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Mr. Kei Kawakami and Rafael Romeu
A stochastic debt forecasting framework is presented where projected debt distributions reflect both the joint realization of the fiscal policy reaction to contemporaneous stochastic macroeconomic projections, and also the second-round effects of fiscal policy on macroeconomic projections. The forecasting framework thus reflects the impact of the primary balance on the forecast of macro aggregates. Previously-developed forecasting algorithms that do not incorporate these second-round effects are shown to have systematic forecast errors. Evidence suggests that the second-round effects have statistically and economically significant impacts on the direction and dispersion of the debt-to-GDP forecasts. For example, a positive structural primary balance shock lowers the domestic real interest rate, in turn raising GDP and lowering the median debt-to-GDP projection by an additional 10 percent of GDP in the medium term relative to prior forecasting algorithms. In addition, the framework employs a new long-term (five decade) data base and accounts for parameter uncertainty, and for potentially non-normally distributed shocks.
Mr. Mohamed A. El-Erian
The paper analyzes the evolution of Mexico’s approach to commercial bank debt restructuring since the outbreak of the 1982 debt servicing problems. It discusses the key elements of the approach, their implementation, and their interaction with developments in the “international debt strategy.” It focusses, in particular, on factors contributing to the emergence of comprehensive market-based debt and debt service reduction operations. Together with the sustained implementation of appropriate economic policies, these operations have contributed to Mexico’s return to voluntary international capital market financing. The paper discusses the major aspects of this market re-entry process.
Mr. Kei Kawakami and Rafael Romeu

-to-GDP ratio. In comparing debt forecasts with and without these effects, the difference in the forecasted debt decline is roughly 10-15 percent of GDP over a five years projection period for Brazil. Moreover, the channel through which the primary balance affects macroeconomic fundamentals is important. If a lower primary balance today raises growth next year, debt could fall initially but then decline slowly over the medium term, as the debt reduction effects of higher GDP are partially offset by the initial lower primary balance. If a higher primary balance today lowers

Mr. Mohamed A. El-Erian

taken to explore market-based, voluntary debt alternatives. If they should fail, the international community must offer a solution or else face unilateral action.” 38/ 2. Comprehensive debt reduction operations The Aztec debt exchange had an impact that went well beyond its modest net debt reduction effects. It represented the first officially-sanctioned market-based bank debt reduction exercise for a large middle-income developing country debtor. 39/ It confirmed the gradual movement toward DDSR operations based on a voluntary market-based approach, and

Mr. Mohamed A. El-Erian

must offer a solution or else face unilateral action.” 35 Comprehensive Debt-Reduction Operations The Aztec debt exchange had an impact that went well beyond its modest net debt-reduction effects. It represented the first officially sanctioned, market-based, bank debt-reduction exercise for a large middle-income developing country debtor. 36 It confirmed the gradual movement toward debt- and debt-service reduction operations based on a voluntary market-based approach, and the associated recognition that some write-down of contractual debt to banks was