Once again, Joshua Aizenman and Nancy Marion have provided us with an interesting and well-executed paper. The authors examine the role that uncertainty concerning the level of outstanding debt obligations in Asia may have played in promoting that region's financial crisis. The analysis is organized in three fairly self-contained sections: The first section reviews the buildup of debt levels in Thailand and South Korea. The second section introduces a sovereign debt model in which increases in uncertainty about a nation's debt overhang can result in reduced lending towards that country. The third section looks at the optimal response of an individual foreign investor with first-order risk aversion to an increase in uncertainty about returns in investment in a foreign nation. The authors demonstrate that a sufficient increase in uncertainty can induce the investor to completely stop investing in that country. I will discuss each section individually.

EXTERNAL DEBT BUILDUPS IN THAILAND AND SOUTH KOREA

The external debt buildups described by the authors were indeed large. I am somewhat less convinced, however, that all of the increase could be characterized as surprising. Both of the reported increases resulted partly from revisions in the manner in which debt burdens were calculated by the government. In particular, the South Korean revision resulted from the inclusion of off-shore liabilities of commercial banks. While the market did not have a good idea of the magnitude of these off-shore obligations prior to the revision announcements, it is implausible that their expected value was zero, given the large buildup in the reported portion of outstanding debt obligations.