Global crisis

John C. Williams, 26 November 2015

Interest rates have been extremely low since the Global Crisis. This column surveys the recent debate over whether they will remain low, or return to normal. While an unequivocal answer is not possible, the evidence suggests a significant decline in average real rates – perhaps to as low as 1%.

Margarita Katsimi, Gylfi Zoega, 19 November 2015

Iceland and Greece were both seriously affected by the Global Crisis, yet their experiences with the implemented IMF programmes have been quite different. In Iceland the programme has been a success, whereas the one in Greece has been a failure. This column explains why this happened. First, Iceland’s external debt was de jure private, while Greece’s external debt was sovereign debt. Second, Iceland has its own currency, making it easy to create a current account surplus through a lower exchange rate. Finally, the government of Iceland took full ownership of the IMF programme, which was not the case in Greece.

Graciela Laura Kaminsky, 08 November 2015

The Eurozone crisis is still lingering. This column uses data from 100 years of sovereign defaults to portray a new take on the crisis. The findings indicate that crises in a financial centre have persistent adverse effects on the periphery. They lead to more economic losses than home-grown idiosyncratic crises. Successful restructuring of such crises would require substantially larger debt write downs than those following idiosyncratic crises.

Jon Danielsson, Marcela Valenzuela, Ilknur Zer, 02 October 2015

Does low volatility in financial markets mean that another financial crisis is more likely? And should we be worried when everything is OK? This column presents the first empirical results that find a strong validation of Minsky's hypothesis – obtained from 200 years of historical cross-sectional data – that low volatility increases the likelihood of a future financial crisis by increasing risk-taking.

Luis AV Catão, Rui C. Mano, 29 September 2015

Sovereign governments re-entering capital markets after debt renegotiations pay an interest rate premium for past defaults. This column presents new evidence that suggests earlier studies have underestimated this premium. This is partly due to the narrow credit history indicators used in previous studies as well as the narrow data coverage. Correcting for these problems, a sizeable and persistent default premium emerges, and one which rises on the duration of the default. The new findings are consistent with the view that financial markets help discipline governments and rationalise why governments try hard not to default.

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