The ghost of Deauville
Ashoka Mody 07 January 2014
On 19 October 2010, Angela Merkel and Nicolas Sarkozy agreed that in future, sovereign bailouts from the European Stability Mechanism would require that losses be imposed on private creditors. This agreement was blamed for the increase in sovereign spreads in late 2010 and early 2011. This column discusses recent research on the market reaction to the surprise announcement at Deauville. With the exception of Greece, the rise in spreads was within the range of variability established in the previous 20 days.
The aversion to debt restructuring in the Eurozone has been remarkable, even though public debt ratios in several countries are well above the IMF-identified critical debt overhang threshold of 100% of GDP (IMF 2012). By early 2010, some recognised the urgency of restructuring Greek public debt (Calomiris 2010). But the official position between late 2009 and early 2011 deemed even Greek debt to be sustainable. Beyond the particularities of Greece, general principles were invoked. In the words of Cottarelli et al.
Financial markets International finance
eurozone, sovereign debt, Eurozone crisis, sovereign debt restructuring, financial contagion, Deauville
Institutional investor flows and the geography of contagion
Damien Puy 13 December 2013
International financial contagion has a destabilising effect on the growth path of many emerging markets. But what are the forces driving international financial contagion? This column argues that institutional investors play an important role in propagating shocks. Changes in economic conditions in advanced countries generate global waves of portfolio fund inflows/outflows that massively effect emerging markets' funding.
International financial contagion implies that countries can be affected by similar economic shocks even in the absence of common fundamentals. Since the Asian financial crisis, academics and policymakers have been eager to better understand the role played by financial intermediaries in propagating shocks across borders. Along with banks, the fund industry has attracted particular attention and is now recognised as an important vehicle of financial contagion (Gelos 2011). Yet, little is known about the geography of such contagion.
Global crisis International finance
mutual funds, financial contagion