countries get into this kind of situation, there seem to be only two ways out: restructure debt to lower its present value, as Argentina has been attempting to do; or adopt flexible exchange rates and run exceptionally large primary fiscal surpluses as Brazil and Turkey have been doing over the past few years.

**Table 6.  Economic Indicators Before and After Crisis in Four Big MACs**

||% of<br>before<br>Primary|GDP<br>after<br>Surplus|% of<br>before<br>Interest P|GDP<br>after<br>ayment|Net Resourc<br>US$ before|e Transfers<br>bln<br>after|1st year<br>before<br>Real Exch|=100<br>after<br>ange Rate|
|---|---|---|---|---|---|---|---|---|
|Argentina|0.1|0.8|3.4|7.3|7.0|-8.1|97.5|57.5|
|Brazil|0.5|3.8|7.0|8.1|19.4|4.7|89.2|54.8|
|Russia|-3.2|4.6|5.0|3.8|6.3|-3.6|111.0|72.4|
|Turkey|0.1|5.2|18.7|19.8|2.8|-0.4|98.1|84.9|

_Notes:_ 1. Real exchange rate is bilateral with respect to US$, period average 2. Argentina: before 1998-2000, after 2001-2003; Brazil: before 1996-1999, after 2000-2003; Russia: before 1995-1998, after 1999-2002; Turkey: GNP is used, instead; before 1998-2000, after 2001-2003. 3. Net resource transfers are calculated as a net resource flows minus interest on long-term debtand profit remittances on FDI Data are not available for 2003 _Source:_ Staff estimates, Global Development Finance, various issues Table 6 captures the nature of the post-crisis adjustment in these countries by presenting averages of key variables for the three years before and three years after the crisis. Apart from Argentina, primary fiscal surpluses have been significantly ramped up and interest payments have risen from already high levels, except for Russia, which successfully restructured its debt. Net resource transfers shrank significantly in all the countries after the crisis; only in the case of Russia, which elected to prepay debt when oil prices rose, and which benefited from a significant write-down on London Club debt, was this by design. The post-crisis bilateral US dollar real exchange rate has depreciated significantly; Turkey is an exception in that by the end of the “after” period, the real exchange rate had reverted to its pre-crisis level.

The key issues in Brazil and Turkey are whether international interest rates will remain low and whether the market will be convinced by these countries’ persistent primary surpluses and lower their sovereign bond spreads. In Turkey, the return of the real exchange rate to its precrisis level raises a question about the sustainability of its high post-crisis growth rate, unless microeconomic efficiency and productivity have risen. Moreover, interest payments in both countries remain in excess of even the ramped-up primary surpluses, so that an overall fiscal deficit exists that needs to be financed by additional debt issue. And to the extent that primary surpluses have been achieved by cutting public investment and social spending, this could have negative consequences for long-run growth.<sup>32</sup> It would be reasonable to assert on this basis that debt continues to be at unsustainable levels and needs to be reduced. Box 6 illustrates, with Brazil’s experience, the challenges of public debt management when debt crosses thresholds deemed unsustainable by the market.

# **Box 6.  Lessons From Brazil’s Macroeconomic Adjustment 1999-2003**

Brazil’s high primary surpluses since 1999, the year in which it also switched from a crawling peg to a flexible exchanger rate regime, have been both surprising and controversial; surprising because the market, judging by the default-level bond spreads in 2002, did not expect the new administration elected that year 32 This is the fiscal space argument made above, and critically assumes that the cash return on infrastructure investment exceeds the marginal cost of borrowed funds; and that fiscal waste is nonexistent.

24