How the euro changed the pattern of international debt flows
Galina Hale, Maurice Obstfeld, 15 May 2014
Large flows of bank lending from core countries in the Eurozone to the periphery lead to large financial imbalances. This column explains what motivated such financial flows. With the advent of the Eurozone, banks in core countries gained relative advantage in lending to the periphery, making such lending very attractive. They also served as intermediaries for financial flows from outside the Eurozone to the periphery. Now – five years since the start of the euro crisis – Eurozone financial markets remain segmented.
Internal financial imbalances within the Eurozone were central to the development of the European debt crisis. They resulted in a concentration of European periphery risks on the balance sheets of banks located in core Eurozone countries (Lane 2012, Rey 2012, Shin 2012).
Topics: EU institutions, Financial markets
Tags: Debt crisis, eurozone
To end the Eurozone crisis, bury the debt forever
Pierre Pâris, Charles Wyplosz, 6 August 2013
The Eurozone’s debt crisis is getting worse despite appearances to the contrary. How can we end it? This column presents five major options for reducing crisis countries’ debt. Looking into the details, it seems the only option that is both realistic and effective is for countries to default by selling monetised debt to the ECB. Moral hazard aside, burying the debt seems to be the only way we can end the crisis.
The Eurozone’s debt crisis is getting worse despite appearances to the contrary.
Topics: EU institutions, Macroeconomic policy
Tags: Debt crisis, debt monetisation, Eurozone crisis
Disaster economics and bond yields
Ziad Daoud, Martin Brookes, 16 August 2012
Two-year bond yields in six European countries recently turned negative. What explains the shift? This column presents a model suggesting that a higher chance of extreme economic events – such as a break up of the euro – can be the cause of a number of abnormal patterns in the bond markets.
Two-year bond yields in six European countries recently turned negative. The decline in bond yields has prompted a growing number of commentators to say that bonds are overvalued.
Topics: International finance
Tags: bond markets, Debt crisis, Eurozone crisis
The Italian situation: Clarification and a prediction
Alberto Alesina, Francesco Giavazzi, 13 September 2011
As Italy’s Prime Minister Silvio Berlusconi announces a new austerity bill based on tax rises, this column argues that the country’s leaders are in denial – it is as if they are trying to take aspirin to hide the symptoms of pneumonia. The authors predict that, with the current political class in power, Italy will soon enter another recession and, eventually, another crisis.
Under pressure from the bond market and the European Central Bank, Italy has adopted a budget that implies a sharp shift in fiscal stance.
Topics: Europe's nations and regions, Macroeconomic policy, Politics and economics
Tags: austerity, Debt crisis, Eurozone crisis, Italy
Italy's confidence crisis: Bad policies from bad politicians
Tito Boeri, 17 August 2011
Italy is on its third fiscal consolidation package in just six weeks, and none have addressed its credibility crisis. This column argues that Italy’s problems come from its bad politicians, who refuse to learn that structural reforms are necessary. To err is human, but to persevere is diabolical.
Three fiscal consolidation packages in six weeks—each more ambitious than the last—have failed to prevent a credibility crisis that has doubled the Italy’s risk premium. The problem was that none of the packages addressed the fundamental shortcomings of the first one—the one that started the credibility crisis.
Topics: Europe's nations and regions
Tags: Debt crisis, Eurozone crisis, Italy
Eurozone debt crisis: Reckless debtors or misguided rescuers?
Stefano Micossi, 29 May 2011
The Eurozone crisis has exposed serious flaws in the single currency’s ability to manage a crisis. This column outlines three ways that Europe’s financial assistance programmes should be changed to rectify this.
Our disgraceful leaders did it again. They managed to deeply unsettle financial markets by once again sparking off doubts on the orderly rollover of distressed sovereigns (Reguly 2011).
Topics: EU policies, Europe's nations and regions
Tags: Debt crisis, Eurozone crisis, Fiscal crisis
The European debt crisis: Worrisome delusions
Charles Wyplosz, 19 December 2010
Lorenzo Bini-Smaghi – Member of the ECB's Executive Board – has produced a brilliant defence of the no-default strategy currently pursued by the Eurozone authorities. This column argues that instead of ruling out highly plausible outcomes, the ECB should explain how it will react if defaults happen. By not making adequate preparations, it may be raising the odds of a very bad scenario.
Lorenzo Bini-Smaghi – Member of the ECB's Executive Board – has produced a brilliant defence of the no-default strategy currently pursued by the Eurozone authorities (Financial Times 2010).
His arguments are straightforward.
Topics: EU institutions
Tags: Debt crisis, ECB, eurozone
Sovereign defaults, banks and financial institutions
Nicola Gennaioli, Alberto Martin, Stefano Rossi, 17 November 2010
Recent sovereign defaults in developing countries have put severe strain on the defaulting country’s banking system. This column argues that these events teach us how the development of private financial markets plays a critical role in reducing the risk of government default and thus in supporting public borrowing.
Recent sovereign defaults highlight a close link between government default and financial sector turmoil, where banks often take centre stage. In the Russian default of 1998 the government's suspension of debt payments triggered large losses on the balance sheets of Russian banks, which had heavily invested in public bonds.
Topics: Global crisis, International finance
Tags: Debt crisis, default, financial development, Fiscal crisis
Debt and growth revisited
Carmen M Reinhart, Kenneth Rogoff, 11 August 2010
With the advanced economies at a critical juncture, some economists are urging more fiscal stimulus while others argue that raising debt levels will stunt growth. This column presents the Reinhart-Rogoff findings on the relationship between debt and growth based on data from 44 countries over 200 years with a focus on the debt-growth link during high-debt episodes.
Economics has been under fire since the recent crisis for enshrining abstract models that offer little connection to the real world.
Topics: Global crisis, Global governance, International finance
Tags: Debt crisis, Eurozone crisis, Fiscal crisis, global crisis
It takes less than a sovereign default to cause instability
Fabio Panetta, Giuseppe Grande, 7 August 2010
The spectre of sovereign default looming over the world economy represents a major threat to economic stability. This column argues that, even without a fully-fledged debt crisis, the deterioration of public finances in major countries could trigger an increase in long-term interest rates and jeopardise the recovery.
According to many commentators a sovereign default could be the next stage of the crisis (Reinhart 2010, Rogoff 2010 and Reinhart and Rogoff 2010).
Topics: Global crisis, Global economy
Tags: Debt crisis, Eurozone crisis, Fiscal crisis, sovereign default