External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the IMF [International Monetary Fund] and World Bank.
The original sin hypothesis was first defined as a situation “in which the domestic currency cannot be used to borrow abroad or to borrow long term even domestically” by Barry Eichengreen and Ricardo Hausmann in 1999. Based on their measure of original sin (shares of home currency-denominated bank loans and international bond debt), they showed that original sin was present in most of the developing economies and independent from histories of high inflation and currency depreciation. However, this early study left the causes of original sin as an open question.
In the second version of the original sin hypothesis, Barry Eichengreen, Ricardo Hausmann and Ugo Panizza in 2002 discarded the domestic element of original sin and redefined (international) original sin as a situation in which most countries cannot borrow abroad in their own currency. They showed that almost all of the countries (except US, Euro area, Japan, UK, and Switzerland) suffered from (international) original sin over time. Eichengreen, Hausmann, and Panizza concluded that weaknesses of national macro-economic policies and institutions are not statistically related with original sin and found that the only statistically robust determinant of original sin was country size. Moreover, they claimed that international transaction costs, network externalities, and global capital market imperfections were the main reasons (which are beyond the control of an individual country) of the original sin.
Hence, as a solution for the original sin problem, they proposed an international initiative and recommended development of a basket index of emerging-market currencies so that international financial institutions could issue debt denominated in this index until a liquid-market in this index had developed. Burger and Warnock (2003) suggested inclusion of information on domestic bond markets to account for the possibility that foreign investors were holding local-currency emerging market bonds to analyze the determinants of original sin.
Using this expanded measure, they showed that emerging markets economies could develop local bond markets (in which they can borrow in domestic currency) and attract global investors with stronger institutions and credible domestic policies. Reinhart, Rogoff and Savastano (2003) criticized the suggested international solution for the original sin problem by claiming that the main problem of emerging market economies is to learn how to borrow “less” (debt intolerance) rather than learn how to borrow “more” in their domestic currency.
In these two earlier versions of original sin hypothesis, Eichengreen, Hausmann and Panizza argued that in the presence of high levels of original sin, domestic investments will have a currency mismatch (projects that generate domestic currency will be financed with a foreign currency) so that macroeconomic and financial instability will be unavoidable. Hence, original sin and currency mismatch are used interchangeable in these early studies. Goldstein and Turner (2003) criticized this by showing that large output losses due to the currency mismatches during financial crises could not be attributed to original sin. Hence, they claimed that the original sin is not a sufficient condition for a currency mismatch.
In their last version of their original sin hypothesis, Eichengreen, Hausmann and Panizza defined domestic component of original sin as the “inability to borrow domestically long-term at fixed rates in local currency” while keeping the definition of (international) original sin same They reported that no country (having an original sin ratio higher than 0.75) with high domestic original sin had low international original sin suggesting that if a country could not persuade its own citizens to lend in local currency at long maturities, it could not convince foreigners to do the same. On the other hand, they reported that seven countries, among the 21 emerging countries included in their sample, had low domestic original sin but relatively high international original sin original sin, suggesting that dominant use of local currency in domestic markets is not a sufficient condition for dominant use internationally.
There are three different measures of original sin in economics literature. These measures are defined mathematically as one minus the percentage of own currency-denominated securities in the relevant total. Original sin measures range between 0 and 1. A high measure of original sin indicates that a country suffers from high level of original sin. Thus, a country that issues all of its securities in foreign currency would have an original sin measure of one, while a country that issues all of its securities in its domestic currency would have an original sin measure of zero.
Empirical studies mainly focus on a few parameters as being the determinants of the original sin:
The first determinant is level of development; measured generally with GDP per capita. Empirical studies indicate that GDP per capita is significantly correlated with original sin. However, this result is not robust to inclusion of other regressors (Hausmann and Panizza, 2003)
The second determinant of the original sin is monetary credibility. This is important for both domestic and international original sin. The monetary credibility is proxied usually by inflation. Generally, the ratio of domestic debt to total public debt is higher in countries with lower and less volatile inflation indicating that inflation can change the composition of public debt and make it riskier. Hausmann and Panizza (2003) find that monetary credibility, as measured by lower inflation and the imposition of capital controls, are associated with lower domestic original sin in emerging economies. On the international side, their study shows that if the monetary and fiscal authorities are inflation prone, foreign investors will lend only in foreign currency, which is protected against inflation risk, or at short maturities, so that the interest rates can be adjusted quickly to any acceleration of inflation.
The third determinant is the level of debt burden. High public indebtness gives rise to an inability to service debt. Consequently, governments attempt to reduce debt service costs through inflation, unexpected changes in interest rates, explicit taxation, or outright default. Such situations reduce their credibility. Therefore, governments will tend to have a shorter maturity debt composition to enhance credibility when the debt burden is high. Most commonly, the ability to service debt is proxied with an array of macroeconomic indicators including the ratios of the fiscal balance to GDP, primary balance to GDP, government debt to exports and government debt to GDP (Hausman et al.,2003 and Mehl et al.,2005)
The fourth determinant is the exchange rate regime. As indicated by Hausmann and Panizza (2003), countries with fixed exchange rate regime experience large volatility in their domestic-currency interest rate, while countries that have a floating exchange rate regime experience larger exchange rate volatility. This creates differences in the structures of borrowing. Empirical studies show that fixed exchange rate regime is the main reason of liability dollarization. Despite these common weaknesses, emerging and developing economies have been able to attract capital because they have often operated under fixed or pegged exchange rate regimes until the early 2000s.
The fifth attempt is the slope of the yield curve. In theory, and given the existence of term premia, issuing short-term debt is cheaper than issuing long-term debt. However, refinancing risk is higher for short-term debt and frequent refinancing implies a larger risk of financing with higher interest rates. Therefore, governments face a trade-off between cheaper funding costs, which tilts the duration towards short-term maturities and refinancing risk, which tilts the duration towards longer-term maturities. Generally, an upward-sloping yield curve is associated with higher long-term borrowing to meet investor demand and, hence, lower original sin.
The sixth; Moreover, size of the investor base is another determinant of the domestic original sin. This concept actually indicates the level of financial development which is measured most of the time by a ratio of total domestic credits to GDP. Finally, a special care to the level of openness which is generally measured by total foreign trade, should be taken into account.
Original sin is a commonly used metaphor in economics literature. It was proposed by Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza in a series of papers to refer a situation in which “most countries are not able to borrow abroad in their domestic currency.”
The Bible relates in Exodus 12:3-13 that when the Jewish people were preparing themselves for their momentous exodus from Egypt, God commanded them to slaughter a year-old sheep or goat on the 14th day of the first month (Nissan) and to publicly place its blood on the outside doorposts of their homes. The Torah never states or even implies that the Passover sheep or goat atones for sin.
A mindful study of the Jewish scriptures reveals that the Torah had alluded to the Paschal lamb long before the exodus from Egypt occurred. Centuries earlier, the Almighty tested Abraham’s faith when God commanded him to sacrifice his beloved son Isaac. Genesis 22:7-8 relates that as the two ascended Mount Moriah together, Isaac turned to his father and asked, “Here is the fire and the wood, but where is the lamb for the offering?” Abraham then replied, “God will see to a lamb for an offering, my son.”
The question that immediately comes to mind is, what happened to that lamb that Abraham promised? A few verses later we find that it was a ram, not a lamb, which was sacrificed! Where was the lamb to which Abraham was prophetically referring? The answer of course is that our father Abraham was referring to the Paschal lamb. Just as God tested Abraham’s faith to show his worthiness to be the father of the chosen people, the young Jewish nation also had to have their faith tested to show their worthiness to participate in the exodus from Egypt, to receive the Torah at Mount Sinai, and to become the progenitors of the covenant people who would forever be known as “a light to the nations.”
In the Egyptian society where the Jewish people were enslaved, the lamb was considered a sacred god, similar to how the cow is deified and worshiped in India today. In ancient Egypt, molesting a lamb in any way was considered a crime punishable by death. That is why, when Egypt was overcome with the third plague of lice, Moses refused Pharaoh’s initial offer that the Jews bring their sacrifice to God while remaining in Egypt.
In Exodus 8:26, Moses explained to Pharaoh that if the Israelites were to kill these animals before the Egyptians, they would be stoned to death. The Almighty, therefore, used this to test the faithfulness of the Jewish people by commanding them to not only kill Egypt’s sacred god, but also to publicly place the lamb’s blood on their doorposts for all to see. Only those Israelites who, like Abraham, demonstrated that their fear of God exceeded their fear of the Egyptians, would be deemed worthy to have their homes passed over during the tenth and final plague.
The ancient religions promoted the same idea about atonement (e.g. Molech). They would joyfully offer a child into the fires of their sacrificial offering in order to expiate their sins and appease the gods. Why would a child sacrifice be used in this pagan ritual rather than an adult? The reason is because a child is thoroughly innocent of sin. A child, they reasoned, could not have committed iniquity and thus mirrored the animal sacrifice which also had to be unblemished. The Torah therefore admonishes the children of Israel never to offer human sacrifices, and forewarned Jewish people of terrible consequences if this commandment were violated.
This message was carefully communicated at Mt. Moriah where Abraham was prepared to offer up his beloved son Isaac as a sacrifice. At that crucial juncture in history when Abraham was ready to sacrifice Isaac, the Almighty admonished him that He did not want the human sacrifice, and directed Abraham to sacrifice the ram caught in the thicket instead.
The Almighty’s directive — that he only wanted animal sacrifices rather than human sacrifices — was immediately understood. This teaching has never departed from the mind and soul of the faithful children of Israel. Leviticus 17:11 specifically says that the blood of the sacrifice must be placed “upon the altar to make atonement for your souls.” That is to say, Leviticus 17:11 explicitly declares that blood can only effect atonement if it is placed on the altar.
The only methods of atonement in the Bible and there are three methods of atonement clearly defined in the Jewish scriptures: the sin sacrifice, repentance, and charity. Moreover, the sin sacrifice (known in the Jewish scriptures as korban chatat) did not atone for all types of sin, but rather, only for man’s most insignificant iniquity: unintentional sins. The sin sacrifice was inadequate to atone for a transgression committed intentionally. The brazen sinner was barred from the sanctuary and had to bear his own iniquity because of his rebellious intent to sin against God. The Torah teaches this fundamental principle in Numbers 15:27-31.
If a person sins unintentionally, then he shall offer a one-year-old female goat for a sin offering. The priest shall make atonement before the LORD for the person who goes astray when he sins unintentionally, making atonement for him that he may be forgiven . The person who does anything defiantly, whether he is native or an alien, that one is blaspheming the LORD; and that person shall be cut off from among his people, because he has despised the word of the LORD and has broken His commandment, that person shall be completely cut off; his guilt shall be on him.
Finally, the prophets loudly declared to the Jewish people that the contrite prayer of the penitent sinner replaces the sacrificial system. Therefore, atonement for unintentional sins today is expiated through devotional supplication to the Merciful One.
In fact, in Hosea 3:4-5, the prophet foretold with divine exactness that the nation of Israel would not have a sacrificial system during the last segment of Jewish history until the messianic age. Hosea 3:4-5 reads, . . . for the children of Israel shall abide many days without king or prince, without sacrifice or sacred pillar, without ephod or teraphim. Afterward the children of Israel shall return and seek the LORD their God and David their king. They shall fear the LORD and His goodness in the latter days.
In the words of the Bible, this period of time would last for many days. The words of Hosea were meticulously fulfilled, and we are without an animal sacrificial system today. Given the spiritual magnitude of this remarkable prophecy, Hosea was compelled to reveal how the ecclesiastical Temple functions were to be replaced. In essence, if the prophet is testifying that the nation of Israel will indeed be without a sacrificial system during their long exile until the messianic age, what are we to use instead? How are the Jewish people to atone for unintentional sin without a blood sacrifice during their bitter exile? What about all the animal sacrifices prescribed in the Book of Leviticus? Can the Jewish people get along without animal offerings?
For this reason, the statement in Hosea 14:2-3 is crucial. In these two verses, Hosea reveals to his beloved nation how they are to replace the sacrificial system during their protracted exile. The prophet declares that the Almighty wants us to “render for bulls the offering of our lips.” Prayer is to replace the sacrificial system. Hosea 14:2-3 states, Take words with you, and return to the LORD. Say to Him, “Take away all iniquity; receive us graciously, for we will render for bulls the offering of our lips.”
Rather, it is the prayers of the sinner that would become as bulls of the sin offerings.
King Solomon echoes this sentiment as well. In I Kings 8:46-50, King Solomon delivers a startling prophetic message as he inaugurates the first Temple that had just been completed. In his inauguration sermon, King Solomon forewarns that one day the Jewish people would be driven out of the land of Israel, and be banished to the land of their enemies, near and far. During their exile they would fervently desire to repent of their sins. King Solomon then declares that they would face Jerusalem from their exile, confess their sins, “and God will hear their prayers in heaven, and forgive them for all their transgressions.”
Only the contrite and repentant prayer of the remorseful sinner can bring about a complete atonement. King Solomon’s timeless remains the centerpiece of the Jewish system of atonement throughout his long and bitter exile.
Rabbi Tovia Singer HaCohen
Interpretation of Genesis 4:6-7
The term “original sin” is unknown to the Jewish scriptures and the teachings on this doctrine are antithetical to the core principles of the Torah and its prophets.
Over and over again the Torah loudly dismisses the notion that man has lost his divinely endowed capacity to freely choose good over evil, life over death. This is not a hidden or ambiguous message in the Jewish scriptures. On the contrary, it is proclaimed in virtually every teaching that Moses directs to the children of Israel.
In fact, in an extraordinary sermon delivered by Moses in the last days of his life, the prophet stands before the entire nation and condemns the notion that man’s condition is utterly hopeless. Throughout this uplifting exhortation, Moses declares that it is man alone who can and must merit his own salvation. Moreover, as he unhesitatingly speaks in the name of God, the lawgiver thoroughly rejects the notion that obedience to the Almighty is “too difficult or far off” and declares to the children of Israel that righteousness has been placed within their reach.
Deuteronomy 30 isn’t a quiet chapter and its verses read as though the Torah is bracing the Jewish people for the false doctrines that would confront them many centuries later. As the last Book of the Pentateuch draws to a close, Moses admonishes his young nation not to question their capacity to remain faithful to the mitzvoth of the Torah.
Deuteronomy 30:10-14 states: . . . if you will hearken to the voice of the Lord your God, to keep His commandments and His statutes which are written in this Book of the Law; if you turn unto the Lord thy God with all your heart and with all your soul; for this commandment which I command you this day is not too hard for you neither is it too far off. It is not in heaven, that you should say, “Who shall go up for us to heaven, and bring it to us, and make us hear it, that we may do it?” Neither is it beyond the sea that you should say: “Who shall go over the sea for us, and bring it unto us, and make us to hear it that we may do it?” The word is very near to you, in your mouth and in your heart, that you may do it.
The Jewish people have drawn great comfort and encouragement from this uplifting promise. The Torah unambiguously declared that man possessed an extraordinary ability to remain faithful to God.
In fact, the Jewish scriptures repeatedly praised numerous men of God for their unwavering righteousness. For example, the Bible declared that men like Calev [Numbers 14:24] and King Josiah [II Kings 22:2] were faithful throughout their extraordinary lives. Moreover, because of their devotion to their Creator,
Abraham and Daniel were the objects of the Almighty’s warm affection as He tenderly referred to Abraham as “My friend,”[Isaiah 41:8] and Daniel, “beloved.”[Daniel 9:23; 10:11; 10:19].
Job’s unique loyalty to God stands as a permanent enigma. Here was a man who was severely tested and endured unimaginable personal tragedies, yet despite these afflictions, Job remains the model of the righteous servant of God.
Immediately after the sin of Adam and Eve is narrated, the Torah declares that man can master his passionate lust for sin. In Genesis 4:6-7, God turns to Cain and warns him, If you do what is right, will you not be accepted? If, though, you do not do what is right, sin is crouching at your door; it desires to have you, but you shall master over it.
Moreover, the fact that the Torah places these assuring words immediately following the sin in the Garden of Eden.
The Almighty does, however, clearly lay out His sovereign plan for His covenant people when he declares, “See, I have set before you today life and good, death and evil.” (Deuteronomy 30:15) What is this “life” and “good” of which the Torah speaks?
Throughout the Hebrew Bible the Almighty unambiguously declares that the children of Israel are to draw near to Him with intense love and faithfully keep His commandments. This is the desire of the Creator. Moses beseeches the children of Israel, I command you today to love the Lord your God, to walk in his ways, and to keep his commands, decrees, and laws; then you will live and increase, and the Lord your God will bless you in the land you are entering to possess. (Deuteronomy 30:16)
Abraham, the father of the Jewish nation, remained intensely loyal to God’s commandments and, as a result, the Torah regards our first patriarch as the paradigm of faithfulness.
I will make your descendants multiply as the stars of heaven; I will give to your descendants all these lands, and in your seed all the nations of the earth shall be blessed because Abraham obeyed My voice and kept My charge, My commandments, My statutes, and My laws. (Genesis 26:4-5)
The Almighty did not give us desires that we cannot govern or commandments that we could not keep. The Torah was not delivered to angels, it was given to the children of Israel long after our first ancestors transgressed in the Garden of Eden.
In Jewish terms, sin is not a person, it’s an event, and that event happened yesterday. In chapter after chapter, the prophets of Israel beseech those who lost their way to turn back to the Merciful One because today is a new day.
Rabbi Tovia Singer HaCohen