In the years since the Global Crisis, there has been substantial public opposition to taxpayer-funded bailouts of financial institutions. Reflecting this sentiment, a cornerstone of the EU’s post-crisis resolution framework is that losses be borne by private investors and creditors. This column surveys some of the details that need to be worked out before such bail-in measures can work. Effective implementation requires clear identification of the limits to bail-in. In particular, for such measures to be successful, bailout cannot be ruled out by assumption.
Giorgio Barba Navaretti, Giacomo Calzolari, Alberto Pozzolo, 12 December 2016
Anil Ari, Giancarlo Corsetti, Andria Lysiotou, 10 August 2015
Cyprus has been striving to get back on its feet after a painful bailout in 2013. This column examines the lessons that could have been drawn from the Cypriot experience by Greece in its recent attempt to seal a bailout deal. Specifically, lengthy negotiations – while tending to mitigate the risk of contagion – offer little benefit for debtor countries, and capital controls, once implemented, cannot be easily undone. While they come too late for Greece, these lessons can be important for countries in need of financial assistance in the future.
Michal Kobielarz, Burak Uras, Sylvester Eijffinger, 12 March 2015
The Eurozone Crisis has been characterised by a sharp rise in sovereign interest rates in peripheral countries. The re-emergence of spreads between peripheral and core Eurozone countries at the start of the Greek crisis came after a decade of homogeneous interest rates in the monetary union. This column investigates the behaviour of spreads through the lens of a theory of implicit bailout guarantees.
Pierre-Cyrille Hautcoeur, Angelo Riva, Eugene White, 02 July 2014
The key challenge for lenders of last resort is to ameliorate financial crises without encouraging excessive risk-taking. This column discusses the lessons from the Banque de France’s successful handling of the crisis of 1889. Recognising its systemic importance, the Banque provided an emergency loan to the insolvent Comptoir d’Escompte. Banks that shared responsibility for the crisis were forced to guarantee the losses, which were ultimately recouped by large fines – notably on the Comptoir’s board of directors. This appears to have reduced moral hazard – there were no financial crises in France for 25 years.
Mitu Gulati, Lee Buchheit, 20 March 2013
Eurozone leaders’ radical step of putting insured depositors in Cypriot banks in harm’s way was not their only option. This column argues that none of the alternatives were pleasant but some were less ominous.
Tito Boeri, 20 July 2012
Solving the EZ crisis will almost certainly involve some financial transfers in exchange for some loss of sovereignty. This column suggests a guiding principle for which policies should be under EZ control. Transfers of authority to supranational bodies must make a no-further-bailout clause credible.
Ricardo Cabral, 29 July 2011
On 21 July 2011, the Council of the EU agreed to a second bailout for Greece. The deal was predicated on “private-sector involvement”. This column explores what this actually means. It estimates that the haircut for private bondholders may well be one-third of the figure initially proposed. It stresses that such uncertainties could spell more trouble for Greece and Europe as a whole.
Harald Hau, 27 July 2011
Last week, the European heads of government added €109 billion to the existing €110 billion rescue plan for Greece. As Europe’s financial sector would have otherwise taken a huge hit, this column address the question: How did the financial sector manage to negotiate such a gigantic wealth transfer from the Eurozone taxpayer and the IMF to the richest 5% of people in the world?
Charles Wyplosz, 09 February 2010
The latest turn in the global financial crisis has ensnared the debt of some European nations. The fact that these nations are members of a monetary union has generated much confused comment. Here one the world’s leading experts on Eurozone monetary and financial matters sets the record straight, debunking 10 myths and setting forth 10 frequently overlooked facts.
Jeffrey Sachs, 25 March 2009
This column explains how the Geithner public-private scheme to buy toxic assets at inflated prices is – in expected value terms – a hidden subsidy to bank shareholders paid for by US taxpayers. If the toxic assets turn out to be good investments, there is no transfer, but if they turn out to be bad loans, the taxpayer is left holding the damage while the private investors walk away.
Johannes Van Biesebroeck, 10 February 2009
Following the US bailout of the automotive industry, Canada is now bailing out its own auto firms, lest they risk southward migration. However, this column shows that this most recent action only continues a long history of lavish subsidies for the auto industry. Are governments giving away money for nothing?
Luc Laeven, 31 October 2008
A new IMF database, which covers the universe of systemic banking crises from 1970 to 2007, shows that the average fiscal cost was about 15% of GDP, or three times the US’s $700 billion. This column points out that quick action often lowers the ultimate cost. Moreover wishful thinking teamed with regulatory forbearance and bank liquidity plans often raises the cost by delaying vital, but politically painful, government action.
Frank Westermann, Romain Rancière, Aaron Tornell, 20 October 2008
The current credit crisis has prompted many calls for regulation to prevent such an event from ever happening again. This column defends a financial system that engenders systemic risk. Economies that risk occasional credit crises enjoy higher long-run growth, and the cost of the US bailout is well within historical norms.
Avinash Persaud, 12 October 2008
The US Economic Emergency Act of 2008 allows the SEC to suspend mark-to-market accounting rules. But a blanket suspension would be counter-productive. Crises are times when uncertainty quickly turns to panic. Now is not the time to increase uncertainty by changing accounting standards. This column proposes an alternative: mark-to-funding.
Nicholas Bloom, 08 October 2008
The crisis is shaping up to be a perfect storm – a huge surge in uncertainty that is generating a rapid slow-down in activity, a collapse of banking preventing many of the few remaining firms and consumers that want to invest from doing so, and a shift in the political landscape locking in the damage through protectionism and anti-competitive policies.
Avinash Persaud, 06 October 2008
The liabilities of the biggest US bank equal half the US tax revenues; the ratios in Europe are bigger. Deutsche Bank’s liabilities are one and a half times Germany’s annual tax revenue; Barclays' are twice Britain’s. This crisis will either leave European financial integration in tatters or quicken the development of European fiscal capacity. European integration is a historical process that routinely stumbles upon crises that threaten to destroy it, only to find that it has been deepened by the crisis.
Howard Rosenthal, Erik Berglöf, 02 October 2008
European politicians have been quick to proclaim the bankruptcy of the US model of capitalism “as we know it”. But, this column explains, all this hyperbole is premature. In fact, the US system of today is the outcome of numerous similar interventions and offers further pause for Europe.
Tito Boeri, Willem Buiter, Daniel Gros, Klaus F. Zimmermann, Guido Tabellini, Stefano Micossi, Charles Wyplosz, Richard Baldwin, Alberto Alesina, Francesco Giavazzi, 01 October 2008
This is a once-in-a-lifetime crisis. Trust among financial institutions is disappearing; fear may spread. Last week’s US experience showed that saving one bank at a time won’t work. A systemic response is needed and in Europe this means an EU-led initiative to recapitalise the banking sector. Unless European leaders immediately unite to address this crisis before it spirals out of control, they may find themselves fighting over how best to salvage the aftermath.
Daniel Gros, Stefano Micossi, 30 September 2008
Europe’s largest banks are highly leveraged and thus vulnerable, as Fortis showed. But some of these banks are both too large to fail and too big to be rescued by a single government. The EU should: (1) urgently pass legislation to cover banks with significant cross-border presence and empower the ECB to provide direct support, and (2) create an EU-level rescue fund managed by an existing institution like the European Investment Bank.
Barry Eichengreen, 28 September 2008
The Paulson Plan, whatever its final form, will not end the crisis quickly. Unemployment will rise but will the most serious credit crisis since the Great Depression bring about a new depression? Here one of the world’s leading economic historians identifies the relevant Great-Depression lessons. We won’t see 25% unemployment as in the 1930s, but double digits are not out of the question.