Daily Archives: January 4, 2010

Shankar Acharya

In this post for the Financial Times, Shankar Acharya writes on employment in India.

 

By Michael Pomerleano

As fears of debt disaster swirl around Dubai and Europe, it is useful to take a closer look at local currency bond markets. A recent superb book – This Time is Different: Eight Centuries of Financial Folly, by Carmen M. Reinhart and Kenneth Rogoff - offers a veritable tour de force of local currency markets. Reinhart and Rogoff have done an extraordinary job of putting together statistics covering eight centuries of government debt defaults around the world. The lengthy historical perspective documents never-ending cycles of boom and bust.

Their story is vastly different from the reports propagated by the official community. The official story of local currency bond markets reads roughly as follows. The typical report from a multilateral financial institution (and there have been several) points to the rapid development of local currency bond markets over the past years as a source of strength for financial systems in emerging-market economies. They report that foreign investment is buoyant, with foreign investors channeling increasing volumes of funds into these markets. The authors invariably commend developing countries for borrowing in local currency to reduce foreign currency mismatches end encourage them to adopt better macroeconomic policies, improve debt management strategies, and undertake further financial sector reform.