on December 20 its 'BB-' long-term foreign currency and 'BB' long-term local currency sovereign credit ratings on the Republic of Turkey, after a deal with the E.U. to begin accession negotiations. At the same time, the 'B' short-term foreign and local currency ratings were affirmed. The outlook is stable. "The affirmation reflects the progress Turkey is making in its talks both with the E.U. regarding the start of accession negotiations, and with the IMF regarding the government's economic program that could be supported by a new three-year stand-by arrangement," said Standard & Poor's credit analyst Konrad Reuss. E.U. leaders on December 19 offered Turkey a start date of Oct. 3, 2005, for full membership accession talks. Turkey

also agreed to an arrangement that will extend the country's existing E.U. customs union accord to the 10 new member states that joined the E.U. in 2004. This means a tacit recognition of the Republic of Cyprus (A/Stable/A-1), which had been a point of contention throughout the talks. Standard & Poor's raised the ratings on Turkey to their current level in August 2004, reflecting Turkey's progress toward durable macroeconomic stability, and the country's expected adherence to a strict macroeconomic program beyond 2004, which will result in further fiscal improvement, disinflation, a more sustainable public debt burden, and reduced vulnerability to market sentiment. "In light of the current progress, we believe that the risks on both the political and economic fronts are well balanced, firmly anchoring Turkey in the 'BB' category," added Mr. Reuss. "On the political front, the challenges faced by the government are mitigated by its continued large parliamentary majority. On the economic front, the government economic program envisages adherence to a continued high primary surplus of 6.5% of GNP, as well as key reforms of public expenditure, tax administration, and the social security system." The current progress on accession talks with the E.U. and expected IMF support for the government's economic program are creating a strong platform for future rating improvements. Sustained fiscal consolidation and a continued downward trend in the public debt burden will be important indicators for likely improvements of the ratings in the medium term. It is also expected that private sector capital inflows, in particular, should benefit from greater political and economic stability and the government's E.U. accession strategy, securing the funding of Turkey's growing external financing gap. Conversely, severe policy slippage that jeopardizes current macroeconomic achievements, a future IMF program, and E.U. talks, would place the ratings under renewed downward pressure. UKRAINE: Politically Charged Atmosphere No Bearing on Rating ------------------------------------------------------------ The political tumult in Ukraine has no negative effect on the country's sovereign debt rating, but international credit rating agency Standard & Poor's admits it is keeping tabs on the situation. In a statement issued on November 27, S&P said, "[h]igh political risks and instability had always been the key factors which are accounted for in Ukraine's rating that currently stands at B+ level." Right now, according to S&P, the country's improving external liquidity and declining state debt are offsetting the current

instability. But if things do not improve over time, a rating action will be likely, S&P said. "The ratings forecast may be changed if the deadlock political situation does not resolve itself or if the growing dissent of the population has negative consequences on Ukraine's macroeconomic situation," MosNews quoted S&P analyst Konrad Reuss. Since the Supreme Court annulled the results of the November 21 presidential elections, the political atmosphere in Ukraine has been highly charged, endangering the country's unity. Opposition candidate, Viktor Yushchenko, enjoys the backing of the cosmopolitan west, while incumbent Prime Minister Viktor Yanukovych is favored by the Kremlin and the industrial east. The election re-run was scheduled for Sunday, December 26. ===================================== R E S E A R C H & A N A L Y S E S ===================================== Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, Or Less? Using Gravity to Establish Causality ----------------------------------------------------------- [Authored by Jeffrey A. Frankel and Eduardo A. Cavallo, this paper appeared on the NBER Web site -- http://www.nber.org/ -- in December.] ABSTRACT Openness to trade is one factor that has been identified as determining whether a country is prone to sudden stops in capital inflow, currency crashes, or severe recessions. Some believe that openness raises vulnerability to foreign shocks, while others believe that it makes adjustment to crises less painful. Several authors have offered empirical evidence that having a large tradable sector reduces the contraction necessary to adjust to a given cut-off in funding. This would help explain lower vulnerability to crises in Asia than in Latin America. Such studies may, however, be subject to the problem that trade is endogenous. We use the gravity instrument for trade openness, which is constructed from geographical determinants of bilateral trade. We find that openness indeed makes countries less vulnerable, both to severe sudden stops and currency crashes, and that the relationship is even stronger when correcting for the endogeneity of trade. To download full text, visit http://papers.nber.org/papers/w10957 Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries

----------------------------------------------------------- [Authored by Silvia Ardagna, Francesco Caselli and Timothy Lane, this paper appeared in the November 2004 issue of the NBER Working Papers.] ABSTRACT We use a panel of 16 OECD countries over several decades to investigate the effects of government debts and deficits on long-term interest rates. In simple static specifications, a one-percentage-point increase in the primary deficit relative to GDP increases contemporaneous long-term interest rates by about 10 basis points. In a vector autoregression (VAR), the same shock leads to a cumulative increase of almost 150 basis points after 10 years. The effect of debt on interest rates is non-linear: only for countries with above-average levels of debt does an increase in debt affect the interest rate. World fiscal policy is also important: an increase in total OECD-government borrowing increases each country's interest rates. However, domestic fiscal policy continues to affect domestic interest rates even after controlling for worldwide debts and deficits. To download full text, visit http://papers.nber.org/papers/W10788 Managing Macroeconomic Crises ----------------------------- [Authored by Jeffrey A. Frankel and Shang-Jin Wei, this paper appeared in the November 2004 issue of the NBER Working Papers.] ABSTRACT This study reviews broadly the experience of the last decade on crisis prevention and management. It seeks to draw greater attention to policy decisions that are made during the phase when capital inflows come to a sudden stop. Procrastination --- the period of financing a balance of payments deficit rather than adjusting -- had serious consequences in some cases. Crises are more frequent and more severe when short-term borrowing and dollar denomination external debt are high, and foreign direct investment (FDI) and reserves are low, in large part because balance sheets are then very sensitive to increases in exchange rates and short-term interest rates. If countries that are faced with a fall in inflows adjusted more promptly, rather than stalling for time by running down reserves or shifting to loans that are shorter-termed and dollar-denominated, they might be able to adjust on more attractive terms. To download full text, visit http://papers.nber.org/papers/W10907 Hiccups for HIPCs?

------------------ [Authored by Craig Burnside and Domenico Fanizza, this paper appeared in the November 2004 issue of the NBER Working Papers.] ABSTRACT In this paper we discuss fiscal and monetary policy issues facing heavily indebted poor countries (HIPCs) who receive debt reduction via the enhanced HIPC initiative. This debt relief program is distinguished from previous ones by its conditionality: freed resources must be used for poverty reduction. We argue that (i) this conditionality severely limits the extent to which the initiative provides significant debt relief; (ii) depending on the response of monetary policy to an increase in social spending, there could be a short-run increase in inflation in HIPC countries and (iii) the keys to long-run fiscal sustainability in the HIPCs are significant fiscal reforms by their governments, and the effectiveness of their poverty reduction programs in raising growth. To download full text, visit http://papers.nber.org/papers/W10903 ********* S U B S C R I P T I O N I N F O R M A T I O N Sovereign Debt Restructuring is a monthly newsletter co-published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Frederick, MD, USA. Larri-Nil G. Veloso, Editor. Copyright 2004. All rights reserved. ISSN: 1544-7855. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The SDR subscription rate is $--- for -- months delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are $-- each. For subscription information, contact Christopher Beard at 240/629-3300. *** End of Transmission *** -------------------------------------------------------------- Recommended Reading: Thomas H. Jackson's newest title, "The Logic and Limits of Bankruptcy Law." List Price: US$34.95 at

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