Revisiting sovereign bankruptcy

Lee C. Buchheit , Beatrice Weder di Mauro, Anna Gelpern, Mitu Gulati, Ugo Panizza, Jeromin Zettelmeyer 12 November 2013



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.



Topics:  EU institutions Global economy

Tags:  eurozone, IMF, sovereign debt crisis

Massacre memories: German car sales and the EZ Crisis in Greece

Vasiliki Fouka, Hans-Joachim Voth 23 October 2013



When Angela Merkel visited Athens earlier this year, local protesters upset about austerity measures and alleged German dominance depicted her on placards wearing a Nazi uniform. Cypriots demonstrating against the terms of their country's bailout showed the stars of the EU surrounding a swastika. As the European debt crisis spreads, protests against austerity have become more frequent and often violent (Lynn, 2010 ).



Topics:  Europe's nations and regions Global crisis

Tags:  eurozone, Greek debt

Banking union for Europe – where do we stand?

Thorsten Beck 23 October 2013



In a few days, pending some last-minute diplomatic conflict between the UK and the European Commission, the ECB will begin an asset-quality review of European banks. This is supposed to be the entry point to the supervisory role of the ECB in the context of the Single Supervisory Mechanism (SSM), the first of three pillars of the planned banking union. Little political progress has been made on the other two pillars, bank resolution and deposit insurance, in spite of proposals by the EU Commission.



Topics:  EU institutions Global crisis

Tags:  ECB, eurozone, monetary union

The impact of sovereign-debt exposure on bank lending: Evidence from the European debt crisis

Alexander Popov, Neeltje van Horen 06 July 2013



The sovereign-debt crisis which erupted in the Eurozone in 2010 has sent ripples through the global banking system and prompted interventions by governments and central banks on a scale comparable to the programs implemented during the financial crisis of 2008-09. Its impact has reached far beyond Europe’s borders, with the IMF calling it “the most immediate threat to global growth” (IMF 2012). The consequences of the crisis, however, are not yet well understood and many questions have been raised regarding the link between sovereigns and banks.



Topics:  Financial markets International finance

Tags:  eurozone, sovereign debt, bank exposure

Putting the ‘system’ in the international monetary system

Michael Bordo, Angela Redish 20 June 2013



The Eurozone and Bretton Woods are prime examples of planned international monetary arrangements designed in each case to deal with the perceived flaws of earlier more ‘spontaneous order systems ‘based on domestic monetary institutions (Gallarotti 1995).



Topics:  Economic history Macroeconomic policy

Tags:  eurozone, monetary policy, Bretton Woods

EZ banking union with a sovereign virus

Daniel Gros 14 June 2013



The purpose of the proposed banking union is to de-link banks from their sovereigns.

  • Putting the ECB in charge of supervision and creating a common resolution mechanism should help.

But this is not enough.

  • European banks hold too much government debt of their own governments to really sever the sovereign-bank link.

Until the link is broken, the Eurozone will continue to be vulnerable to disruptive, self-reinforcing feedbacks of the type that brought the Eurozone to the brink of collapse in 2011-12.



Topics:  EU institutions Europe's nations and regions

Tags:  eurozone, EZ banking union

Panic-driven austerity in the Eurozone and its implications

Paul De Grauwe, Yuemei Ji 21 February 2013



Southern Eurozone countries have been forced to introduce severe austerity programs since 2011. Where did the forces that led these countries into austerity come from? Are these forces the result of deteriorating economic fundamentals that made austerity inevitable? Or could it be that the austerity dynamics were forced by fear and panic that erupted in the financial markets and then gripped policymakers. Furthermore, what are the implications of these severe austerity programs for the countries involved?



Topics:  Financial markets Macroeconomic policy

Tags:  eurozone, financial panic, austerity

Eurozone in recession since 3rd quarter 2011

Philippe Weil interviewed by Viv Davies,

Date Published

Mon, 11/19/2012




View Transcript

Viv Davies: Hello and welcome to Vox Talks, a series of audio interviews with leading economists from around the world. I’m Viv Davies from the Centre for Economic Policy Research, it’s 16 November 2012 and I’m speaking with Philippe Weil, president of the OFCE in Paris and newly appointed chair of CEPR’s Euro Area Business Cycle Dating Committee. The dating committee has recently determined that economic activity in the euro area peaked in the third quarter of 2011, and that the euro area as a whole has been in recession since then. I began the interview by asking Philippe to explain the conclusions of the committee in a little more detail.

Philippe Weil: We determined that the euro area business cycle experienced a peak in the third quarter of 2011, so that means that economic activity in the quarters that preceded the third quarter of 2011 was actually lower than at the peak, and that since then economic activity in the euro area has been in decline.

VD: How does the committee define a recession? Does it differ from, for example, the NBER’s definition of a recession?

PW: The general principle is the same. The idea is to try to date the business cycles in the euro area, but when we say ‘business cycles’ we don’t necessarily mean the evolution of GDP. What we do does not boil down simply to the usual two-quarter decline or two-quarter increase in GDP that could be applied mechanically and for which no committee would be needed. We need to have, for reasons that we might get in to later if you wish, a wider view of what’s going on both in terms of components in GDP and, very importantly, in terms of labour markets, to have a feel of what actually is the evolution of economic activity. The recession from our point of view is a prolonged slowdown of economic activity interpreted widely.

VD: Employment is generally a lagging variable of output, and was a lagging variable in the previous recession. Are you saying it’s not lagging this time around?

PW: This time what’s very striking is that, although we date the start of the decline of economic activity at the third quarter of 2011, employment started to decline a little bit ahead of that time. We don’t necessarily have an explanation of that but we have a deep suspicion that this recession started late in 2011, before the labour market had time to recover from the previous recession. This is probably what has caused employment to turn down so quickly and slightly ahead of time of the current peak that took place in the third quarter of 2011.

VD: To an extent you’re dealing with imperfect information. What’s the potential impact of future data revisions on your interpretation of the current recession in the euro area?

PW: It’s not like meteorology so we know what the weather is in London at a given time and a given day. We have only very imperfect knowledge of what’s going on at a given time and a given date. Data are published with a lag, and on top of that they are revised for long periods of time, sometimes for years afterwards. What we want to do, most importantly, so that we don’t later have to revise that dates that we’ve announced, we want to protect ourselves against data revisions and the fact that they might beat us later on and change the picture that we paint of economic activity. We try to protect against these data revisions, which could come from the fact that more information arrives from statistical agencies, corrections of measurement errors and things of that nature. To protect against that, we try to look not only at GDP but at a wide array of statistical series, because it’s unlikely that we’ll be unable to detect the true turning point if we look at more series than just at GDP. That’s why we look at the labour market, and that’s why we look at the components of GDP. There’s another way, and it’s actually a novel component of this dating exercise both with respect to our past experience and to what the NBER has been doing.

One of the committee members, Domenico Giannone, has done something quite original, which is to try to look at the statistical properties of past data revisions for GDP in the euro area. On the basis of these past statistical revisions what he’s done is compute the probability that, three years from now, we might regret the date that we’ve set – 2011 third quarter – for the peak in euro area economic activity. What Domenico Giannone has computed for us is that there is a very small probability that, for instance, we would conclude that economic activity in 2012’s second quarter might be higher than 2011 Q3 levels that we dated as the peak. There’s only a 5% probability that this might occur based on data that will be available three years from now, so that’s very tiny. It’s unlikely that the peak was later than what we determined, so it’s probably not in the beginning of 2012 but at the end of 2011. On top of this Domenico has computed that in fact, based again on the data that will be available to us in three years, meaning revisions of the data that we did consider and had available when we did our dating, we will still determine, with a 75% probability, that 2011 Q3 was the peak of euro area GDP. So based on data that will be available in September 2015, there’s a 75% probability that we will still date the peak as we did. That gives us a high degree of confidence that we did the right thing, and should protect us against the risk that we might have to change our minds later on. Of course there’s no certainty, but I must insist that in the past this committee has a very good track record.

There was an episode in 2001 where the data at the time when the committee met pointed to negative GDP growth for a while, and if we had simply had a computer do the dating for us based on a mechanical rule just looking at GDP we would then, in 2001 and 2002, have decided that there had been a recession in 2001. However the data that we had at the time, particularly employment data, did not accord with the picture that the GDP gave, and therefore we did not decide that there had been a recession. And indeed the data got revised substantially later on, and what looked in April 2002 to be negative growth of GDP turned out in April 2009, so seven years later, to be actually very modest but nevertheless positive growth in GDP. From that point of view this method, the first method that involves looking at a wide array of data, has proved itself. And the method that Domenico Giannone implemented in this committee, trying to estimate the probability of data revisions, is more novel – time will test it – but we have a high degree of confidence that we will not have to modify the chronology that we established of euro area business cycles.

VD: I guess it’s an obvious question to ask, given the nature of the euro area: how does the committee deal with the issue of heterogeneity in the euro area?

PW: This is actually a very important question, because heterogeneity has increased substantially in the past. When we first started this exercise there was a factual element that heterogeneity across euro area countries was not very big, and there was also the hope that it would not increase too much. In the past, meaning from 2002 when the committee met, it used to define recession as a significant decline in the level of economic activity spread across the economy of the euro area. We had a clause inserted that actually required that the turnaround in euro area economic activity be visible in most countries of the euro area. With hindsight we thought that inserting this requirement was not a very felicitous one. First of all, it’s very vague: what does ‘most countries’ mean? Do we mean most countries in terms of number of countries or in terms of weight of euro area GDP? That’s not very clear. Second, when we reflect on the meaning of the task that has been given to us by CEPR, we see that we have to make a statement and establish a chronology of economic activity in the euro area as a whole. We decided to make it clear that this is what to do: to simply define a recession, for instance, as a significant decline in the level of economic activity in the whole euro area at the aggregate level. And to drop the requirement that this turnaround be visible in most countries.

One question is whether we would have dated business cycles as we have done had the requirement that the turnaround be visible in most countries not been imposed in the past. What we did is revisited the decisions of the Euro Area Business Cycle Dating Committee since 2002 to check whether the requirement that the turnaround be visible in most countries made a difference or not. And Binnur Balkan, who is a research assistant of Refet Gürkaynak, did a very nice piece revisiting the decisions of the committee in the past. From what she did I think we can be confident that the past decisions would not have been affected had we never had that requirement that we’ve now dropped that the turnaround be visible in most countries. What we do observe, now that we have dated this peak in 2011 Q3, is that there has been a substantial increase in heterogeneity in business cycles in euro area countries in the last few quarters. We don’t date turning points of individual countries but, looking at the data that we have released in our findings, it’s obvious that some countries, and actually these are large countries, have done better than others. Germany has been doing quite well since 2011 Q3, actually much better than the average of the euro area. France has been muddling through. Netherlands is not doing so well but still better than the average, at least at the beginning of 2012. It’s countries like Spain and Italy that are dragging down the euro area as a whole.

We can also see in the labour market data that we’ve considered that there’s actually a wide difference in the behaviour of employment across euro area countries over the business cycle, in particular when we compare what employment and GDP are now with what they were in 2011 Q3, which we’ve picked as the peak of the euro area’s business cycle. In short, we date on the basis of euro area aggregate data, we determined that there was a peak in 2011 Q3, but that does not mean that all members of the euro area have been in recession since then. We do not date the business cycles of individual countries, but we do observe that some countries, like France and Germany, have had an experience which is not exactly the same as that of the euro area as a whole. They are doing better, and heterogeneity in the euro area has increased, which is of course a matter of concern for policymakers in, for instance, monetary policy for the whole euro area. Not for individual countries, but nevertheless the impact is likely to be differentiated across countries as a function of where they sit in their business cycle.

VD: I was going to ask you, from a personal perspective, what you think the euro area needs to do as a whole to get itself out of recession.

PW: I express myself not in my capacity as chairman of this committee, but there is an increased awareness that fiscal multipliers are probably a lot bigger than many people would have liked to believe. That’s the first point. Second, their magnitude depends on where we are in the business cycle and the increased perception that at times of recession, in particular financial crisis, fiscal multipliers can be quite big, and the value of the multipliers depends on the place on the business cycle. Frontloading austerity is probably a recipe for disaster, and therefore the recent European institutional changes do provide some measure of ability for countries to commit to credibly delay austerity. There’s a strong case to be made for delaying austerity, because if multipliers are indeed higher in recessions than in expansions, postponing austerity enables you to reach, after a while, the same point in debt-to-GDP ratio with much less pain, especially in unemployment, along the way.

VD: Finally, Philippe, what are the future plans for the business cycle dating committee in terms of ways of working? Are you planning to introduce any changes in your approach and methods?

PW: Well, the current committee hopes fervently to have to reconvene soon to decide when we’ve gone through the trough and when the expansion started. So the committee hopes that it will soon have a lot of work to do. In the meantime it’s going to examine how to refine its diagnosis of business cycles in the euro area. Right now we are limited by data, in the sense that the euro area GDP is only available on a quarterly basis. So we cannot, for instance, in any rigorous way, date precisely the month of the turnaround. We can get some feel from looking at other data, but this is very judgemental and we would like to try to do things in a slightly better way, so we are probably going to try to produce a monthly GDP series. We’re not a statistical agency so we don’t produce the raw data, but using the published data we are going to construct, using statistical methods, a monthly GDP series that will try to guide us to date the turnaround points within the quarters that we are setting up as turnaround points. That’s one thing that we want to do.

The other thing we want to do is improve out treatment of the labour market. For conceptual and statistical reasons there is very little aggregate data on employment that we can use, and that’s a major drawback. So we want to explore how to do that. Those will probably we the two innovations that will be introduced by the time the committee meets again to date the next trough. Again, hopefully, very soon. But I must say that the committee is keen to arm itself with more and more tools to do its work. Judgement is important, but I think it’s much sounder when it’s based on methodological elements and, from that point of view, it is crucial that complement the work of this committee with a research effort to enable it to contribute to the policy debate in Europe and setting an improved chronology of business cycles.

VD: Philippe Weil, thanks very much.




Europe's nations and regions Macroeconomic policy
eurozone, business cycles, CEPR

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November 2012

From the internal market to a banking union: A proposal by the German Council of Economic Experts

Peter Bofinger, Claudia M. Buch, Lars P Feld, Wolfgang Franz, Christoph M Schmidt 12 November 2012



 The European sovereign debt crisis has revealed severe flaws in the design of the internal market. Both private and public borrowers had incentives for excessive borrowing, which have been created by deficits in the regulatory structure of financial markets. Capital requirements for banks were too low and had procyclical effects (Favara and Ratnovski 2012). Supervision has been ineffective with regard to containing the build-up of risks in banks’ balance sheets.



Topics:  EU institutions EU policies Macroeconomic policy

Tags:  ECB, eurozone, European Stability Mechanism, banking union

The doomsday cycle turns: Who’s next?

Simon Johnson, Peter Boone 21 September 2012



There is a common problem underlying the economic troubles of Europe, Japan, and the US: the symbiotic relationship between politicians who heed narrow interests and the growth of a financial sector that has become increasingly opaque (Igan and Mishra 2011). Bailouts have encouraged reckless behaviour in the financial sector, which builds up further risks – and will lead to another round of shocks, collapses, and bailouts.



Topics:  Global crisis International finance Politics and economics

Tags:  eurozone, US, Japan, financial crisis