Why do governments repay external borrowing? This column argues that myopic governments seeking popularity do not default when they are poor because they would lose access to debt markets and be forced to reduce spending. And they do not default when rich because of the adverse consequences to the domestic financial sector. This explains why governments continue servicing debt when default is beneficial for the country.
Raghuram Rajan, Viral Acharya, Thursday, November 24, 2011 - 00:00
Barry Eichengreen, Tuesday, January 20, 2009 - 00:00
2008 was the year of asymmetric financial shocks for the Eurozone, but 2009 will be the year of the symmetric economic shock. All of Europe is slipping simultaneously towards recession and the threat of deflation. Here one of the world’s leading international economists explains that a common monetary policy response is optimal. Euro interest rates should be cut to zero and quantitative easing undertaken, all complemented by fiscal expansion by Eurozone nations that can afford it. What started as the euro’s greatest challenge could be its salvation, but only if policy makers act swiftly.