Sovereign-debt relief and its aftermath: The 1930s, the 1990s, the future?
Carmen M Reinhart, Christoph Trebesch 21 October 2014
To work towards resolving Europe’s ongoing debt crisis this column looks to the past. From the recent emerging market debt crisis (1980s-2000s) and the interwar episode of the 1920s-1930s we learn that debt write-downs and defaults are able to be postponed but not prevented. Punishment for default is temporary, sometimes followed by a renewed surge in borrowing that leads to another crisis.
Since 2008 Europe has been mired in a combination of economic depression, financial crisis, and public and private debt overhangs. Greece was the first advanced economy to restructure its debt in more than a generation, and the ongoing depression in Europe’s periphery has already surpassed the economic collapse of the 1930s by some markers. In most advanced economies record private debt overhangs are unwinding only slowly, while the steady upward march in public debts continues largely unabated.
Economic history Financial markets International finance
sovereign debt, crises, restructuring, sovereign debt crisis
Why DSGEs crash during crises
David F. Hendry, Grayham E. Mizon 18 June 2014
Many central banks rely on dynamic stochastic general equilibrium models – known as DSGEs to cognoscenti. This column – which is more technical than most Vox columns – argues that the models’ mathematical basis fails when crises shift the underlying distributions of shocks. Specifically, the linchpin ‘law of iterated expectations’ fails, so economic analyses involving conditional expectations and inter-temporal derivations also fail. Like a fire station that automatically burns down whenever a big fire starts, DSGEs become unreliable when they are most needed.
In most aspects of their lives humans must plan forwards. They take decisions today that affect their future in complex interactions with the decisions of others. When taking such decisions, the available information is only ever a subset of the universe of past and present information, as no individual or group of individuals can be aware of all the relevant information. Hence, views or expectations about the future, relevant for their decisions, use a partial information set, formally expressed as a conditional expectation given the available information.
crises, DSGE, law of iterated expectations
Restructuring sovereign debt, 1950–2010: From process to outcomes
Udaibir S Das, Michael G. Papaioannou, Christoph Trebesch 28 November 2012
There is an ongoing debate about debt restructurings, debt buybacks and other strategies to resolve sovereign debt crises. Unfortunately there is limited empirical knowledge about the process and outcome of past restructurings to guide the debate and help tackle future crises. This column is an attempt to fill this gap by surveying new data and lessons learned from debt crises of the past six decades.
Reinhart and Rogoff (2009) provide an impressive account of the history of sovereign debt crises over the past 200 years. However, they do not discuss the patterns of crisis resolution in detail. How frequent are sovereign debt restructurings? What amounts have been restructured? How long does it take to restructure sovereign bonds or loans? What are the typical pitfalls in the restructuring process (creditor litigation or holdouts)? How do governments communicate with their creditor banks and bondholders? What is the scope of debt relief, or 'haircuts', in past restructurings?
sovereign debt, crises, restructuring
Precautionary savings in the Great Recession
Ashoka Mody, Damiano Sandri, Franziska Ohnsorge 22 February 2012
Uncertainty rose sharply during the Great Recession, as did saving rates. This column shows that these two developments were related. Using a panel of OECD countries, it estimates that at least two-fifths of the increase in households’ saving rates between 2007 and 2009 was due to increased uncertainty about labour-income prospects. It adds that restoring higher levels of consumption and aggregate demand will require employment-friendly social insurance and reduced policy-induced uncertainty.
A key feature of the Great Recession was a striking increase in uncertainty. The volatility of real GDP increased (left chart in Figure 1) and, at the same time, the higher unemployment rate raised the risks of job losses, longer unemployment durations, and, hence, of severe reductions in income (see Carroll 1992 for a similar interpretation of unemployment rates). These developments stood in marked contrast to the immediately preceding years of apparent tranquility, often characterised as the Great Moderation.
OECD, crises, savings
Political constraints in the aftermath of financial crises
Francesco Trebbi, Atif Mian, Amir Sufi 21 February 2012
Political environments appear systematically different in the aftermath of a financial crisis relative to before the crisis. This column argues that the ensuing gridlock and the delay in potentially beneficial policy reforms should come as no surprise.
Financial crises of all colours (banking, currency, inflation, or debt crises) leave deep marks on an economy. Deep economic contractions, both in output and employment, are systematic in the interim and in the aftermath of financial crises, as thoroughly documented in research by Reinhart and Rogoff (2009) and Reinhart and Reinhart (2010).
Sustained waves of volatility, often resulting in secondary crises (e.g. debt crises following banking crashes), are almost the norm in the post-crisis period (Reinhart and Rogoff 2011).
Politics and economics
reforms, crises, inequalities
Labour markets on the verge of a regulation crisis
Giuseppe Bertola 26 May 2009
In Europe, unemployment is increasing more rapidly than in earlier comparable crises. This column attributes that to the severity of the recession and the flexibility-oriented reforms that only recently brought European unemployment down. But that does not mean that the answer is re-regulation of labour markets.
Unemployment is now just about the same in France and the Eurozone as a whole (8.8%) and in the US (8.9%). This is a rather unusual coincidence. The trends in Figure 1 show that in the 1960s unemployment in France (and other European countries) was much lower than in the US. It rose steadily in the 1970s, driven by the interaction of shocks and institutional features (Blanchard, 2006), reached the US level in the early 1980s and remained higher, only starting to descend in the 1990s.
unemployment, regulation, crises