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). They also promoted larger intra-Eurozone current-account deficits and a sharp fall in peripheral bond yields, accompanied by a loss of competitiveness of the peripheral economies, most strikingly relative to Germany (Chen et al. 2013, Shambaugh 2012).
EU institutions Financial markets
eurozone, Debt crisis
To end the Eurozone crisis, bury the debt forever
Pierre Pâris, Charles Wyplosz 06 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.
Eurozone bond rate spreads have narrowed – leading some to think that the crisis is fading.1 Yet the narrowing is not due to an improvement in fundamentals. It happened after the ECB announced its Outright Monetary Transactions (OMT) programme. Mario Draghi’s, “Whatever it takes”, did the trick; investors believe the ECB could and would counter rising spreads in the medium term.2
EU institutions Macroeconomic policy
Debt crisis, Eurozone crisis, debt monetisation
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.
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.
- The primary surplus is projected to move from 0% in 2011 to close to 6% in 2014, with half of the adjustment happening next year.
- The size of the shift meets the conditions the ECB had set on 11 August 2011 in order to continue buying Italian government bonds.
The composition is, however, quite different from what the ECB suggested.
Europe's nations and regions Macroeconomic policy Politics and economics
Italy, Debt crisis, Eurozone crisis, austerity
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. We saw partial remedies for relatively minor deficiencies. Such failings bring to mind the old axiom: Errare humanum est, perseverare autem diabolicum (to err is human but to persevere is diabolical).
Europe's nations and regions
Italy, Debt crisis, Eurozone crisis
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). This has pushed interest spreads over German Bunds to unprecedented heights – over 2300 basis points for Greek sovereigns – and raised fears that contagion might spread not only to Spain and Italy, but reaching the Eurozone core, starting with Belgium (Micossi 2010). The public discussion stands out for its especially damaging effects.
EU policies Europe's nations and regions
Debt crisis, Fiscal crisis, Eurozone 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.
ECB, eurozone, Debt crisis
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. These events, further exacerbated by the devaluation of the rouble, allegedly contributed to cause a financial sector meltdown and a credit crunch. Although particularly severe, the Russian episode is by no means exceptional.
Global crisis International finance
financial development, default, Debt crisis, 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. In “Growth in a Time of Debt,” our data-intensive approach aims at providing stylised facts, well beyond selective anecdotal evidence, on the contemporaneous link between debt, growth, and inflation at a time in which the world wealthiest economies are confronting a peacetime surge in public debt not seen since the Great Depression of 1930s and indeed virtually never in peacetime.
Global crisis Global governance International finance
global crisis, Debt crisis, Fiscal crisis, Eurozone crisis
It takes less than a sovereign default to cause instability
Fabio Panetta, Giuseppe Grande 07 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). Indeed, the Greek crisis has highlighted the potential contagion effects of a sovereign default. Actually, it would take much less than a large-scale debt crisis to generate instability.
Global crisis Global economy
Debt crisis, Fiscal crisis, sovereign default, Eurozone crisis