The seniority conundrum: Bail out countries but bail in private, short-term creditors?
Daniel Gros 05 December 2010
Despite its large size relative to the small Irish economy, last weekend’s bailout is not working. Risk premiums continue to rise. This column argues that part of the problem lies in a seemingly innocuous provision in the rescue facility that is to replace the current European Financial Stability Facility in 2013. The argument is tricky, but the heart of the problem is the insistence that rescue financing be senior to private debt while simultaneously ruling out rescheduling of short-term debt.
European policy-makers might come to regret the statement of the Eurogroup (Eurogroup 2010) that announced the outline of the new European Stability Mechanism that will replace the temporary EFSF from 2013.
The stated purpose of the announcement was to stabilise financial markets, to provide assurances that funding for a crisis resolution mechanism would be available even after the EFSF ends in 2013.
ECB, Eurozone crisis, debt seniority, ESM, EFSF
Reforming the Stability Pact: Focus on financial supervision
Guido Tabellini 05 October 2010
The current European economic governance needs reform. This column argues that rather than trying to invade national governments’ autonomy in economic policy, the European authorities should focus on the transfer of sovereignty in the field of financial supervision.
The economic governance of the Eurozone is under repair. After months of work and deep thinking involving several institutions, including the ECB and the governments of France and Germany, the Commission has proposed a reform plan.
The reform is aimed at the two problems that the financial crisis of Greece highlighted:
- First, the Stability Pact and the European surveillance mechanisms have failed.
Indeed, they could not counter the accumulation of imbalances in the public finances and foreign accounts of southern European countries.
ECB, EU, Economic governance
ECB interest rate policy and the “zero lower bound”
Stefan Gerlach, John Lewis 27 July 2010
Monetary policy during the global crisis entered unchartered territory. This column suggests that fear of a global recession may have led policymakers to cut rates more aggressively in order to prevent the need for negative interest rates.
Since the start of the financial crisis, central banks across the world have cut interest rates substantially. In Japan, the US, the Eurozone and elsewhere, short-term interest rates controlled by the central bank are at or close to zero.
There are two reasons why this may have happened.
ECB, monetary policy, global crisis, zero lower bound
The ECB: Gestures and credibility
Guido Tabellini 26 May 2010
Improvisation in handling the crisis in Greece has given the impression that governments and European institutions are not capable of facing the toughest challenges. This column reminds us that in times like these, the credibility of institutions is essential and rests on consistency. The ECB decision to "sterilise" the purchase of bonds with inverse operations to drain liquidity puts this credibility at risk.
The currency crisis that is affecting Europe is fuelled by several economic factors such as the fear of insolvency by Greece, low growth and deficits in southern Europe,
Europe's nations and regions
ECB, Fiscal crisis, Eurozone crisis
Monetary policy in exceptional times and the economic implications of phasing out in the Eurozone
Michele Lenza, Lucrezia Reichlin 16 February 2010
What effects have the recent exceptional monetary policy interventions had on loans and unemployment, and what are the possible effects of phasing them out? This column provides quantitative estimates for the Eurozone, arguing that that the exceptional policies affect the economic via the spread between the policy rate and the market rate on overnight deposits rather than through their effect on the monetary base.
In response to the global financial crisis, central banks have reacted in a number of novel and innovative ways. Recently, some economists have started to assess the effects of these measures (e.g. Taylor and Williams 2008 for the effects of Fed policies on money market spreads) while others have suggested a framework to analyze the non standard policies in the new Keynesian monetary model (see Cardia and Woodford, 2010).
ECB, monetary policy, market spreads
Eurozone monetary policy in uncharted waters
Emil Stavrev, Martin Cihák, Thomas Harjes 15 January 2010
The global crisis forced central banks to take unconventional measures. This column says that the ECB’s “enhanced credit support” helped support the transmission of monetary policy by reducing money market term spreads. The substantial increase in the ECB’s balance sheet also likely contributed to a reduction in government bond term spreads and a somewhat flatter yield curve.
In response to the financial crisis and its fallout on economic activity, inflation, and inflation expectations, central banks around the globe flooded markets with liquidity and slashed interest rates to unprecedented low levels. The ECB led the way in actively providing financial markets with massive amounts of liquidity. After the real impact of the crisis had become apparent, the ECB cut its policy rate, reducing it to an all time low of 1% by early 2009.
ECB, eurozone, monetary policy
Adjustments to the accountability and transparency of the European Central Bank
Sylvester Eijffinger 24 October 2009
Governments are restructuring their financial supervision systems. This column warns that the proposed new structure for European financial supervision is poorly coordinated and will not help in a systemic crisis. It discusses how the ECB might coordinate macro-prudential supervision in the euro area.
It is widely agreed that central banking should not be subject to "political business cycles". Consequently, in the last decades, it has become an integral part of modern central banking policy that full operational (or functional) independence of central banks is a welfare-enhancing quality. However, the objectives of the central bank should then be clearly defined from the outset, the bank should be accountable for its actions, and the public should have a solid trust in its actions. The ongoing crisis may well have made central banking more complicated.
ECB, Central Banks, financial supervision
Multinational banks and European financial integration: Lessons for supervision and regulation
Giorgio Barba Navaretti, Giacomo Calzolari, Guido Ferrarini, Alberto Franco Pozzolo 08 April 2009
The crisis has brought multinational banks and their cross-border activities to the forefront of European regulatory concerns. This column argues that such banks are critical to successful EU financial integration and says that the appropriate response is to establish multinational regulation to match multinational banks. It proposes a European System of Banking Supervision and harmonisation of regulating banking groups.
Multinational banks are a crucial piece of the puzzle in the flurry of proposals for European financial reform. The size and cross-border operations of these institutions are seen by some as amplifying the effects of wrong management choices and practices and making the current crisis more systemic. That has cast doubts on the viability of this business model in the post-crisis world.
ECB, EU, banking regulation
Europe in the eye of a crisis
Lans Bovenberg, Coen Teulings 04 April 2009
Some analysts have argued that the European is poorly positioned to address the crisis since its economic integration has outpaced its integration of politics and governance. This column says that, in the face of the crisis, Europe must now decide between political integration and economic disintegration. It argues for EU-wide banking reforms, financial regulation, macroeconomic policies, and global coordination.
Europe is now at a crossroads: either closer political integration will support European economic integration or European markets will disintegrate at the cost of falling standards of living and rising international political tensions. It would not be the first time that a crisis compels Europe to take a step further on the road to closer political cooperation, as Avinash Persaud has argued on Vox.
EU policies Global crisis
ECB, EU, Banking crisis
Keep it simple
Carmine Di Noia, Stefano Micossi 01 April 2009
What are feasible policy responses to the crisis? This column argues for simple but significant changes in international imbalances, financial regulation, global coordination, and micro-prudential regulation.
Tomorrow’s G20 meeting in London should not try to resolve everything. It must concentrate on what is urgent and, for the rest, start a process capable of producing a consensus on what must be corrected in the global governance of the economy and financial markets within reasonable deadlines.
EU policies Global crisis Global governance
ECB, financial regulation, G20