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
Saving the euro: self-fulfilling crisis and the ‘Draghi put’
Marcus Miller, Lei Zhang 26 June 2014
Like banks, indebted governments can be vulnerable to self-fulfilling financial crises. This column applies this insight to the Eurozone sovereign debt crisis, and explains why the ECB’s Outright Monetary Transactions policy reduced sovereign bond spreads in the Eurozone.
In surveying eight centuries of financial folly, Reinhart and Rogoff (2009) observed that:
International finance Monetary policy
ECB, eurozone, sovereign debt, financial crises, sovereign debt crisis, Outright Monetary Transactions, European sovereign debt crisis, self-fulfilling crises
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. Recent experiences in Europe underscore how hard it is to foresee sovereign debt crises, with regard to both occurrence and depth; assessment of public finances is no easy task.
EU institutions Global crisis
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.
Procedures of this type have been periodically debated – most recently, about a decade ago – when IMF management proposed a global sovereign debt restructuring mechanism (Krueger, 2002). Yet, they have so far been rejected.
EU institutions Global economy
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. Little analysis has been published on the crisis, and almost none in English. We mostly rely on Gørtz et al. (1994) and Hansen and Joensen (2008).
International finance Politics and economics
eurozone, sovereign debt crisis, Faroes
Is Italy going to make it?
Nicola Borri, Gianfranco di Vaio, Giuseppe Ragusa 04 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.
EU policies Macroeconomic policy
Italy, Eurozone crisis, 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.
EU institutions EU policies Europe's nations and regions Financial markets Macroeconomic policy Politics and economics Taxation
banking, capital requirements, Eurozone crisis, sovereign debt crisis, financial risks, euro bonds, ring-fencing, financial transaction tax, prudential regulation
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. Sunday may be very soon and only a few days before the G20 meeting in Cannes, but it has been two years since the Greek debt crisis explosion – more than enough time to have solved the crisis.
Eurozone crisis, sovereign debt crisis
Welcome to phase 2 of the Eurozone (EZ) crisis
Richard Baldwin 05 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).
- Phase 1 was the Eurozone (EZ) periphery;
- Phase 2 is the EZ core (Gros 2011).
It is now possible that more Eurozone nations will need bailouts and Europe will fall into a Lehman-size recession (Wyplosz 2011).
EU policies Europe's nations and regions
Eurozone crisis, sovereign debt crisis, Bank default
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. Sovereign risk is already a major issue in the Eurozone, where three countries have received international assistance, and others have seen their credit ratings lowered during 2009-11 and/or their funding costs rise.
Global economy International finance
Fiscal crisis, Eurozone crisis, sovereign debt crisis