An early-warning indicator for debt sustainability
Casper van Ewijk, Jasper Lukkezen, Hugo Rojas-Romagosa, 28 November 2013
The sustainability of government debt cannot be determined with certainty. This column presents an early warning indicator to predict sovereign debt crises using a stochastic simulation framework. What counts is the risk of a significant rise in public debt, more so than the expected evolution of the debt level. A key determinant of the indicator is the quality of budgetary policies in controlling the government budget in the event of adverse shocks.
Insight into the sustainability of public finances is critical to European policymakers and financial markets alike. It informs decisions concerning the need for reform and the determination of the appropriate risk premium on government debt. Furthermore, unsustainable public finances may cause significant spillovers, highlighting the need for international fiscal surveillance.
Topics: EU institutions, Global crisis
Tags: eurozone, sovereign debt crisis
Revisiting sovereign bankruptcy
Lee C. Buchheit , Beatrice Weder di Mauro, Anna Gelpern, Mitu Gulati, Ugo Panizza, Jeromin Zettelmeyer, 12 November 2013
Sovereign bankruptcies occur regularly and violently. The nature of sovereign-debt problems has changed in comparison to ten years ago. This column discusses policy proposals to better resolve debt crises and prevent them from happening in the future. Such proposals are given both for the Eurozone, and at a global level.
Sovereign-debt crises occur regularly and often violently. The recent debt crisis in Greece almost led to the collapse of the euro. Yet, there is no legally and politically recognised procedure for restructuring the debt of bankrupt sovereigns.
Topics: EU institutions, Global economy
Tags: eurozone, IMF, sovereign debt crisis
The first sovereign debt crisis in the EU
Jon Danielsson, Hermann Oskarsson, 11 September 2012
The current EZ crisis is not Europe’s first sovereign-debt crisis. This column shows parallels can be drawn from an all-but-forgotten episode, i.e. the 1990 Faroese crisis. Just like Greece, the Faroes got into difficulty because of excess borrowing facilitated by a currency union with an AAA-rated partner undeterred as the sovereign debt spiralled upwards. In the Faroese case, the crisis was eventually resolved when political necessities outweighed the cost of the bailout.
Today is not the first time Europe has suffered a sovereign-debt crisis. Twenty years ago another crisis happened, passing without notice except amongst those affected, i.e. the Faroe Islands. The islands accumulated too much sovereign debt, eventually getting hit by a crisis much larger in magnitude than even the worst in the ongoing European crisis.
Topics: International finance, Politics and economics
Tags: eurozone, Faroes, sovereign debt crisis
Is Italy going to make it?
Nicola Borri, Gianfranco di Vaio, Giuseppe Ragusa, 4 February 2012
Will Italy be able cut its debt and abide by the new EU fiscal rules? This column presents a simulation of the evolution of the Italian debt-to-GDP ratio. It finds that Italy’s borrowing and saving plans are sustainable – even at today’s high interest rates.
Topics: EU policies, Macroeconomic policy
Tags: Eurozone crisis, Italy, sovereign debt crisis
The Future of Banking – solving the current crisis while addressing long-term challenges
Thorsten Beck, 25 October 2011
For better or worse, banking is back in the headlines. From the desperate efforts of crisis-struck Eurozone governments to the Occupy Wall Street movement currently spreading across the globe, the future of banking is hotly debated. This VoxEU.org eBook presents a collection of essays by leading European and American economists that discuss both immediate solutions to the on-going financial crisis and medium- to long-term regulatory reforms.
Three years after the Lehman Brothers failure sent shockwaves through financial markets, banks are yet again in the centre of the storm.
Topics: EU institutions, EU policies, Europe's nations and regions, Financial markets, Macroeconomic policy, Politics and economics, Taxation
Tags: banking, capital requirements, euro bonds, Eurozone crisis, financial risks, financial transaction tax, prudential regulation, ring-fencing, sovereign debt crisis
A deadline for solving a deadly Eurozone sovereign debt crisis
Guillermo de la Dehesa, 20 October 2011
Time is running out for EU leaders to put an end to the Eurozone crisis. This column explains how leaders could find a definitive solution to Greece insolvency, isolate solvent countries from possible Greek contagion, improve EU governance by creating a true European parliament, and refocus on a pro-growth policy mix.
Next Sunday the European Council meeting should, once for all, dispel all of investors’ concerns about the Eurozone crisis. If the Council is not able to achieve this, it will cross the final red line of patience, making it very unlikely to ever regain the confidence of investors.
Topics: EU policies
Tags: Eurozone crisis, sovereign debt crisis
Welcome to phase 2 of the Eurozone (EZ) crisis
Richard Baldwin, 5 September 2011
The Eurozone crisis moved into phase 2 this August when the contagion spread to Italian debt, Spanish debt, and most EZ banks. Radical ECB actions prevented a disaster. This column argues that the ECB emergency policies are unsustainable politically and perhaps legally. The only policy combination that EZ leaders could agree on quickly enough involves political cover for ECB bond buying in exchange for national fiscal reforms of the German “debt brake” type.
IMF Chief Christine Lagarde made phase 2 official: "Developments this summer have indicated we are in a dangerous new phase" (Lagarde 2011).
Topics: EU policies, Europe's nations and regions
Tags: Bank default, Eurozone crisis, sovereign debt crisis
How does sovereign risk affect bank funding conditions? What can policymakers do?
Fabio Panetta, Michael Davies, 26 July 2011
Sovereign credit risk has emerged as the main challenge to global financial stability. This column explains how a deterioration in sovereign creditworthiness can damage bank funding conditions before discussing possible options for mitigating these effects. It argues that banks can only do so much and that the policymakers have a critical role.
The financial crisis and the subsequent recession have caused a sharp deterioration in public finances across advanced countries, raising concerns about sovereign credit risk.
Topics: Global economy, International finance
Tags: Eurozone crisis, Fiscal crisis, sovereign debt crisis
A debt swap to save Greece and the euro
Avinash Persaud, 18 May 2010
The Eurozone crisis is not over. This column argues that solving it requires a voluntary debt swap. Creditors should be invited to swap old Greek bonds for new bonds backed by the European and IMF package. Par values would be the same but the coupons would be lower and the maturities doubled. The exact parameters should be set so the value of the greater certainty of payout was offset by the lower coupons. This would strengthen the euro, facilitate recovery of the $145 billion pledged, and yet force private creditors to realise that Eurozone support is not a one-way bet.
There is a simple way to resolve the Greek problem that will strengthen the euro, not undermine it, will lead international tax payers to recover the $145 billion they have pledged, not lose it, and will not require ambitious institution building in Europe at a time when the electorate is euro-fatigued. The solution requires three critical ingredients.
Topics: Financial markets
Tags: Eurozone crisis, greek crisis, sovereign debt crisis, voluntary debt swaps
European Stabilisation Mechanism: Promises, realities and principles
Charles Wyplosz, 12 May 2010
Markets liked the European Stabilisation Mechanism but a closer look shows that the money is announced but not available. When markets realise this, they may do to Portugal and Spain what they did to Greece. Worse still, crucial principles have been sacrificed for the sake of unconvincing announcements. The debt crisis is unlikely to go away and the monetary union will have to be reconstructed to re-establish the principle of collective fiscal discipline.
There is much to reflect on following the decisions taken over the last weekend. The most important ones are:
Topics: EU institutions
Tags: European Stabilisation Mechanism, eurozone, greek crisis, sovereign debt crisis