Fiscal consolidations for debt-to-GDP ratio containment? Maybe … but with much care
Gianluca Cafiso, Roberto Cellini 20 March 2012
As fiscal-consolidation policies are being implemented across the EU, a debate has been developing concerning the effects of such policies on the dynamics of the debt-to-GDP ratio. This column examines past episodes and finds that following fiscal adjustment may have favourable effects in the short term but that the two-year cumulated changes have been mainly adverse.
In recent time a wide debate has been developing concerning the effects of restrictive fiscal policies on the dynamics of the debt-to-GDP ratio (eg Corsetti and Müller 2012). The debate is nourished by the current experience of EU countries, where fiscal-consolidation policies are implemented.
eurozone, debt, austerity
Fed versus ECB: How Target debts can be repaid
Hans-Werner Sinn 10 March 2012
In February 2012, the Bundesbank had a TARGET claim of €547 billion on the Eurosystem. This column proposes a US-like system of marketable covered treasury bills that could be applied to a yearly settlement of TARGET liabilities.
Now that Bundesbank President Jens Weidman has expressed his concern about the rising TARGET balances within the Eurozone in an official letter to Mario Draghi, the issue can no longer be swept under the carpet. In February, the Bundesbank had a TARGET claim of €547 billion on the Eurosystem, while the Dutch central bank had one of €171 billion in January. These claims constitute more than half of both countries’ net foreign wealth.
ECB, eurozone, TARGET2
Brinkmanship in Brussels, Sturm and Drachma for Greece and Europe
Jacob Funk Kirkegaard 01 March 2012
Brinkmanship has produced an early-morning deal in Europe to extend a new lifeline to Greece and clear the way for the biggest sovereign bond restructuring in history. This column takes a detailed look at the EU deal, the ongoing brinkmanship between the Eurozone and the IMF, and the general focus on austerity.
Just as it did when Congress recently extended the payroll tax cut, brinkmanship has produced an early-morning deal in Europe to extend a new lifeline to Greece and clear the way for the biggest sovereign bond restructuring in history. Both pieces of the agreement – the privately held Greek debt write-down of more than €100 billion and the terms of the new bailout extension – have produced widespread doubts in markets and among many analysts.
eurozone, IMF, Greece
Apart from the fiscal compact – on competitiveness, nominal wages and labour productivity
Marga Peeters, Ard den Reijer 03 January 2012
While EU leaders are drafting a fiscal compact, the problem of intra-European real exchange-rate misalignments remains. This column argues that reducing imbalances implies a focus on competitiveness, and hence on the alignment of nominal-wage growth with labour-productivity growth.
Eurozone members that face the consequences of severe asymmetric shocks can, in the absence of labour mobility, accommodate by means of fiscal transfers. In order to avoid becoming a one-way transfer union from the core to the periphery, the EU needs to address structural imbalances and persistent current-account deficits and surpluses that are due to real exchange-rate misalignment.
EU policies Productivity and Innovation
eurozone, productivity, wages
Deleveraging in the Eurozone
Vincent O'Sullivan, Stephen Kinsella 17 December 2011
The capital shortfall at EU banks is 8% higher than originally thought, according to the latest assessment from the European Banking Authority. This column examines the evolution of loan-to-deposit ratios in big European banks. It says banks have been buying back their debt securities, hoarding profits, limiting bonuses, and deleveraging. However, write-downs of sovereign debt have largely offset these efforts.
The capital shortfall at EU banks is 8% higher than originally thought, according to the latest assessment from the European Banking Authority (EBA 2011) released on 8 December. In the aggregate, European banks need to raise €114.7 billion as an exceptional, temporary capital buffer against sovereign debt exposures and to ensure their individual Core Tier 1 capital ratio reaches 9% of risk-weighted assets by the end of June 2012.
Financial markets International finance
eurozone, leverage, banks
From trade to domestic collapse? On the complementarity between exports and domestic sales
Nicolas Berman, Antoine Berthou, Jérôme Héricourt 16 December 2011
The synchronised poor growth in European countries can be explained by many factors, including trade and financial linkages. This column argues that firms’ domestic sales are directly affected by the fall in their exports. Using French firm-level data and the Asian Crisis as a foreign-demand shock, it finds that domestic sales were 5% lower for firms exposed to the crisis. It suggests that this is because the cash flow generated by exports may be used by firms to finance domestic operations in the short term.
The Eurozone is close to slipping into a recession. The most recent OECD forecasts point to an average growth of 0.2% of GDP in volume within the EZ151 in 2012, ranging from -3% (Greece and Portugal) and -0.5% (Italy), to +0.6% (Germany) and +1% (Ireland).
eurozone, exports, French firms
The interplay of sovereign spreads and banks’ fragility in the Eurozone
Damiano Sandri, Ashoka Mody 23 November 2011
European policymakers are confronting a heightened crisis characterised by a perverse and seemingly intractable interplay between sovereign debt pressures and financial-sector fragilities. This column argues that the payoffs from strengthening banks’ balance-sheets can still be large and, therefore, fiscal support is merited. But a more resolute strategy for winding down banks is also needed.
European policymakers are confronting a heightened crisis characterised by a perverse and seemingly intractable interplay between sovereign debt pressures and financial-sector fragilities (Wolff 2011). Three questions arise:
Financial markets International finance
eurozone, spreads, banks
How much capital do European banks need? Some estimates
Viral Acharya, Dirk Schoenmaker, Sascha Steffen 22 November 2011
The lack of market confidence in European banks is fed by the uncertainty about Eurozone sovereign debt. This column argues governments and banking supervisors should agree a recapitalisation package well before Christmas. It adds that the required amount to be raised by each bank should be presented as a euro amount and not as a ratio so as not to tempt banks to cut down assets instead of raising capital.
The European banking system is freezing up. Several banks are not able to fund themselves in the market. The lack of market confidence in European banks is fed by the ongoing uncertainty about Eurozone sovereign debt (as well as real estate) to which these banks are exposed.
Financial markets International finance
eurozone, sovereign debt, banks, recapitalisation
The Eurozone needs exit rules
Cezary Wójcik, Christian Fahrholz 31 October 2011
With the sovereign debt crisis spreading across Europe, there is no shortage of suggestions on how to save the Eurozone. This column says exit rules are the silver bullet. It argues that exit rules would decrease the probability of a breakup of the Eurozone by enhancing market discipline, increasing the political bargaining power of EZ members vis-à-vis the profligate countries, enhancing internal discipline in the profligate countries, and reducing market uncertainty.
With the sovereign debt crisis spreading across Europe and in the run-up to the next EU Summit there is no shortage of suggestions on how to save the Eurozone. Unfortunately, the majority of these suggestions have one of the following flaws. Either they address the long-term challenges without dealing with the short-term stabilisation problems (for example, Cooley and Marimon 2011) or they address the short-term stabilisation issues at the cost of the Eurozone’s long-term sustainability (de Grauwe 2011, and Delpa and Weizsaecker 2011).
EU institutions EU policies
eurozone, EU, exit rules
Is the recent bank stress really driven by the sovereign debt crisis?
Guntram Wolff 30 October 2011
Stress in the interbank market has increased dramatically since July 2011, and bank stock market valuations have fallen by 22% on average for 60 of the most important banks subject to stress tests. This column argues that bank stock valuation has been affected by the banks’ exposure to Greek debt and that Greek banks were particularly affected. Holdings of debt of the other four periphery countries does not, however, appear to be a strong determinant of stock price movements.
Stress in the interbank market has increased significantly since July (Figure 1). There is now a significant debate on why this is the case and what would be the best way to address it (Financial Times 2011).1 Many have argued that the sovereign debt crisis isthe most important driver of banking stress in the Eurozone. If that view is correct, then the right approach to solving Europe’s banking problem is to solve the sovereign debt crisis. Recapitalising banks instead would be far too costly, in particular if one wanted to cater for a haircut in Italy.
EU policies Financial markets International finance
eurozone, stock markets, Eurozone crisis, sovereign bonds