Banks, government bonds, and default: What do the data say?
Nicola Gennaioli, Alberto Martin, Stefano Rossi 19 July 2014
There is growing concern – but little systematic evidence – about the relationship between sovereign default and banking crises. This column documents the link between public default, bank bondholdings, and bank loans. Banks hold many public bonds in normal times (on average 9% of their assets), particularly in less financially developed countries. During sovereign defaults, banks increase their exposure to public bonds – especially large banks, and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults.
Recent events in Europe have illustrated how government defaults can jeopardise domestic bank stability. Growing concerns of public insolvency since 2010 caused great stress in the European banking sector, which was loaded with Euro-area debt (Andritzky 2012). Problems were particularly severe for banks in troubled countries, which entered the crisis holding a sizeable share of their assets in their governments’ bonds – roughly 5% in Portugal and Spain, 7% in Italy, and 16% in Greece (2010 EU Stress Test).
sovereign debt, financial crises, banking, banks, bonds, sovereign default, credit, bank lending, risk-weighting
Currency intervention as global monetary easing: The case of Japan in 2003-04
Petra Gerlach-Kristen, Robert McCauley, Kazuo Ueda 07 November 2012
Do incidental large-scale bond purchases have a global portfolio balance effect? This column argues that one country’s bond purchases can ease monetary conditions abroad. Whether this effect is welcome depends on the phase of the business cycle, but the authors emphasise that it is of paramount importance for resolving the current crisis that Eurozone policymakers closely consider the effects of large-scale bond buying.
One consequence of monetary easing in major economies most affected by the financial crisis is the subsequent currency appreciation in apparently separate economies that are less affected by the crisis, such as those of Japan, Switzerland, and many emerging economies. Policymakers in these countries have, to varying extents, resisted the appreciation of their currencies by intervening in the foreign exchange market. Increasingly, observers have emphasised the potential for currency tensions under the current circumstances.
Exchange rates Financial markets Global crisis International finance
exchange rates, monetary policy, Japan, bonds, Eurozone crisis
Government bonds and their investors: What are the facts and do they matter?
Jochen Andritzky 05 August 2012
Public debt held by non-residents has been on the rise over the last few decades – that is until the global crisis. This column looks at how the ownership of government bonds in the G20 and the Eurozone. It finds that increased foreign bondholders bring costs as well as benefits.
Prior to the start of the global crisis in late 2008, global imbalances, reserve accumulation and regulatory changes fostered greater cross-border integration of sovereign debt markets as measured by the share of government securities held by non-residents.
Global crisis International finance
global crisis, bonds, government debt, global markets
In the slipstream of the Greek debt exchange
Jeromin Zettelmeyer, Mitu Gulati 05 March 2012
One of the most interesting questions arising from the ongoing Greek debt restructuring is what it implies about the feasibility of voluntary debt restructurings. Indeed, why would anyone voluntarily take a debt-exchange offer that promises a large reduction in repayments? This column argues creditors might feel safer with new debt instruments issued under English law than with old Greek-law regulated ones.
One of the most interesting questions arising from the ongoing Greek debt restructuring is what it implies about the feasibility – or lack of feasibility – of ‘voluntary’ debt restructurings. This issue is of first-order importance because it has implications for how other countries in the Eurozone (and indeed outside) may want to conduct such restructurings, if it comes to that point.
Europe's nations and regions International finance
sovereign debt, bonds, Greece, EZ crisis
Tito Boeri 04 October 2011
Today Italian five-year governments bonds are insured at 70 basis points above Spanish ones. In June it was the other way around. This column argues that this increase in Italian spreads is due not only to policy and communication failures but also to Berlusconi’s lack of personal credibility. The costs of such bad handling of the crisis could be of the order of €20 billion.
Around mid June 2011, the CDS over five-year Italian governments bonds, which measures the cost of insurance against a sovereign default, was about 80 basis points lower than the CDS of the Spanish bonds (bonos) with the same maturity. Today Italian five-year government bonds are insured at 70 basis points above the bonos. Spreads of Italian bonds and bonos vis-à-vis the German Bunds experienced similar developments. From having spreads 70 basis points lower than Spain, Italy has now a spread which is over 40 points higher than Spain.
Europe's nations and regions International finance
Italy, Spain, spreads, bonds
Euro-area sovereign risk during the crisis
Silvia Sgherri, Edda Zoli 17 November 2009
Can euro-area governments cushion the impact of the crisis without damaging market perceptions of their fiscal sustainability? This column suggests that euro-area sovereign spreads have typically reflected a common factor that mimics global risk repricing, not country-specific solvency concerns. But in the last year, market sentiments seem to have shifted to concerns about fragile national financial sectors and future debt dynamics.
On the heels of the crisis, sovereign risk premium differentials in the euro area have been widening. Although the perceived risk of default for euro-area countries remains generally low, financial markets appear to have been increasingly discriminating among government issuers while requiring overall higher risk premiums (Figure 1). Specifically, the spreads on the yield on 10-year government bonds over Bunds spiked in January 2009 for various euro-area members, accompanied by downgrades of sovereign debt ratings for Greece, Spain, and Portugal and a warning for Ireland.
spreads, bonds, sovereign risk
Government guarantees on bank funding: Should we extend them into 2010 despite the improved bank profitability and the schemes’ distortionary effects?
Aviram Levy, Fabio Panetta 03 November 2009
In December 2009, government guarantees on the issuance of bank bonds will close to new issuance in many EU countries. This column argues that the guarantees have been effective and should be extended into 2010, despite improved market conditions and bank profitability. In doing so, governments should correct the schemes for some distortionary effects and develop a careful exit strategy.
In December 2009, the government guarantee schemes for bank bonds that were adopted last autumn will close to new issuance in many EU countries (with guarantees already issued expiring typically in 2012), unless the authorities decide to extend them.1 These schemes were meant to help banks retain access to wholesale funding in the aftermath of Lehman Brothers’ demise, when money and corporate bond markets were severely disrupted.
global crisis, bonds, government guarantees
A “systemic vulnerability index”: Measuring risk in the asset generation chain
Leonardo Felli, Luca Anderlini 22 August 2009
Like flights, securities can be non-stop (direct claims) or they can involve (sometimes many) intermediate stops (indirect claims). How should we measure the vulnerability of different securities to "systemic risk"? This column proposes a simple index to capture the important information of interest to both regulators and investors.
Civil aviation is remarkably safe. IATA numbers put the probability of death at roughly one in 7.7 million passenger/flights in 2008. This makes air travel about 120 times less dangerous than car travel in the US, although the numbers are hard to compare.
systemic risk, bonds, systemic vulnerability index